RESMED INC - 10-K Annual Report

Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
_________________

FORM 10-K
_________________

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

FOR THE FISCAL YEAR ENDED JUNE 30, 1996
COMMISSION FILE NUMBER 0-26038

RESMED INC.
(Exact name of Registrant as specified in its Charter)

DELAWARE 98-0152841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

5744 PACIFIC CENTER BOULEVARD
SUITE 311
SAN DIEGO CA 94104
UNITED STATES OF AMERICA
(Address of principal executive offices)

619 622 2040
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

COMMON STOCK, $.004 PAR VALUE

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.

Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K (S 229.405 of this Chapter) is not contained herein and
will not be contained to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of the
Form 10-K or any amendment to this Form 10-K( ).

The aggregate market value of the voting stock held by non-affiliates of
Registrant as of September 23, 1996, computed by reference to the closing sale
price of such stock on the NASDAQ Stock Market, was approximately $125,082,814
(All directors and executive officers of Registrant are considered
affiliates.)

At September 23, 1996, Registrant had 7,183,330 shares of Common Stock, $.004
par value, issued and outstanding.

Portions of Registrant's Annual Report to Stockholders for the period ended
June 30, 1996 are incorporated by reference into Part I of this report.
Portions of Registrant's definitive Proxy Statement for its November 12, 1996
meeting of stockholders are incorporated by reference into Part III of this
report.

PART I

Item 1. Business

Overview

ResMed Inc., a Delaware corporation, was formed in March 1994 as the
ultimate holding company for its Australian, European and United States
operating subsidiaries. On June 1, 1995 the Company completed an initial
public offering of common stock and on June 2, 1995 the Company's common stock
commenced trading on the NASDAQ Stock Market. Its Australian subsidiary ResMed
Holdings Limited ("RHL") was originally organized in 1989 by Dr. Peter Farrell
to acquire from Baxter Center for Medical Research Pty Limited ("Baxter"), the
rights to certain technology relating to nasal Continuous Positive Airway
Pressure ("CPAP") treatment of Obstructive Sleep Apnea ("OSA"), as well as
Baxter's existing CPAP device business. Baxter had sold CPAP devices in
Australia since 1988, having acquired the rights to the technology in 1987
from Dr. Colin Sullivan of the University of Sydney, who invented nasal CPAP
for the treatment of OSA. The Company and its subsidiaries, since 1989, have
specialized in the design, manufacture and marketing of patented nasal CPAP
equipment for the diagnosis and treatment of OSA.

Recent Developments

The Company acquired the distribution business of both Dieter W Priess
Medtechnik and Premium Medical SARL its German and French distributors on
February 7, 1996 and June 12, 1996, respectively. The acquisition of the
German Distributor, for US$6,500,000 was the subject of a separate report on
Form 8K and amendment to a report on Form 8K which were filed with the
Securities Exchange Commission on February 21, 1996 and April 26, 1996,
respectively.

The Company in July and August 1996 respectively received FDA clearance
to market its AutoSet(Trademark) Portable diagnostic products,
AutoSet(Trademark) Clinical devices and its VPAP(Registered Trademark)II ST
bilevel CPAP. The VPAP(Registered Trademark)II ST bilevel device features
spontaneous and timed mode operation.

Obstructive Sleep Apnea

OSA is a breathing disorder in which an individual experiences a
temporary collapse of the upper airway during sleep. This restricts breathing
and severely disrupts the individual's sleep. Sleep is a complex neurological
process that includes two distinct states: rapid eye movement ("REM") sleep
and non-rapid eye movement ("non-REM") sleep. REM sleep, which occurs during
about 20-25% of sleep in adults, is characterized by a high level of brain
activity, bursts of rapid eye movement, increased heart and respiration rates,
and paralysis of many muscles. Non-REM sleep is subdivided into four stages
that generally parallel sleep depth: stage 1 is the lightest and stage 4 is
the deepest. The inability of an individual to experience adequate amounts of
REM and deeper levels (stages 3 and 4) of non-REM sleep results in daytime
tiredness and reduced cognitive function, both of which are characteristic of
OSA.
- -2-

Normally, during REM sleep and deeper levels of non-REM sleep, upper
airway muscles relax and the airway narrows. The upper airway has no rigid
support and is held open by active contraction of upper airway muscles.
Individuals with narrow upper airways or poor muscle tone are prone to upper
airway closure during sleep (an "apnea"), resulting in an inability to
breathe, or near closure (an "hypopnea") which causes snoring and breathing
difficulties. These breathing irregularities result in a lowering of blood
oxygen concentration, and after 10 seconds or more, the brain reacts to the
lack of oxygen and signals the body to respond. Typically, the individual
subconsciously arouses from REM sleep or from Stages 3 or 4 of non-REM sleep
to Stages 1 or 2 of non-REM sleep, causing the throat muscles to contract,
thus opening the airway. After a few gasping breaths, blood oxygen levels
increase and the individual can resume a deeper sleep until the cycle repeats
itself. The cycle of complete or partial upper airway closure with
subconscious arousal to lighter levels of sleep can be repeated as many as
several hundred times during six to eight hours of sleep. Sufferers of OSA
typically experience ten or more such cycles per hour and as a result
experience clinical symptoms of OSA, such as excessive daytime sleepiness or
reduced cognitive function. These awakenings greatly impair the quality of
sleep, although the individual is not normally aware of these disruptions.

Sleep fragmentation and the loss of the deeper levels of sleep caused by
OSA can lead to excessive daytime sleepiness, reduced cognitive function
(including memory loss and lack of concentration) and irritability. OSA has
been associated with employment difficulties, marital discord, impotence and
other adverse effects. Patients with OSA have been shown to have impaired
daytime performance in a variety of cognitive functions including problem
solving, response speed and visual motor coordination. Certain studies have
linked OSA to increased occurrences of traffic and workplace accidents. OSA
sufferers also may experience an increase in heart rate and an elevation of
blood pressure during the cycle of apneas. Several reports indicate that the
oxygen desaturation, increased heart rate and elevated blood pressure caused
by OSA may be associated with increased risk of cardiovascular morbidity and
mortality due to angina, stroke and heart attack.

The Market

In its "Wake Up America" report to Congress in 1993, the National
Commission on Sleep Disorders Research estimated that approximately 40 million
individuals in the United States suffer from chronic disorders of sleep and
wakefulness, such as sleep apnea, insomnia and narcolepsy. According to this
report, sleep apnea is the most common sleep disorder, affecting approximately
20 million individuals in the United States. Nearly 6.5 million of these
persons over the age of 30 experience moderate to severe forms of sleep apnea.
However, there is a general lack of awareness of OSA among both the medical
community and the general public, which has led to a corresponding failure to
diagnose the disorder. It is estimated that less than 3% of those persons
afflicted by OSA know the cause of their fatigue or other symptoms. Health
care professionals are often unable to diagnose OSA because they are unaware
that such non-specific symptoms as fatigue, snoring and irritability are
characteristic of OSA.
- -3-

While OSA has been diagnosed in a broad cross-section of the population,
it is predominant among middle-aged men and those who are obese, smoke,
consume alcohol in excess or use muscle-relaxing drugs. In addition, patients
who are being treated for certain other conditions, including those undergoing
dialysis treatment or suffering from diabetes, are medically predisposed to
OSA.

Generally, an individual seeking treatment for the symptoms of OSA is
referred by a general practitioner to a specialist, such as a pulmonologist,
neurologist or psychiatrist for further evaluation. The diagnosis of OSA
typically requires monitoring the patient during sleep at either a sleep
clinic or the patient's home. During overnight testing, respiratory
parameters and sleep patterns are monitored along with other vital signs such
as blood pressure, heart rate and blood oxygen levels. These tests allow sleep
clinicians to detect any sleep disturbances such as apneas, hypopneas or
subconscious awakenings.

The Company estimates that there are currently more than 1,200 sleep
clinics in the United States, a substantial portion of which are affiliated
with hospitals. Sleep clinics generally range in size from one to six beds.
The number of sleep clinics has expanded significantly from approximately 100
such facilities in 1985. The Company believes that despite the increase in
sleep clinics, testing facilities currently remain inadequate to address the
large population of undiagnosed OSA sufferers.

Existing Therapies

Prior to 1981, the primary treatment for OSA was a tracheotomy, a
surgical procedure to cut a hole in the patient's windpipe to create a channel
for airflow. Most recently, surgery has involved either
uvulopalatopharyngoplasty ("UPPP"), in which surgery is performed on the upper
airway to remove excess tissue and to streamline the shape of the airway, or
mandibular advancement, in which the lower jaw is moved forward to widen the
patient's airway. UPPP alone has a poor success rate; however, when performed
in conjunction with mandibular advancement, a greater success rate has been
claimed. This combined procedure, performed by highly specialized surgeons,
is expensive and involves prolonged and often painful recovery periods.

Nasal CPAP was first used as a treatment for OSA in 1980 by Dr. Colin
Sullivan, the Chairman of the Company's Medical Advisory Board. CPAP systems
were commercialized for treatment of OSA in the United States in the mid
1980's. Today, use of nasal CPAP, although not a medical cure for OSA, is
generally acknowledged as the most effective and least invasive treatment for
OSA, allowing the individual to enjoy a more normal sleep pattern. The Company
estimates that during 1995, CPAP treatment was prescribed for over 100,000 new
patients in the United States.
- -4-

During nasal CPAP treatment, a patient sleeps with a nasal mask connected
to a small portable air flow generator that delivers room air at a
predetermined positive pressure. The patient breathes in air from the air
flow generator and breathes out through an exhaust port in the mask.
Continuous air pressure applied in this manner acts as a pneumatic splint to
keep the upper airway open and unobstructed. Upon diagnosis of OSA and the
decision to prescribe CPAP treatment for an OSA sufferer, the physician must
determine an appropriate pressure setting for the CPAP device. This pressure
titration (adjustment) procedure typically occurs in the sleep clinic while
the patient sleeps using the CPAP device, and a technician manually increases
the pressure until sleeping and breathing are normalized. After determination
of the proper therapeutic pressure, the patient is prescribed a nasal CPAP
device set to that pressure for home use.

CPAP is a treatment and not a cure for OSA, and therefore, must be used
on a nightly basis for life. Patient compliance has been a major factor in
the efficacy of CPAP treatment. Early generations of CPAP units provided
limited patient comfort and convenience. Patients experienced soreness from
the repeated use of nasal masks and had difficulty falling asleep with the
CPAP device operating at the prescribed pressure. Recently, product
innovations to improve patient comfort and compliance have been developed.
These include more comfortable mask systems, delay timers which gradually
raise air pressure allowing the patient to fall asleep more easily, and
bi-level air flow generators which provide different air pressures for
inhalation and exhalation.

Business Strategy

The Company believes that the number of OSA patients receiving treatment
will increase in the future due to several factors, including increased
awareness of OSA, an increase in the number and capacity of sleep clinics, and
improved products for the diagnosis and treatment of OSA at home. The
Company's strategy for the expansion of its business operations consists of
the following key elements.

Continue Product Development and Innovation. The Company believes that
it is a leading innovator in nasal CPAP technology for the treatment of OSA
and that its continued product development and innovation will be a key factor
in its success. Since its founding, the Company has introduced product
advancements and improvements designed to increase patient comfort and
encourage compliance, such as delay timers, heated humidifiers, and pliable
Bubble Masks(Trademark). The Company is currently developing a range of
automatic CPAP devices, including further developments of its existing range
of AutoSet(Trademark) products, that are designed to continually adjust CPAP
pressure to meet changing individual patient's needs and to eliminate the need
for manual pressure titration.

Expand Market Presence. The Company currently markets its products in 40
countries through a network of independent distributors, the Company's direct
sales force and manufacturers' representatives. The Company intends to
increase its sales and marketing efforts in its current markets, particularly
Europe and the United States, as well as to continue expansion into new
countries.
- -5-

Increase Public and Clinical Awareness. The Company intends to promote
awareness of the prevalence of, and treatment alternatives for, OSA with three
main groups: (1) the population with predisposition to OSA; (2) primary care
physicians and other specialists, such as cardiologists and anesthesiologists;
and (3) special interest groups, such as sleep disorder support groups. The
Company is working with other physicians to explore new medical applications
for nasal CPAP, including the treatment of post-operative surgery patients and
pediatric patients, such as premature babies and infants at risk of Sudden
Infant Death Syndrome.

Products

The Company designs, manufactures and markets nasal CPAP equipment for
the diagnosis and treatment of OSA. These products consist of air flow
generators, which are small, portable devices that provide a preset positive
airway pressure, air delivery systems that include nasal masks, tubing and
headsets that connect the airflow generator to the patient and AutoSet
diagnostic equipment. In addition, the Company markets accessories to improve
patient comfort, convenience and compliance, such as heated humidifiers. The
Company also distributes Compumedics laboratory and portable sleep diagnostic
products.

Air Flow Generators

The Company manufactures and markets a broad range of air flow generators
which are sold to the end user at prices which vary from approximately $1,000
to $3,000, depending primarily upon the model, features and country of sale.
Air flow generators accounted for approximately 61%, 66% and 68% of the
Company's net revenues in 1994, 1995 and 1996, respectively.

CPAP. The Company's CPAP air flow generators consist of the
SULLIVAN(Registered Trademark) III, SULLIVAN(Registered Trademark) IV and
SULLIVAN(Registered Trademark) V series. The SULLIVAN(Registered Trademark)
III, SULLIVAN(Registered Trademark) IV and SULLIVAN(Registered Trademark) V
offer a range of enhancements to the Company's initial CPAP products, released
in 1989 and 1991. The Company's primary air flow generator prior to July 1995
was the SULLIVAN(Registered Trademark) III, which weighs less than five
pounds, is about four inches high and conveniently fits under most beds. The
SULLIVAN(Registered Trademark) V range of flow generators which feature a 20%
reduction in physical size when compared to the SULLIVAN(Registered Trademark)
III was introduced in July 1995 and is now the Company's main air flow
generator product. The SULLIVAN(Registered Trademark) V line of flow
generators consists of three individual models with each model providing a
range of features depending upon the needs of patients. Each model
continuously delivers a fixed positive pressure air flow to the patients.

VPAP(Registered Trademark). Since the introduction of the
SULLIVAN(Registered Trademark) VPAP(Registered Trademark) flow generator in
1994, the Company has released a number of Variable Positive Airway Pressure
(VPAP) flow generators which it believes improve patient comfort by applying
different air pressures for inhalation and exhalation. These features are
particularly beneficial for those patients with impaired breathing ability who
need high levels of air pressure for inhalation as well as less resistance for
exhalation.

At June 1996 the Company had two main VPAP flow generators, the
SULLIVAN(Registered Trademark) VPAP(Registered Trademark)II and
SULLIVAN(Registered Trademark) Comfort. Both units were released in March
1996 and feature improved pressure switching and reduced noise. In August
1996 the Company received FDA approval for the marketing and sale of the
VPAP(Registered Trademark)II ST flow generator, a bilevel pressure
VPAP(Registered Trademark) device with timed and spontaneous/timed breathing
modes of operation.
- -6-

Air Flow Generators Under Development. The Company is developing the
patented AutoSet(Trademark) CPAP devices for home use which are designed to
automatically adjust air pressure as needed on a breath by breath basis. The
Company markets similar devices for use in sleep clinics (AutoSet(Trademark)
Clinical) in Europe and the rest of the world. The Company obtained FDA
clearance for the AutoSet(Trademark) Clinical in July 1996 which conducts
automated assessment of sleep apnea and the CPAP pressure required by
patients. While conventional CPAP units operate at a fixed CPAP pressure, the
actual pressure required for effective treatment of OSA can vary depending on
factors such as weight change, alcohol consumption, sedative use, stage of
sleep and body position. The AutoSet(Trademark) device is designed to detect
the patient's level of airway resistance and to continually adjust the air
pressure to the appropriate therapeutic level throughout the night. The
Company is developing a version of AutoSet(Trademark) which will record airway
resistance and actual levels of therapeutic air pressure during home use for
later review by sleep physicians for diagnostic purposes. The Company is also
developing a CPAP device for use with infants and children, the pediatric
CPAP, which incorporates features such as tamper-resistant controls and
certain alarms.

The following table lists the Company's air flow generator products.

Product Features Date of Commercial Introduction
- -------------------------------------- ------------------------------------------------ -------------------------------

SULLIVAN(Registered Trademark) III Microprocessor-controlled, fixed-pressure May 1993*
portable device with tamper resistant key
pad for easier pressure setting

SULLIVAN(Registered Trademark) IV Fixed-pressure portable device with October 1994**
reduced noise levels

SULLIVAN(Registered Trademark) V A range of compact portable fixed-pressure July 1995
devices with various features to facilitate
patient comfort

SULLIVAN(Registered Trademark) VPAP Dual pressure portable device provides March 1996
(Registered Trademark)II different pressure levels for inhalation and
exhalation features improved pressure
switching and reduced noise output and
spontaneous breath triggering

SULLIVAN(Registered Trademark) COMFORT Limited featured dual pressure device March 1996

SULLIVAN(Registered Trademark) VPAP Dual pressure portable device with April 1996
(Registered Trademark)II ST spontaneous and spontaneous/timed breath
triggering modes of operation

AutoSet(Trademark) Clinical Micro processor controlled, automatically. May 1996
and continuously adjusts pressure in
response to patient's needs. Stores data for
subsequent evaluation. For use in sleep
labs to aid diagnosis

AutoSet(Trademark) Portable Portable version of AutoSet(Trademark) Clinical with In development
dedicated processor units, for home use
sleep studies

AutoSet(Trademark) Home AutoSet(Trademark) Home treatment version, In development
encompassing automatic and continuous
pressure adjustment

Pediatric CPAP Microprocessor-controlled, fixed-pressure, In development
portable device for infants and children

* Received FDA clearance in March 1994
** The SULLIVAN(Registered Trademark) IV currently is being sold only outside the United States

- -7-

The Company provides optional features including a patented delay timer, which
allows the patient to select the time over which a gradual transition to full
therapeutic pressure is achieved, allowing the patient to fall asleep more
easily. Another feature, the SmartStart(Trademark) function, automatically
starts airflow when the patient breathes into the mask and stops airflow upon
removal of the mask. Some models record the number of hours a patient
receives therapy, permitting physicians to monitor patient compliance. Most
units come equipped with a carrying bag for enhanced portability. In
addition, every unit has international electric voltage compatibility.

Mask Systems, Accessories and Other Products

Mask systems, accessories and other products accounted for approximately
37%, 30% and 30% of the Company's net revenues in 1994, 1995 and 1996,
respectively.

Mask Systems

The Company's mask system includes the mask frame, a nasal cushion, and
headgear to secure the nasal cushion to the face.

The Company's Bubble Mask(Trademark) includes a patented Bubble
Cushion(Trademark) which represents a significant advance in patient comfort.
Introduced in 1991, the Bubble Cushion(Trademark) contains a silicone membrane
which readily adjusts to a patient's facial contours. Air pressure seals the
thin membrane around the patient's nose, thereby minimizing air leakage and
the possibility of skin irritation from repeated usage. The Company's
headgear includes the ResCap(Registered Trademark) which has a five-point
attachment method of stabilizing the Bubble Cushion(Trademark) on the
patient's nose.

In addition, in July 1995 the Company introduced the modular mask frame
which features T Bar forehead pads to prevent sideways movement of the frame
and provide maximum stability.

Typically, patients replace masks or mask cushions every 12 to 18 months,
at a cost of approximately $100-$200 depending upon the model. Bubble
Masks(Trademark) are available in a variety of sizes and are sold
independently of the Company's air flow generators either as replacement
products or with other manufacturers' air flow generators. The Company also
manufactures the Bubble Mask(Trademark) on an OEM basis for Nellcor Puritan
Bennett, one of its competitors.

Accessories and Other Products

In order to enhance patient comfort, convenience and compliance, the
Company markets a variety of other products and accessories. These products
include humidifiers which connect directly with the CPAP and VPAP air flow
generator to moisten (humidify) and, if desired, heat air delivered to the
patient. This prevents the drying of nasal passages which can cause
discomfort upon repeated use of the system. Other optional accessories
include carry bags to carry portable flow generators, replacement filters.

Clinical Support

The Company also manufactures products that are used primarily in sleep
clinics and hospitals to monitor key respiratory parameters. These products
consist of CPAP devices together with additional diagnostic tools to assist
clinicians in the diagnosis of OSA and establishment of therapeutic pressures
necessary to treat OSA suffers.
- -8-

CPAP Clinical Interface. Introduced in October 1995, the Universal
Control Unit (UCU) is a diagnostic and monitoring device that is used by
clinicians to measure and adjust the pressures being delivered by either the
Company's CPAP or VPAP devices to a patient undergoing a sleep study. The
clinical interface allows the clinician to conduct this review and adjustment
from a remote location within the sleep lab. In the United States, clinical
interface devices are typically provided to clinics by the Company without
charge in order to increase clinical awareness and interest in the Company's
products.

The SULLIVAN(Registered Trademark) Compliance Application (SCAN),
introduced in October 1995 comprises the software necessary to download
compliance data from flow generators with recording capabilities. In
connection with a modem, this product allows compliance data to be downloaded
from a flow generator in a patients name direct to the sleep laboratory.

AutoSet(Trademark) Clinical. The Company's AutoSet(Trademark) Clinical
allows the clinical real-time observation and review by a clinician of
respiratory parameters during a sleep study. AutoSet(Trademark) Clinical
incorporates a PC-based monitoring device which permits real-time diagnosis of
patient airway resistance. This device may also be used in the therapeutic
mode for automatic breath-by-breath adjustment to maintain an open airway.
AutoSet(Trademark) Clinical received FDA clearance in July 1996. The Company
is currently developing an AutoSet(Trademark) CPAP device for home use

Product Development

The Company is committed to an ongoing program of product advancement and
development. During the past year, the Company introduced several new
products, including SULLIVAN(Registered Trademark) VPAPII, SULLIVAN(Registered
Trademark) V, SULLIVAN(Registered Trademark) Comfort, AutoSet(Trademark)
Clinical and improved nasal masks. Currently, the Company's product
development efforts are focused on automated CPAP systems, improved mask
systems and manufacturing cost-reduction programs.

The Company consults with physicians at major sleep centers throughout
the world to identify technology trends in the treatment of OSA. Some of
these physicians currently serve on the Company's Medical Advisory Board. New
product ideas are also identified by the Company's marketing staff, direct
sales force, network of distributors and manufacturers' representatives.
Typically, new product development is then performed by the Company's internal
development staff in collaboration with Dr. Sullivan and his colleagues at the
Royal Prince Alfred Hospital, the University of Sydney, and other research
groups around the world.

In each of the three fiscal years ended June 30, 1994, 1995 and 1996, the
Company expanded $1,546,000, $1,996,000 and $2,841,000 respectively, on
research and development.

Sales and Marketing

The Company currently markets its products in 40 countries using a
network of distributors, independent manufacturers' representatives and its
direct sales force. The Company attempts to tailor its marketing approach to
each national market, based on regional awareness of OSA as a health problem,
physician referral patterns, consumer preferences and local reimbursement
policies.

North America. In the United States, the Company's marketing activities
are conducted through a field sales organization comprised of 11 direct
sales employees, including three regional sales managers, and 18
independent manufacturers' representatives' organizations. The Company's
United States field sales organization markets and sells the Company's
products primarily to more than 1,500 home health care dealer branch locations
throughout the United States. The Company also promotes and markets
its products directly to sleep clinics. Patients who are diagnosed with
OSA and prescribed CPAP treatment are typically referred by
- -9-

the diagnosing sleep clinic to a home health care dealer to fill the
prescription. The home health care dealer, in consultation with the referring
physician, will assist the patient in selecting the equipment, fits the
patient with the appropriate mask and set the flow generator pressure to the
prescribed level. In the United States, sales employees and manufacturers'
representatives are managed by the three regional sales managers and the
Company's national sales manager. A marketing manager, responsible for
marketing in the United States and Canada, is based in the Company's office in
San Diego. The Company's Canadian sales are conducted through a Canadian
distributor. Sales in North America accounted for 47%, 53% and 49% of the
Company's total net revenues for the fiscal year's ended June 30, 1994, 1995
and 1996, respectively.

Europe. The Company markets its products in most major European
countries. In countries other than the United Kingdom, Germany and France, in
each of which the Company has fully owned subsidiaries, the Company uses
independent distributors to sell its products. These distributors have been
selected in each country based on their knowledge of respiratory medicine as
well as a commitment to nasal CPAP therapy. In each country in which the
Company has a subsidiary a local senior manager is responsible for direct
national sales. The Group's Senior Vice President, is responsible for
coordination of all European distributors and, in conjunction with local
management, the direct sales activity in Europe. In addition, the Company
uses a consultant in Switzerland to assist in sales and marketing efforts for
selected European countries. Sales in Europe accounted for 30%, 29% and 36%
of the Company's total net revenues for the fiscal year's ended June 30, 1994,
1995 and 1996, respectively.

Australia/Rest of World. Prior to May 1994, the Company was the
exclusive source of nasal CPAP air flow generator units in Australia as a
result of ResMed Limited's ownership of Dr. Sullivan's original nasal CPAP
patent. This patent, which covered the CPAP method of treating, and the
device for treatment of, OSA, was challenged by the Australian distributor for
Respironics and, in May 1994, was revoked by an Australian appeals court in
reliance on issues specific to Australian patent law. Such revocation permits
competitors to market CPAP products in Australia. Consequently, the Company's
dominant market share in Australia has decreased in 1996. In May 1996 the
Company concluded an exclusive distribution agreement with Medical Gases of
Australia, the largest sleep medicine distributor in Australia, in an effort
to secure the Company's existing market position. As part of this agreement
the Company agreed to cease direct sales activities in Australia.

Marketing in the rest of the world is the responsibility of the Vice
President of Sales and Marketing based in Sydney, Australia. Sales in
Australia and the rest of the world accounted for 23%, 18% and 15% of the
Company's total net revenues for the fiscal year's ended June 30, 1994, 1995
and 1996, respectively.

Medical Gases of Australia accounted for approximately 18%, 10% and 7% of
net sales in 1994, 1995 and 1996, respectively, and another customer, Priess
Med Technik, prior to the acquisition of its business by ResMed in February
1996, accounted for approximately 19%, 15% and 8% of net sales in 1994, 1995
and 1996, respectively.
- -10-

Manufacturing

The Company performs its manufacturing operations at its facility in
Sydney, Australia. The Company's manufacturing operations consist primarily
of assembly and testing of the Company's air flow generators, masks and
accessories. Of the numerous raw materials, parts and components purchased
for assembly of the Company's diagnostic and therapeutic sleep disorder
products, most are off-the-shelf items available from multiple vendors.
Several components, such as printed circuit boards and plastic moldings, are
produced by third parties to meet certain specifications established by the
Company. Two key components of each of the Company's CPAP devices are
purchased from two single source suppliers. The Company is currently
qualifying additional sources of supply for these components. The Company's
quality control group performs tests at various steps in the manufacturing
cycle to ensure compliance with the Company's specifications. See Note 13 to
Notes to Consolidated Financial Statement.

The Company generally manufactures to its internal sales forecasts and
fills orders as received and as a result has no significant backlog of orders
for its products. The Company uses management information systems to
integrate its manufacturing planning, billing and accounting systems.

Service and Warranty

The Company offers one-to-two year limited warranties on its airflow
generator products. Warranties on mask systems are for 90 days. In most
markets, the Company relies on its distributors to repair the Company's
products with parts supplied by the Company. In the United States, home
health care dealers generally arrange shipment of products to the Company's
San Diego facility for repair.

The Company has received returns of its products from the field for
various reasons. The Company believes that the level of returns it has
experienced to date is consistent with levels typically experienced by
manufacturers of similar devices. The Company provides for warranties and
returns based on historical data.

Patents and Proprietary Rights and Related Litigation

The Company, through its subsidiary ResMed Limited, owns or has licensed
rights to five issued United States patents and eleven issued foreign patents.
In addition, there are six pending United States patent applications and
twelve pending foreign patent applications. Some of these patents and patent
applications relate to significant aspects and features of the Company's
products. These include United States patents relating to CPAP devices, a
delay timer system, the Bubble Mask, and an automated means of varying air
pressure based upon a patient's changing needs during nightly use, such as
that employed in the Company's AutoSet Device. No patents are due to expire
in the next five years.

The Company relies on a combination of patents, trade secrets,
non-disclosure agreements and proprietary know-how to protect its proprietary
technology and rights. ResMed Limited is pursuing an infringement action
against one of its competitors (Respironics, Inc.) and is investigating
possible infringement by others.

In October 1994, in Australia, a patent held by ResMed was revoked on
appeal on the grounds that the patent was not entitled to claim priority to a
"provisional" application, which was filed before the inventor's publication.
As a result of this claim, ResMed based in part on advice from legal counsel,
at June 30, 1994 accrued approximately $300,000 for costs associated with this
patent litigation which remains outstanding at June 30, 1996. This amount is
included in accrued expenses on the consolidated balance sheet.
- -11-

Additional litigation may be necessary to enforce patents issued to the
Company, to protect the Company's proprietary rights, or to defend third-party
claims of infringement by the Company of the proprietary rights of others.
Patent laws regarding the enforceability of patents vary from country to
country. Therefore, there can be no assurance that patent issues will be
uniformly resolved, or that local laws will provide the Company with
consistent rights and benefits.

ResMed Limited is also defending alleged breaches of the Australian Trade
Practices Act in a suit, claiming damages of $730,000 brought in Sydney
Australia by Respironics and their Australian distributor. This action
relates to ResMed Limited exercising its rights to the Australian original
CPAP patent, which was revoked by the Federal Court of Australia in 1994.

Third-Party Reimbursement

The cost of medical care is funded in substantial part by government and
private insurance programs. Although the Company does not generally receive
payments for its products directly from these payors, the Company's success is
dependent upon the ability of patients to obtain adequate reimbursement for
the Company's products. In most markets, the Company's products are purchased
primarily by home health care dealers, hospitals or sleep clinics, which then
invoice third-party payors directly.

In the United States, third-party payors include Medicare, Medicaid and
corporate health insurance plans. These payors may deny reimbursement if they
determine that a device has not received appropriate FDA clearance, is not
used in accordance with cost-effective treatment methods, or is experimental,
unnecessary or inappropriate. Third-party payors are also increasingly
challenging prices charged for medical products and services, and certain
private insurers have initiated reimbursement systems designed to reduce
health care costs. The trend towards managed health care and the concurrent
growth of HMOs which could control or significantly influence the purchase of
health care services and products, as well as legislative proposals to reform
health care, may result in lower prices for the Company's products.

In some foreign markets, such as Spain, France and Germany, government
reimbursement is currently available for purchase or rental of the Company's
products subject, however, to constraints such as price controls or unit sales
limitations.

In Australia and in other foreign markets, such as the United Kingdom and
Japan, there is currently limited or no reimbursement for devices that treat
OSA.

Government Regulations

The Company's products are subject to extensive regulation particularly
as to safety, efficacy and adherence to FDA Good Manufacturing Procedures
(GMP) and related manufacturing standards. Medical device products are
subject to rigorous FDA and other governmental agency regulations in the
United States and regulations of relevant foreign agencies abroad. The FDA
regulates the introduction, manufacture, advertising, labeling, packaging,
marketing, distribution, and record keeping for such products, in order to
ensure that medical products distributed in the United States are safe and
effective for their intended use. In addition, the FDA is authorized to
establish special controls to provide reasonable assurance of the safety and
effectiveness of most devices. Noncompliance with applicable requirements can
result in import detentions, fines, civil penalties, injunctions, suspensions
or losses of regulatory approvals, recall or seizure of products, operating
restrictions, refusal of the government to approve product export applications
or allow the Company to enter into supply contracts, and criminal prosecution.
- -12-

The FDA requires that a manufacturer introducing a new medical device or
a new indication for use of an existing medical device obtain either a Section
510(k) premarket notification clearance or a premarket approval ("PMA") prior
to it being introduced into the market. The Company's products currently
marketed in the United States are marketed in reliance on a 510(k)
pre-marketing clearance. The process of obtaining a Section 510(k) clearance
generally requires the submission of performance data and often clinical data,
which in some cases can be extensive, to demonstrate that the device is
"substantially equivalent" to a device that was on the market prior to 1976 or
to a device that has been found by the FDA to be "substantially equivalent" to
such a pre-1976 device. As a result, FDA clearance requirements may extend
the development process for a considerable length of time. In addition, in
some cases, the FDA may require additional review by an advisory panel, which
can further lengthen the process. The PMA process, which is reserved for new
devices that are not substantially equivalent to any predicate device and for
high risk devices or those that are used to support or sustain human life, may
take several years and requires the submission of extensive performance and
clinical information.

As a medical device manufacturer, the Company is subject to inspection on
a routine basis by the FDA for compliance with the FDA's current GMP
regulations which impose procedural and documentation requirements with
respect to manufacturing and quality control activities. The Company believes
that its manufacturing and quality control procedures meet the requirements
for the regulations.

Sales of medical devices outside the United States are subject to
regulatory requirements that vary widely from country to country. The time
required to obtain approvals by foreign countries may vary from that required
for FDA approval.

Competition

The markets for the Company's products are highly competitive. The
Company believes that the principal competitive factors in all of its markets
are product features, reliability and price. Reputation and efficient
distribution are also important factors. Patent protection could also become
an important issue in the future.

The Company competes on a market-by-market basis with various companies,
some of which have greater financial and marketing resources than the Company.
In the United States, its principal market, Respironics, Healthdyne
Technologies, DeVilbiss and Nellcor Puritan Bennett are the primary
competitors for the Company's CPAP products. The Company's principal European
competitors are also Respironics, Healthdyne Technologies, DeVilbiss and
Nellcor Puritan Bennett, as well as regional European manufacturers.

Any product developed by the Company that gains regulatory approval will
have to compete for market acceptance and market share. An important factor
in such competition may be the timing of market introduction of competitive
products. Accordingly, the relative speed with which the Company can develop
products, complete clinical testing and regulatory approval processes and
supply commercial quantities of the product to the market are expected to be
important competitive factors.
- -13-

Employees

As of June 30, 1996, the Company had 229 employees including eight full
time consultants, 111 persons in warehousing and manufacturing, 28 in research
and development, 54 in sales and marketing and 36 in administration. Of the
Company's employees and consultants, 163 are located in Australia, 33 in the
United States and 33 in Europe. The Company believes that the success of its
business will depend, in part, on its ability to attract and retain qualified
personnel. None of the Company's employees is covered by a collective
bargaining agreement. The Company believes that its relationship with its
employees is good.

Medical Advisory Board

The Company has a Medical Advisory Board ("MAB") consisting of physicians and
scientists specializing in the field of sleep disorders. MAB members meet as
a group twice a year with members of the Company's senior management and
members of its research and marketing departments to advise the Company on
technology trends in the treatment of OSA and other developments in sleep
disorders medicine. MAB members are also available to consult on an as-needed
basis with the senior management of the Company. MAB members are as follows:

Colin Sullivan, M.D., Ph.D., F.R.A.C.P., age 52, is the inventor of nasal CPAP
for treating obstructive sleep apnea and is a thoracic physician at the
Royal Prince Alfred Hospital. He is Professor of Medicine and Director of the
David Read Laboratory at the Sydney University Medical School. He is a Fellow
of the Royal Australian College of Physicians and Director of the National
SIDS Council Pediatric Sleep Laboratory at the Royal Alexandria Children's
Hospital, Westmead. Dr. Sullivan is the Chairman of the Medical Advisory
Board, and has continued to contribute to the Company's innovation, product
development and clinical testing. He has authored over 100 papers in sleep
disorders and related respiratory areas and is on the editorial board of
several professional journals. Dr. Sullivan's M.D. and Ph.D. degrees are from
the University of Sydney Medical School.

William C. Dement, M.D., Ph.D., age 69, is the Lowell W. and Josephine Q.
Berry Professor of Psychiatry and Behavioral Sciences at the Stanford
University School of Medicine and Director of the Stanford Sleep Disorders
Clinic and Research Center. He was Chairman of the USA National Commission on
Sleep Disorders Research. During the 1950's, Dr. Dement was part of the team
at the University of Chicago that discovered REM sleep. In 1970 he
established the first sleep disorders clinic in which he introduced
polysomnography. Dr. Dement has co-authored more than 400 papers and has
written definitive textbooks on sleep. He is on the editorial board of
several professional journals. Dr. Dement is a graduate of the University of
Washington, Seattle, and received his M.D. and Ph.D. degrees from the
University of Chicago.

Neil J. Douglas, M.D., F.R.C.P., age 48, is Reader in Medicine and Respiratory
Medicine, University of Edinburgh, an Honorary Consultant Physician, Lothian
Health Board and Director, Scottish National Sleep Laboratory. He is a
member of the Action on Smoking and Health Scotland Council and the National
Panel of Specialists for Respiratory Medicine. He chairs the Ethics of
Medical Research Volunteer Studies Sub-Committee of Lothian Health Board and
is a member of the Working Party on Sleep Apnea of the Royal College of
Physicians of London. He is the author of over 100 papers in the area of
sleep and pulmonary medicine. Dr. Douglas has a M.D. from the University of
Edinburgh.
- -14-

Ralph Pascualy, M.D., A.C.P., age 46, is Medical Director, Pacific Northwest
Sleep/Wake Disorders Center, Providence Medical Center, Seattle. He held
research fellowships in psychiatry prior to a professional focus on sleep
disorders medicine in the early 1980s. He was awarded the William C. Dement
Award in Sleep Disorders Medicine in 1983 and became an Accredited Clinical
Polysomnographer in 1986. Dr. Pascualy trained in sleep disorders medicine at
Stanford. He is Editor-in-Chief of the Research Newsletter of the Clinical
Sleep Society, Chairs the National Insurance Committee and is a member of the
Technology Committee of the Association of Sleep Disorders Centers. He is
also a member of the Gerontological Society, the American Psychiatric
Association, and National Affairs Committee of the Association of Professional
Sleep Societies. He is a graduate of Columbia University and received a M.D.
from the State University of New York.

J. Woodrow Weiss MD age 47 is Associate Professor of Medicine at Harvard
Medical School, as well as Physician Director, Pulmonary-Medical Intensive
Care Unit and Co-Director of the Sleep Disorders Center at Beth Israel
Hospital, Boston. His main research interests are in the cardiovascular
consequences of sleep and sleep apnea, upper airway muscle control and
dyspnea. Dr Weiss was in intern and resident at the University of California,
San Francisco and completed research fellowships at both Dartmouth and Harvard
Medical Schools; he is an internationally- recognized researcher in sleep
disorders medicine. He holds a BA from Harvard and an MD from Case Western
Reserve School of Medicine.

B. Tucker Woodson MD FACS age 39 is an Otolaryngologist and is an Associate
Professor of Surgery at the Medical College of Wisconsin. He is a Fellow of
the American Academy of Otolaryngology - Head and Neck Surgery and did
surgical training with Dr. Fujite, the pioneer of uvulopalatopharyngoplasty to
treat obstructive sleep apnea. He has a primary research interest in the
surgical management of sleep apnea but is also a proponent of nasal CPAP. Dr.
Woodson did his surgical training in otolaryngology at Detroit's Henry Ford
Hospital and holds a BA from Washington University, St. Louis and an MD from
the University of Missouri, Columbia.

Clifford W. Zwillich, M.D., age 56, is Chief, Division of Pulmonary and
Critical Care Medicine, Pennsylvania State University, and Distinguished
Professor of Medicine. His major scientific interest is the body's control of
respiration. He serves on the Editorial Boards of more than 10 journals and
is active in numerous associations specializing in pulmonary medicine and
sleep disorders. Dr. Zwillich holds a B.A. degree from Hunter College and a
M.D. from the University of Kansas. He completed his senior residency at the
Harvard Medical School in the early 1970s and then undertook a research
fellowship at the University of Colorado Health Services Center.

Members of the Medical Advisory Board, other than Dr. Sullivan, receive
approximately $1,000 per month and all members receive reimbursement of
traveling costs and other out-of-pocket expenses incurred in attending such
industry conferences as may be requested by the Company.

Item 2 Properties

The Company's principal offices are located in Sydney, Australia, at a
leased facility of approximately 46,000 square feet. This facility is leased
through 1999 and contains approximately 28,000 square feet of assembly space,
and approximately 18,000 square feet devoted to research and administration
offices. The Company believes that this facility is adequate to meet its
requirements at least through early 1998. Sales and warehousing facilities
are also leased in San Diego, California, Oxford, England, Moenchengladbach,
Germany and Lyon, France.
- -15-

Item 3. Legal Proceedings

The Company is currently engaged in significant patent litigation
relating to the enforcement and defense of certain of its patents. In 1992 the
Company's original Australian patent, which was due to expire in 1998 and
covered the CPAP method of treating, and the device for treatment of OSA, was
challenged by the Australian distributor for Respironics, Inc. and in May
1994, was revoked by an Australian appeals court in reliance on issues
specific to Australian patent law. The Company's market share in Australia
decreased in 1995 and 1996 and the Company expect that its market share in
Australia will continue to decrease. At June 30, 1996, the Company had
accrued approximately $300,000 for estimated additional costs associated with
this litigation.

In January 1995, the Company filed a complaint for patent infringement in
the United States against Respironics. The complaint seeks monetary damages
from, and injunctive relief against Respironics resulting from its alleged
infringement of three of the Company's patents. In February 1995, Respironics
filed a complaint against the Company seeking a declaratory judgment that
Respironics does not infringe claims of these patents and that the Company's
patents are invalid and unenforceable. The two actions have been combined and
will proceed in the United States District Court for the Western District of
Pennsylvania. In June 1996 the Company initiated a further action in
Pennsylvania against Respironics regarding alleged infringement of the
Company's continuation patent, granted June 4, 1996, related to the delayed
timer feature. The action is continuing and is expected to be defended by
Respironics. Management believes based in part on advice from legal counsel,
that this action will not have a material impact on the operations or
financial position of the Company.

On May 17, 1995, Respironics and its Australian distributor filed a
Statement of Claim against the Company and Dr. Peter Farrell in the Federal
Court of Australia. The Statement of Claim alleges that the Company engaged
in unfair trade practices, including the misuse of the power afforded by its
Australian patents and dominant market position in violation of the Australian
Trade Practices Act. The Statement of Claim asserts damage claims in the
aggregate amount of approximately $730,000, constituting lost profit on sales.
While the Company intends to defend this action, there can be no assurance
that the Company will be successful in defending such action or that the
Company will not be required to make significant payments to the claimants.
Furthermore, the Company expects to incur ongoing legal costs in defending
such action.

Item 4 Submission of Matter to a Vote of Security Holders

None

PART II

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

The common stock of the Company commenced trading on June 2, 1995 on the
NASDAQ Stock Market under the symbol "RESM". The following table sets forth
for the fiscal periods indicated the high and low closing prices for the
Common Stock as reported by NASDAQ.

1995 1996
1995/1996 High Low High Low

Quarter One 18.00 12.00
Quarter Two 17.75 10.50
Quarter Three 14.25 10.50
Quarter Four 12.0 9.75 17.25 12.50

As of September 23, 1996, there were approximately 122 holders of record
of the Company's Common Stock The Company does not intend to declare any cash
dividends in the foreseeable future.
- -16-

Item 6 Selected Financial Data

The following table summarizes certain selected consolidated financial data for, and as of the end of, each
of the years in the five-year period ended June 30, 1996. The data set forth below should be read in conjunction
with the Consolidated Financial Statements and related Notes included elsewhere in this Report.

Year Ended June 30,
-----------------------------------------
Consolidated Statement of Income Data: 1992 1993 1994 1995 1996
-------- ------- ------- ------- -------
(In thousands, except per share data)

Net revenues 3,356 7,650 13,857 23,501 34,562
Cost of sales 2,040 3,109 6,213 11,271 16,990
_______ _______ _______ _______ _______
Gross profit 1,316 4,541 7,644 12,230 17,572
_______ _______ _______ _______ _______
Selling, general and administrative
expenses 744 3,084 4,809 7,447 11,136
Research and development expenses 667 820 1,546 1,996 2,841
_______ _______ _______ _______ _______
Total operating expenses 1,411 3,904 6,355 9,443 13,977
_______ _______ _______ _______ _______

Income (loss) from operations (95) 637 1,289 2,787 3,595
_______ _______ _______ _______ _______

Interest income, net 65 61 98 205 1,072
Government grants 311 432 440 527 537
Other, net 34 75 4 262 1,357
_______ _______ _______ _______ _______
Total other income, net 410 568 542 994 2,966
_______ _______ _______ _______ _______

Income before income taxes 315 1,205 1,831 3,781 6,561
Income taxes - 359 599 948 2,058
_______ _______ _______ _______ _______
Net income 315 846 1,232 2,833 4,503
======= ======= ======= ======= =======
Net income per common and
common equivalent share:
Primary 0.08 0.22 0.34 0.63 0.63
Assuming full dilution 0.08 0.22 0.34 0.62 0.62

Cash dividends per common share - 0.03 0.04 - -

Weighted average common and common
equivalent shares outstanding:
Primary 3,773 3,914 3,639 4,450 7,199
Assuming full dilution 3,773 3,914 3,639 4,513 7,218

As of June 30,
1992 1993 1994 1995 1996
----- ----- ----- ------ ------
Consolidated Balance Sheet Data: (in thousands)

Working capital 1,501 2,589 5,010 27,354 30,464
Total assets 2,886 5,173 9,608 35,313 46,946
Long-term debt, net of current maturities 218 163 386 787 578
Total stockholders' equity 1,689 2,895 5,630 28,867 38,986

- -17-

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

Management's discussion and analysis of financial condition and results
of operations should be read in conjunction with the selected financial data
and consolidated financial statements and notes thereto included elsewhere
herein.

The Company designs, manufactures and markets nasal CPAP equipment for
the diagnosis and treatment of obstructive sleep apnea. The Company's net
revenues are generated from the sale of its various nasal CPAP devices, nasal
mask systems, accessories and other products, and, to a lesser extent from
royalties. The Company receives other income through interest and certain
Australian government grants.

Prior to 1992, the Company marketed its products in several countries
primarily through independent distributors. In May 1992, the Company
terminated its United States distributor, and acquired certain inventory
maintained by the distributor, employed four of the distributor's sales
employees, and issued stock options to the distributor, which were
subsequently repurchased by the Company in October 1993. After such
termination, the Company established a direct sales force in the United States
and developed a network of independent sales representatives. In early 1992,
the Company commenced in-house manufacturing operations, consisting primarily
of assembly activities, at its Sydney, Australia facility. This facility was
expanded in December 1994 and during fiscal 1996.

The Company has invested significant resources in research and
development and product enhancement. Since 1989, the Company has developed
several innovations to the original CPAP device to increase patient comfort
and to improve ease of product use. The Company has recently been developing
products for automated treatment and monitoring of OSA, such as
AutoSet(Trademark). The Company's research and development expenses are
subsidized in part by grants and tax incentives from the Australian federal
government. The Company has also received grants from the Australian federal
government to support marketing efforts to increase Australian export sales,
and for incorporation of computer components into its products. Given
Australian Government regulations the Company does not expect to receive
future Australian export sales grants.

The Company's income tax rate is governed by the laws of the regions in
which the Company's income is recognized. To date, a substantial portion of
the Company's income has been subject to income tax in Australia where the
statutory rate prior to June 30, 1995 was 33%, increased to 36% effective July
1, 1995. During fiscal 1994, 1995 and 1996, the Company's effective tax rate
has fluctuated from approximately 25% to approximately 33%. These
fluctuations have resulted from, and future effective tax rates will depend
upon, numerous factors, including the amount of research and development
expenditures for which a 150% Australian tax deduction is available, the level
of non-deductible expenses, and the use of available net operating loss
carryforward deductions and other tax credits or benefits available to the
Company under applicable tax laws.

Following is a comparative discussion by fiscal year of the results of
operations for the three years ended June 30, 1996.
- -18-

Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30,
1995

Net Revenues. Net revenues increased in fiscal 1996 to $34.6 million
from $23.5 million in fiscal 1995, an increase of $11.1 million or 47.1%.
This increase was primarily attributable to an increase in unit sales of the
Company's flow generators and accessories in Europe where net revenues
increased to $12.4 million from $6.8 million and, to a lesser extent, in North
America, where net revenues increased to $16.8 million from $12.5 million. In
addition, net revenues were affected favorably by a product mix shift to new,
higher-priced products such as Sullivan VPAPII. This favorable effect was
partially offset by a decrease in the selling prices of the Company's CPAP
products in most geographic markets.

Gross Profit. Gross profit increased in fiscal 1996 to $17.6 million
from $12.2 million in 1995, an increase of $5.4 million or 43.7%. The
increase resulted primarily from increased unit sales during fiscal 1996.
Gross profit as a percentage of net revenues declined in fiscal 1996 to 50.8%
from 52.0% in 1995. The decrease was primarily due to an increase in the
value of the Australian Dollar relative to the US Dollar over the period and
continuing price competition in the United States, where prices for the
Company's products are lower than elsewhere in the world. The increased value
of the Australian Dollar increases the relative cost of manufacturing in
Australia where the Company's manufacturing facilities are located.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased in 1996 to $11.1 million from $7.4 million
for 1995, an increase of $3.7 million or 49.5%. As a percentage of net
revenues, selling, general and administrative expenses increased in fiscal
1996 to 32.2% from 31.7% for fiscal 1995. The increase in expenses was due
primarily to the acquisition of the Company's German distributor in February
1996, an increase to 87 from 58 in the number of sales and administrative
personnel, and other expenses related to the increase in the Company's sales.
In addition the Company incurred substantial legal fees with respect to its
ongoing patent action of $773,000, and $278,000 in 1996 and 1995,
respectively.

Research and Development Expenses. Research and development expenses
increased in fiscal 1996 to $2.8 million from $2.0 million in fiscal 1995, an
increase of approximately $800,000 or 42.3%. As a percentage of net revenues,
research and development expenses in fiscal 1996 decreased to 8.2% from 8.5%
in fiscal 1995. The dollar increase in research and development expenses was
due primarily to an increase in research and development equipment and
external consultancy fees.

Other Income. Other income increased in fiscal 1996 to $3.0 million from
$994,000 for fiscal 1995, an increase of $2.0 million or 198.4%. This
increase was due primarily to the recognition of unrealized gains on foreign
currency options of $961,000, as a result of marking the options to market
which arose from revaluation of the Australian Dollar over the year, and $1.1
million of interest income derived from funds generated from the Company's
June 2, 1995 initial public offering of common stock.

Income Taxes. The Company's effective income tax rate for fiscal 1996
increased to approximately 31.4% from approximately 25.1% for fiscal 1995.
This increase was primarily due to the an increase in the Australian income
tax rate from 33% to 36% from July 1, 1995 and high relative taxes incurred in
Germany. These higher tax rates were partially offset by additional research
and development expenses in Australia for which the Company received a 150%
deduction for tax purposes.
- -19-

Fiscal Years Ended June 30, 1995 and June 30, 1994

Net Revenues. Net revenues increased in fiscal 1995 to $23.5 million
from $13.9 million in fiscal 1994, an increase of $9.6 million or 69.6%. This
increase was primarily attributable to an increase in unit sales of the
Company's flow generators and accessories in North America, where net revenues
increased to $12.5 million from $6.5 million, and, to a lesser extent, in
Europe where net revenues increased to $6.8 million from $4.2 million. In
addition, net revenues were affected favorably by a product mix shift to new,
higher-priced products such as Sullivan VPAP. This favorable effect was
partially offset by a decrease in the selling prices of the Company's products
in most geographic markets.

Gross Profit. Gross profit increased in fiscal 1995 to $12.2 million
from $7.6 million in 1994, an increase of $4.6 million or 60.0%. The increase
resulted primarily from increased unit sales during fiscal 1995. Gross profit
as a percentage of net revenues declined in fiscal 1995 to 52.0% from 55.2% in
1994. The decrease was primarily due to an increasing percentage of the
Company's worldwide sales occurring in the United States, where prices for the
Company's products are lower than elsewhere in the world. In addition, gross
profit as a percentage of net revenues declined due to an increase in the
value of the Australian Dollar relative to the United States Dollar during the
period. This increased the relative cost of manufacturing which occurs in
Australia. Also contributing to the decrease was the introduction of a new
lower margin humidifier manufactured by a third party for the Company.

Selling, General and Administrative Expenses. Selling general and
administrative expenses increased in 1995 to $7.4 million from $4.8 million
for 1994, an increase of $2.6 million or 54.9%. As a percentage of net
revenues, selling, general and administrative expenses declined in fiscal 1995
to 31.7% from 34.7% for fiscal 1994. The increase in expenses was due
primarily to an increase to 58 from 34 in the number of sales and
administrative personnel, and other expenses related to the increase in the
Company's sales. Rent and leasehold expenses also increased primarily due to
a substantial increase in the size of the Company's Australian facility. In
addition, fiscal 1994 included $311,000 of expenses associated with the grant
of compensatory stock options and the establishment of a $300,000 reserve for
estimated cost associated with the Company's Australian patent litigation.

Research and Development Expenses. Research and development expenses
increased in fiscal 1995 to $2.0 million from $1.5 million in fiscal 1994, an
increase of approximately $500,000 or 29.1%. As a percentage of net revenues,
research and development expenses in fiscal 1995 decreased to 8.5% from 11.2%
in fiscal 1994. The dollar increase in research and development expenses was
due primarily to an increase in the average number of research and development
employees over the period to approximately 30 in fiscal 1995 from 20 in fiscal
1994. This increase was also attributable to higher payments for consulting
fees related to product development efforts.

- -20-

Other Income. Other income increased in fiscal 1995 to $994,000 from
$542,000 for fiscal 1994, an increase of $452,000 or 83.4%. This increase was
due primarily to the recognition of income for the receipt in December 1994 of
an up-front payment of $189,000 from a Japanese company for the exclusive
rights to market certain respiratory and related products in the Japanese
market that are under development by the Company. In addition, government
grants for fiscal 1995 increased to $527,000 from $440,000 for fiscal 1994 as
a result of government computer grant claims of $357,000 recognized by the
Company on receipt of a favorable Australian government ruling in April 1995.

Income Taxes. The Company's effective income tax rate for fiscal 1995
decreased to approximately 25.1% from approximately 32.7% for fiscal 1994.
This decrease was primarily due to the Company's use of net operating loss
carryforward deductions available to offset United States income, and the
additional research and development expenses in Australia for which the
Company received a 150% deduction for tax purposes.

Recent Accounting Developments

In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. ("SFAS") 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
effective for fiscal years beginning after December 15, 1995. SFAS 121
provides guidance for recognition and measurement of impairment of long-lived
assets, certain identifiable intangible assets and goodwill related both to
assets to be held and used and assets to be disposed of. The adoption of SFAS
121 is not expected to have a material effect on the Company's financial
position or results of operations.

In October 1995, the Financial Accounting Standards Board issued SFAS
123, "Accounting for Stock-Based Compensation," effective for fiscal years
beginning after December 15, 1995. Under the provisions of SFAS 123, the
Company is encouraged, but not required, to measure compensation costs related
to its employee stock compensation under the fair value method. The Company
has elected not to recognize compensation expense under this methodology.

The company will adopt the proforma method of disclosure under SFAS 123 in
fiscal year ended June 30, 1997

Liquidity and Capital Resources

As of June 30, 1996 and June 30, 1995, the Company had cash and cash
equivalents and marketable securities available for sale of approximately
$23.5 million and $23.8 million, respectively. The Company's working capital
approximated $30.5 million and $27.4 million, respectively, at June 30, 1996
and 1995. The increase in working capital balances reflects the net of the
receipt of approximately $4.5 million from the underwriter's exercise of their
over allotment arising from the Company's initial public offering less the
cash used to fund the acquisition of two European distributors.
- -21-

With the exception of the proceeds of the initial public offering, the
Company has predominantly financed its operations and capital expenditures
through cash generated from operations and through sales of common stock.
During the fiscal years ended June 30, 1996 and 1995, the Company's operations
generated approximately $3.4 million and $694,000, respectively more cash than
was used in operations, primarily as a result of continued increases in net
revenues, offset in part by increases in accounts receivable levels and
prepayments during 1996. However, cash and cash equivalents and marketable
securities available for sale decreased to $23.5 million at June 30, 1996 from
$23.8 million at June 30, 1995, a decrease of $300,000 after capital
expenditures. During fiscal 1996 and 1995 approximately $468,000 and
$1,718,000 of cash was received from sales of common stock on exercise of
outstanding options.

The Company's June 30, 1996, balance sheet also reflects significant
increases in the levels of inventory and accounts receivable over the levels
reflected on the June 30, 1995, balance sheet as a result of the acquisition
of Priess Medizintechnik and significant increases in the Company's sales
during the period.

The Company's capital expenditures for the fiscal years ended June 30,
1996 and 1995 aggregated $8.7 million and $1.8 million, respectively. The
majority of these expenditures were for the purchase of the businesses of
Priess Medizintechnik and Premium Medical for $6.8 million, purchase of
production tooling and equipment and, to a lesser extent, for the purchase of
office furniture, computers and research and development equipment. As a
result the Company's June 30, 1996 balance sheet reflects an increase in net
property plant and equipment to approximately $3.3 million at June 30, 1996,
from $2.0 million at June 30, 1995, an increase of approximately $1.3 million.

The results of the Company's international operations are affected by
changes in exchange rates between currencies. Changes in exchange rates may
negatively affect the Company's consolidated net sales and gross profit
margins from international operations. The Company is exposed to the risk
that the dollar-value equivalent of anticipated cash flows will be adversely
affected by changes in foreign currency exchange rates. The Company manages
this risk by entering into foreign currency option contracts.

In May 1993, the Australian Federal Government agreed to lend the Company
up to $870,000 over a six year term. Such loan bears no interest for the first
three years and will bear interest at a rate of 3.8% thereafter until
maturity. The first repayment of loan funds will commence in November 1996.
The outstanding principal balance of such loan was $867,000 and $787,000 at
June 30, 1996 and 1995, respectively.
- -22-

Item 8 Consolidated Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

Page

Independent Auditors' Report F1
Consolidated Balance Sheets as of June 30, 1995 and 1996 F2
Consolidated Statements of Income for the three years ended June 30, 1996 F3
Consolidated Statements of Stockholders' Equity for the three years ended June 30, 1996 F4
Consolidated Statements of Cash Flows for the three years ended June 30, 1996 F5
Notes to Consolidated Financial Statements F6

Item 9 Changes in and Disagreements with Accountant on Accounting and
Financial Disclosure

None

PART III

Item 10 Directors and Executive Officers of the Registrant

Incorporated by reference to Registrant's definitive Proxy Statement for
its November 12, 1996 meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days from June 30, 1996.

Item 11 Executive Compensation

Incorporated by reference to Registrant's definitive Proxy Statement for
its November 12, 1996 meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days from June 30, 1996.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Incorporated by reference to Registrant's definitive Proxy Statement for
its November 12, 1996 meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days from June 30, 1996.

Item 13. Certain Relationships and Related Transactions

Dr. Colin Sullivan, a member of the Company's Medical Advisory Board,
provides consulting services to the Company pursuant to a Consulting
agreement that terminates on December 31, 1997 ( subject to extension for an
additional five-year term ) for which he receives annual payments based on
the net sales ( as defined in the Consulting Agreement ) of certain of the
Company's products subject to a $90,000 per annum minimum payment. The
company also reimburses Dr. Sullivan for his out-of-pocket expenses in
performing such consulting services. The Company has also agreed to pay such
amounts to Dr. Sullivan for a period of 24 months following the termination
of his consulting relationship with the Company. Total payments to Dr.
Sullivan were $147,000, $228,000 and $314,000 for the Company's fiscal years
ended June 30, 1994, 1995 and 1996, respectively.

- -23-

Dieter and Helmke Priess, the holders of approximately 4% of the
outstanding shares of common stock of the Company, were the sole owners of
Priess Medizintechnik, the distributor of the Company's products in Germany
until the Company purchased the business of Priess in February 1996. Sales to
Priess aggregated approximately $2.6 million, $3.5 million and $2.8 million,
in fiscal 1994, 1995 and 1996 (up to February 7, 1996 the date of
acquisition), respectively.

During the year ended June 30, 1995, there were outstanding options to
purchase up to 421,900 shares of common stock of ResMed Holdings Limited
(RHL), the Company's wholly owned subsidiary. The exercise prices of such
options ranged from $0.38 to $9.10, with a weighted average exercise price of
$5.35. The majority of such options were exercised for shares of common stock
of RHL and each such share was surrendered in exchange for 2.5 shares of
common stock of the Company. As a result, RHL received $1,768,000 and the
Company issued 857,750 shares of common stock to such holders. The balance of
such options were exchanged in June 1995, for options to purchase up to
197,000 shares of common stock of the Company at an aggregate exercise price
of approximately $473,000. At June 30, 1996 approximately 9,500 RHL options
remain outstanding with an aggregate exercise price of $3.64 each.

PART IV

Item 14 Exhibits, Consolidated Financial Statements Schedule, and Reports
on Form 8-K

a) Report on Form 8-K

The Company lodged a report under item 2 of Form 8-K and an amended
report under Item 2 of Form 8-K on February 21, 1996 and April 26, 1996,
respectively, to reflect the acquisition of the business of Priess
Medizintechnik on February 7, 1996. Incorporated within the initial report on
Form 8-K and the amended report on Form 8-K, the Company lodged the following:

- - Audited Financial Statements of Dieter W Priess Medizintechnik for the
years ended December 31, 1995 and December 31, 1994 and Independent Auditors
Report thereon.

- - Unaudited Proforma Combined Condensed Consolidated Financial Statements
of ResMed, Inc. and Priess Medizintechnik as of December 31, 1995 for the year
ended June 30, 1995 and the six months ended December 31, 1995.

- -24-

Exhibits thereto

2.1 Purchase Agreement dated February 7, 1996 between Dieter W Priess
Medizinische technische Ger te and ResMed-Priess GmbH (I, GR).

23.1 Consent of KPMG Deutsche Treuhand Gesellschaft.

99.3 Press Release, dated February 12, 1996, issued by ResMed, Inc.

b) The following documents are filed as part of this report:

1.1 Consolidated Financial Statements and Schedule.

The consolidated financial statements and schedule of the Company and its
consolidated subsidiaries are set forth in the "Index to Consolidated
Financial Statements" under Item 8 of this report.

3. Exhibits. The following exhibits are filed as a part of this report:

3.1 Certificate of Incorporation of Registrant, as amended*
3.2 By-laws of Registrant*
4.1 Form of certificate evidencing shares of Common Stock*
10.1 1995 Stock Option Plan*
10.2 Licensing Agreement between the University of Sydney and ResMed
Limited dated May 17, 1991, as amended*
10.3 Amended and Restated Consulting Agreement between Colin Sullivan and
ResMed Limited dated September 2, 1994*
10.4 Loan Agreement between the Australian Trade Commission and ResMed
Limited dated May 3, 1994*
10.5 Lease for 82 Waterloo Road, Sydney, Australia*
10.6 Lease for 5744 Pacific Center Boulevard, San Diego, USA*
11.1 Statement re: Computation of Earning per Share
16.1 Letter regarding change in Certifying Accountant*
21.1 Subsidiaries of the Registrant
23.1 Consent and Report on Schedules of KPMG Peat Marwick LLP
27.1 Financial Data Schedule

* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 33-91094) declared effective on June 1, 1995.

- -25-

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
ResMed Inc.:

We have audited the accompanying consolidated balance sheets of ResMed Inc.
and subsidiaries as of June 30, 1995 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
years in the three year period ended June 30, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ResMed
Inc., and subsidiaries as of June 30, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three year period
ended June 30, 1996, in conformity with generally accepted accounting
principles.

KPMG PEAT MARWICK LLP
San Diego, California KPMG Peat Marwick LLP
August 12, 1996

- -F1-

RESMED INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)

June 30, June 30,
1995 1996
-------------- ------------
Assets
- -------

Current assets:

Cash and cash equivalents $ 3,256 5,510
Marketable securities - available for sale (note 3) 20,510 18,021
Accounts receivable, net of allowance for doubtful accounts
of $144 and $175 at June 30, 1995 and 1996, respectively 3,792 6,252
Government grants 825 915
Inventories, net (note 4) 4,350 6,134
Prepaid expenses and other current assets 280 1,014
____________ ____________
Total current assets 33,013 37,846
____________ ____________

Property and equipment, net (note 5) 1,981 3,284
Patents, net of accumulated amortization of $179 and
$260 at June 30, 1995 and 1996, respectively 161 217
Deferred income taxes (note 10) 139 27
Goodwill, net of amortization of $120 at June 30, 1996 - 4,309
Other assets 19 1,263
____________ ____________
$ 35,313 46,946
============ ============
Liabilities and Stockholders' Equity
- ------------------------------------

Current liabilities:

Accounts payable $ 2,572 2,421
Accrued expenses (note 6 and 16) 2,006 2,815
Income taxes payable 1,081 1,857
Current portion of long debt (note 7) - 289
____________ ____________
Total current liabilities 5,659 7,382
____________ ____________

Long-term debt less current portion (note 7) 787 578
____________ ____________
6,446 7,960
____________ ____________
Stockholders' equity (note 8):
Preferred stock, $.01 par value,
2,000 shares authorized; none issued - -
Common stock, $.004 par value, 15,000 shares authorized;
issued and outstanding 6,534 at June 30, 1995 and 7,172
at June 30, 1996 26 29
Additional paid-in capital 24,393 29,407
Retained earnings 4,600 9,103
Foreign currency translation adjustment (152) 447
____________ ____________
Total stockholders' equity 28,867 38,986
____________ ____________
Commitments and contingencies (notes 16 and 18)
$ 35,313 46,946
============ ============

See accompanying notes to consolidated financial statements.

- -F2-

RESMED INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

June 30, June 30, June 30,
1994 1995 1996
------------- ------------ ------------

Net revenues $ 13,857 23,501 34,562

Cost of sales 6,213 11,271 16,990
____________ ____________ ____________
Gross profit 7,644 12,230 17,572
____________ ____________ ____________
Operating expenses:
Selling, general and administrative expenses 4,809 7,447 11,136
Research and development expenses 1,546 1,996 2,841
____________ ____________ ____________
Total operating expenses 6,355 9,443 13,977
____________ ____________ ____________

Income from operations 1,289 2,787 3,595
____________ ____________ ____________
Other income:
Interest income, net 98 205 1,072
Government grants 440 527 537
Other, net (note 9) 4 262 1,357
____________ ____________ ____________
Total other income, net 542 994 2,966
____________ ____________ ____________
Income before income taxes 1,831 3,781 6,561
Income taxes (note 10) 599 948 2,058
____________ ____________ ____________
Net income $ 1,232 2,833 4,503
============ ============ ============
Net income per common and common equivalent
share:
Primary .34 .63 .63
Assuming full dilution .34 .62 .62

Weighted average common and common equivalent
shares outstanding:
Primary 3,639,434 4,449,867 7,199,438
Assuming full dilution 3,639,434 4,512,533 7,218,468

See accompanying notes to consolidated financial statements.

- -F3-

RESMED INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Retained/ Foreign
Additional earnings currency
Common stock paid-in (accumulated translation
Shares Amount capital deficit) adjustment Total

Balance, June 30, 1993 2,390 $ 9 2,494 705 (313) 2,895

Common stock issued for cash 375 5 1,098 - - 1,103
Common stock issued on exercise of options (note 8) 825 - 174 - - 174
Issuance of stock options (note 8) - - 311 - - 311
Repurchase of stock options (note 8) - - (348) - - (348)
Foreign currency translation adjustment - - - - 433 433
Dividends declared, $.04 per share - - - (170) - (170)
Net income - - - 1,232 - 1,232
__________ __________ __________ __________ __________ __________
Balance June 30, 1994 3,590 14 3,729 1,767 120 5,630

Common stock issued for cash, net (note 8) 2,000 8 18,950 - - 18,958
Common stock issued on exercise of options (note 8) 944 4 1,714 - - 1,718
Foreign currency translation adjustment - - - - (272) (272)
Net income - - - 2,833 - 2,833
__________ __________ __________ __________ __________ __________
Balance, June 30, 1995 6,534 26 24,393 4,600 (152) 28,867

Common stock issued for cash, net (note 8) 450 2 4,547 - - 4,549
Common stock issued on exercise of options (note 8) 188 1 467 - - 468
Foreign currency translation adjustment - - - - 599 599
Net income - - - 4,503 - 4,503
__________ __________ __________ __________ __________ __________
Balance, June 30, 1996 7,172 $ 29 29,407 9,103 447 38,986
========== ========== ========== ========== ========== ==========

See accompanying notes to consolidated financial statements.

- -F4-

RESMED INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(IN THOUSANDS)

June 30, June 30, June 30,
1994 1995 1996
-------------- ------------- -------------
Cash flows from operating activities:
Net income $ 1,232 2,833 4,503
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 255 590 1,154
Goodwill amortization - - 123
Provision for service warranties 121 267 (117)
Issuance of stock options 311 - -
Deferred income taxes (190) (133) 112
Foreign currency options revaluation - 14 (844)
Changes in operating assets and liabilities, net of effect
of acquisitions:
Accounts receivable, net (693) (1,589) (2,327)
Government grants (115) (328) (78)
Inventories (774) (2,596) 272
Prepaid expenses and other current assets (34) (41) (652)
Accounts payable, accrued expenses and other liabilities 1,023 1,385 792
Income taxes payable 471 292 515
____________ ____________ ____________
Net cash provided by operating activities 1,607 694 3,453
____________ ____________ ____________
Cash flows from investing activities:
Purchases of property and equipment (342) (1,805) (1,472)
Purchase of marketable securities - available for sale - (27,187) (102,730)
Proceeds from sale of securities - available for sale - 6,677 105,219
Purchases of patents (60) - (97)
Purchase of other assets - - (373)
Business acquisitions - - (6,815)
Other (52) 15 -
____________ ____________ ____________
Net cash used in investing activities (454) (22,300) (6,268)
____________ ____________ ____________
Cash flows from financing activities:
Repurchase of stock options (348) - -
Proceeds from issuance of common stock, net 1,303 20,723 5,017
Dividends paid (236) - -
Proceeds from issuance of long-term debt 198 420 -
Repayment of long-term debt (138) - -
Repayments of capital lease obligations (133) - -
____________ ____________ ____________
Net cash provided by financing activities 646 21,143 5,017
____________ ____________ ____________
Effect of exchange rate changes on cash 271 (20) 52
____________ ____________ ____________
Net increase (decrease) in cash and cash equivalents 2,070 (483) 2,254
Cash and cash equivalents at beginning of the year 1,669 3,739 3,256
____________ ____________ ____________
Cash and cash equivalents at end of the year $ 3,739 3,256 5,510
============ ============ ============
Supplemental disclosure of cash flow information:
Income taxes paid $ 309 600 1,132
Interest paid 3 - -

See accompanying notes to consolidated financial statements.

- -F5-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

1. ORGANIZATION AND BASIS OF PRESENTATION

ResMed Inc. is a Delaware corporation formed in March 1994 as a holding
company for ResMed Holdings Ltd. ("RHL") (formerly ResCare Holding Limited), a
company resident in Australia. RHL designs, manufactures and markets devices
for the evaluation and treatment of sleep disordered breathing, primarily
obstructive sleep apnea. ResMed Inc.'s ("ResMed", or "the Company") principal
manufacturing operations are located in Australia. Other principal
distribution and sales sites are located in the United States, United Kingdom,
Germany, France and Europe.

In May 1994, the shareholders of RHL approved a reorganization and
reincorporation of RHL resulting in the exchange of the shares of the
outstanding common stock of RHL for the shares of ResMed. In addition,
effective in March 1995, the Company effected a 5:2 stock split. As a result
of the reorganization, reincorporation and the stock split, the accounts
within the consolidated financial statements have been reclassified to reflect
a par value of $.004 per share. The board of directors also authorized
2,000,000 shares of $0.01 par value preferred stock. No such shares were
issued or outstanding at June 30, 1996.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Consolidation:

The consolidated financial statements include the accounts of ResMed
and its wholly owned subsidiaries. All significant transactions and balances
have been eliminated in consolidation.

(b) Use of Estimates:

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

(c) Revenue Recognition:

Revenue on product sales is recorded at the time of shipment, when
earned. Royalty revenue from license agreements is recorded when earned.

(d) Cash and Cash Equivalents:

Cash equivalents include certificates of deposit, commercial paper,
and other highly liquid investments with original maturities of three months
or less stated at cost, which approximates market. Investments with original
maturities of three months or less are considered to be cash equivalents for
purposes of the consolidated statements of cash flows.

(e) Inventories:

Inventories are stated at the lower of cost, determined principally
by the first-in, first-out method, or net realizable value.

- -F6-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(f) Property and Equipment:

Property and equipment is recorded at cost. Depreciation expense is
computed using the straight-line method over the estimated useful lives of the
assets, generally two to ten years. Assets held under capital leases are
recorded at the lower of the net present value of the minimum lease payments
or the fair value of the leased asset at the inception of the lease.
Amortization expense is computed using the straight-line method over the
shorter of the estimated useful lives of the assets or the period of the
related lease. Straight-line and accelerated methods of depreciation are used
for tax purposes. Maintenance and repairs are charged to expense as incurred.

(g) Patents:

The registration costs for new patents are capitalized and amortized
over the estimated useful life of the patent, generally five years. In the
event of a patent being superseded or deemed to have no future value, the
unamortized costs are written off immediately.

(h) Goodwill:

Goodwill arising from business acquisitions is amortized on a
straight-line basis over periods ranging from five to 15 years. The Company
carries goodwill at cost net of amortization. The Company reviews its
goodwill carrying value when events indicate that an impairment may have
occurred in goodwill. If, based on the undiscounted cash flows, management
determines goodwill is overvalued, goodwill is written down to its discounted
cash flow value and the amortization period is re-assessed.

(i) Government Grants:

Government grants revenue is recognized when earned. Grants have
been obtained by ResMed from the Australian Federal Government to support the
continued development and export of ResMed's proprietary positive airway
pressure technology and to assist development of export markets in the amount
of $440,000, $527,000 and $537,000 for the years ended June 30, 1994, 1995 and
1996, respectively.

(j) Foreign Currency:

The consolidated financial statements of ResMed's non-U.S.
subsidiaries are translated into U.S. Dollars for financial reporting
purposes. The assets and liabilities of non-U.S. subsidiaries whose
functional currencies are other than the U.S. Dollar are translated at year
end exchange rates. Income statements are translated at weighted average
rate. The cumulative translation effects are reflected in stockholders'
equity. Gains and losses on transactions denominated in other than the
functional currency of the entity are reflected in operations.

(k) Research and Development:

All research and development costs are expensed in the period
incurred.

- -F7-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(l) Net Income per Common and Common Equivalent Share:

Primary net income per common and common equivalent share and net
income per common and common equivalent share assuming full dilution are
computed using the weighted average number of shares outstanding adjusted for
the incremental shares attributed to outstanding options to purchase common
stock as determined under the treasury stock method.

(m) Financial Instruments :

The carrying value of financial instruments, such as cash and cash
equivalents, foreign currency option contracts, accounts receivable, accounts
payable, marketable securities and long-term debt approximate their fair
value. The Company does not hold or issue financial instruments for trading
purposes.

The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at June 30, 1995 and June 30,
1996. The fair value of financial instruments is defined as the amount at
which the instrument could be exchanged in a current transaction between
willing parties.

1995 1996
Carrying Fair Carrying Fair
Amount Value Amount Value

Financial assets
Cash and cash equivalents $ 3,256 3,256 5,510 5,510
Marketable securities -
available for sale 20,510 20,510 18,021 18,021
Accounts receivable 3,792 3,792 6,252 6,252
Government grants 825 825 915 915
Other assets 19 19 1,263 1,263
Financial liabilities
Accounts payable 2,572 2,572 2,421 2,421
Long-term debt 787 787 867 867

The carrying amounts shown in the table are included in the consolidated
balance sheets under the indicated captions.

(n) Foreign Exchange Risk Management:

The Company enters into various types of foreign exchange contracts in
managing its foreign exchange risk, including derivative financial instruments
encompassing forward exchange contracts and foreign currency options.

- -F8-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(n) Foreign Exchange Risk Management (continued):

The purpose of the Company's foreign currency hedging activities is to
protect the Company from adverse exchange rate fluctuations with respect to
net cash movements resulting from the sales of products to foreign customers
and Australian manufacturing activities. The Company enters into foreign
currency option contracts to hedge anticipated sales principally in Pound
Sterling and Deutschmarks. The term of such currency derivatives is generally
less than three years.

Premiums to enter certain foreign currency options are included in other
assets and are amortized over the period of the agreement in the consolidated
statement of income against other income, net. At June 30, 1996 unamortized
premiums amounted to $302,490.

Unrealized gains or losses are recognized as incurred in the consolidated
balance sheets as either other assets or other liabilities and are recorded
within other income, net on the Company's consolidated statement of income.
Unrealized gains and losses on currency derivatives are determined based on
dealer quoted prices.

Foreign currency option contracts have been purchased in part by the
issue of put options to counterparts. As a result, should foreign exchange
rates drop below specified levels, on a specific date, the Company is required
to deliver certain funds to counterparts at contracted foreign exchange rates.
As at June 30, 1996 none of the put options issued by the Company are
exercisable as foreign exchange rates remain above the foreign exchange rates
specified.

The Company is exposed to credit-related losses in the event of
nonperformance by counterparts to financial instruments, but it does not
expect any counterparts will fail to meet their obligations given their high
credit ratings. The credit exposure of foreign exchange options is
represented by the fair value of options with a positive fair value at the
reporting date. The Company does not require collateral on its financial
instruments.

At June 30, 1996 the Company held foreign currency option contracts with
notional amounts totaling $43,595,350 to hedge foreign currency items. These
contracts mature at various dates prior to December 31, 1999.

(o) Income Taxes:

ResMed accounts for income taxes under Statement of Accounting
Standards No. 109, "Accounting for Income Taxes" (Statement 109). Statement
109 requires an asset and liability method of accounting for income taxes.
Under the asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. Under Statement 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

- -F9-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(p) Marketable Securities Available for Sale:

The Company adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS
115), on July 1, 1994. In accordance with FAS 115, prior years' financial
statements have not been restated to reflect the change in accounting method.
There was no cumulative effect as a result of adopting FAS 115 in fiscal 1995.

Management determines the appropriate classification of its
investments in debt and equity securities at the time of purchase and
re-evaluates such determination at each balance sheet date. Debt securities
for which the Company does not have the intent or ability to hold to maturity
are classified as available for sale. Securities available for sale are
carried at fair value, with the unrealized gains and losses, net of tax,
reported in a separate component of shareholders' equity. At June 30, 1995
and 1996, the Company had no investments that qualified as trading or held to
maturity.

The amortized cost of debt securities classified as available for
sale is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization and interest are included in interest income.
Realized gains and losses are included in other income or expense. The cost
of securities sold is based on the specific identification method.

At June 30, 1996, the Company's investments in debt securities were
classified on the accompanying consolidated balance sheet as marketable
securities-available for sale. These investments are diversified among high
credit quality securities in accordance with the Company's investment policy.

3. MARKETABLE SECURITIES - AVAILABLE FOR SALE

The fair value of marketable securities available for sale at June 30,
1995 and 1996, were $20,510,000 and $18,021,000, respectively. These
securities have contractual maturity dates between 2002 and 2025. The
estimated fair value of each investment approximates the amortized cost, and
therefore, there are no unrealized gains or losses as of June 30, 1995 or
1996.

Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties.

- -F10-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

4. INVENTORIES

Inventories were comprised of the following at June 30, 1995 and 1996 (in
thousands) :

1995 1996
--------- --------

Raw materials $ 1,990 2,088
Work in progress 888 257
Finished goods 1,472 3,789
________ ________
$ 4,350 6,134
======== ========

5. PROPERTY AND EQUIPMENT

Property and equipment is comprised of the following at June 30, 1995 and
1996 (in thousands):

1995 1996
---------- ---------

Machinery and equipment $ 1,181 1,893
Computer equipment 398 780
Rental units - 155
Furniture and fixtures 426 538
Vehicles 264 461
Clinical and demonstration equipment 491 1,300
Leasehold improvements 297 355
________ ________
3,057 5,482

Accumulated depreciation and amortization (1,076) (2,198)
________ ________
$ 1,981 3,284
======== ========

- -F11-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

6. ACCRUED EXPENSES

Accrued expenses at June 30, 1995 and 1996 consist of the following (in
thousands) :

1995 1996
------------ -----------

Service warranties $ 410 280
Legal 286 394
Royalties 31 39
Initial public offering costs - printing 154 -
Initial public offering costs - legal 140 -
Value added taxes due 47 654
Consulting fees - 133
Employee benefits 355 522
Other 583 793
___________ ___________
$ 2,006 2,815
=========== ===========

7. LONG-TERM DEBT

As part of an agreement between ResMed and the Australian Federal
Government, ResMed obtained an $870,000 loan facility of which $787,000 and
$867,000 were outstanding at June 30, 1995 and 1996, respectively. The loan
facility is unsecured and accrues interest at 3.8% per annum beginning May 3,
1996 through April 3, 1999. The facility is payable in six monthly
installments beginning November 3, 1996. Prior to May 3, 1996, the loan is
interest free.

The aggregate annual maturities of long-term debt at June 30, 1996 are as
follows:

Year ending June 30 Amount
- ------------------- ------------

1997 $ 289
1998 289
1999 289
2000 -
2001 -
Thereafter -
___________
$ 867
===========

8. STOCKHOLDERS' EQUITY

Initial Public Offering

On June 1, 1995, the Company completed an initial public offering of
2,000,000 new shares of common stock at a price of $11.00 per share, resulting
in net proceeds of approximately $18.9 million, after deducting issuance costs
of $1.6 million.

On July 10, 1995, the underwriters for the above-mentioned public
offering exercised their over-allotment of 450,000 new shares of common stock,
resulting in additional net proceeds of approximately $4.5 million, after
deducting issuance costs of approximately $347,000.

- -F12-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

8. STOCKHOLDERS' EQUITY (CONTINUED)

Stock Options

Prior to the formation of the Company, RHL, a wholly owned subsidiary, at
the discretion of the directors, from time-to-time granted stock options to
key personnel, including officers, directors and outside consultants. The
options granted by RHL were exchanged for options with similar terms to
purchase common stock of ResMed. These options have expiration dates of two
to five years from the date of grant and vested immediately.

On June 1, 1995, May 13, 1996 and June 27, 1996 the Company granted
235,000, 7,500 and 262,300 stock options respectively to personnel, including
officers and directors in accordance with the 1995 option plan. These options
have expiration dates of ten years from date of grant and vest over three
years. The Company granted these options with the exercise price equal to the
market value as determined at the date of grant.

The following table summarizes options activity (adjusted for 5:2 stock split effected
in fiscal 1995)

Years ended June 30,
1994 1995 1996
--------------- --------------- ---------------

Outstanding at beginning of year 1,799,860 1,143,125 433,625

Granted 668,250 235,000 269,800
Exercised (824,985) (944,500) (187,950)
Canceled (500,000) - -
______________ ______________ ______________
Outstanding at end of year 1,143,125 433,625 515,475
============== ============== ==============

Price range of granted options 0.78-3.58 11.00 13.06-16.34

Shares reserved for granting future
stock options

Beginning of year - - 465,000
End of year - 465,000 195,200

Options exercisable at end of year 1,143,125 198,625 84,433
Price range of exercisable options 0.15-3.64 1.08-3.64 1.08-11.00

During the year ended June 30,1994, ResMed repurchased 500,000 options
from a former distributor for $348,000. Expenses related to compensatory
options granted for the year ended June 30, 1994 was $322,000. No such
expense was incurred in fiscal 1995 or fiscal 1996.

- -F13-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

9. OTHER, NET

Other, net is comprised of the following at June 30, 1994, 1995 and 1996 (in thousands):

1994 1995 1996
-------------- ------------- ------------

License fees $ - 189 242
Gain/(loss) on unrealized foreign currency options - (97) 961
Gain/(loss) on foreign currency transactions (29) 166 147
Other 33 4 7
____________ ____________ ____________
$ 4 262 1,357
============ ============ ============

In November 1994, the Company and an unrelated third-party entered
into a marketing rights agreement for the third-party to exclusively market
certain respiratory and related products under development by the Company in
the Japanese market. Under the terms of the agreement, the third-party is
required to provide up to $470,000 to the Company, of which $189,000 and
$242,000 has been recognized in the consolidated statements of income during
the years ended June 30, 1995 and June 30, 1996, respectively. The amounts
recognized were limited by certain performance requirements of the agreement.

10. INCOME TAXES

Income before income taxes for the years ended June 30, 1994, 1995 and
1996, was taxed under the following jurisdictions (in thousands).

1994 1995 1996
-------------- ------------ -------------

U.S. $ (141) 11 (32)
Non-U.S. 1,972 3,770 6,593
____________ ____________ ____________
$ 1,831 3,781 6,561
============ ============ ============

The provision (benefit) for income taxes is presented below (in
thousands) :

Current:

U.S. $ - - -
Non-U.S. 789 1,081 1,958
____________ ____________ ____________
789 1,081 1,958
____________ ____________ ____________

Deferred:

U.S. - - -
Non-U.S. (190) (133) 100
____________ ____________ ____________
Provision for income taxes $ 599 948 2,058
============ ============ ============

- -F14-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

10. INCOME TAXES (CONTINUED)

The provision for income taxes differs from the amount of income tax determined by
applying the applicable U.S. federal income tax rate of 35% to pretax income as a result of
the following (in thousands):

1994 1995 1996
-------------- ------------- -------------

Computed "expected" tax expense $ 623 1,286 2,296
Increase (decrease) in income taxes
resulting from:
Issuance of stock options 109 - -
Non-deductible expenses 60 40 9
Research and development credit (219) (274) (359)
Non assessable interest income - - (125)
Non-deductible formation costs 31 - -
Repurchase of stock options (118) - -
Utilization of net operating loss carryforwards - (11) (8)
Change in valuation allowance 59 (10) 133
Effect of non-U.S. tax rates (18) (29) 233
Effect of a change in Australian tax rates - (48) -
Other 72 (6) (121)
____________ ____________ ____________
$ 599 948 2,058
============ ============ ============

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are comprised
of the following at June 30, 1995 and 1996 (in thousands):

1995 1996
------------- ------------
Deferred tax assets:
Employee benefit obligations $ 74 97
Provision for service warranties 147 101
Net operating loss carryforwards 74 176
Accrual for legal costs - 272
Intercompany profit in inventories 108 437
Other accruals 245 197
___________ ___________
Total gross deferred tax assets 648 1,280

Less valuation allowance (74) (176)
___________ ___________
Net deferred tax assets 574 1,104
___________ ___________
Deferred tax liabilities:
Patents (58) (78)
Government grants (272) (329)
Unamortized foreign exchange premiums - (109)
Unrealized foreign exchange gains - (346)
Amortization expense - (92)
Other receivables (97) -
Other (8) (123)
___________ ___________
Total gross deferred tax liabilities (435) (1,077)
___________ ___________
Net deferred tax asset $ 139 27
=========== ===========

- -F15-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

10. INCOME TAXES (CONTINUED)

The valuation allowance at June 30, 1995 and 1996, primarily relates to a
provision for uncertainty as to the utilization of net operating loss
carryforwards. The net change in the valuation allowance was an increase of
$59,000 and a decrease of $21,000 for the years ended June 30, 1994 and 1995.
For the year ended June 30, 1996, the net change in the valuation allowance
was a increase of $125,000. The measurement of tax assets and liabilities at
June 30 of each year, reflect foreign currency translation adjustments,
changes in enacted tax rates and changes in temporary differences. Income
taxes in 1995 were reduced by $11,000 through the utilization of net operating
loss carryforwards. Based on the Company's history of taxable income and its
projection of future earnings, it believes that it is more likely than not
that sufficient taxable income will be generated in the foreseeable future to
realize the deferred tax asset.

At June 30, 1996, ResMed has net operating loss carryforwards for U.S.
federal income tax purposes of approximately $176,000 which are available to
offset future U.S. federal taxable income, if any, through 2010. These have
not been brought to account as the entity involved has not generated taxable
income to date.

11. EMPLOYEE RETIREMENT PLANS

ResMed contributes to defined contribution (accumulation) pension plans
(the plans) as required by Australian law covering all eligible employees
resident in Australia. All Australian employees after serving a qualifying
period, are entitled to benefits on retirement, disability or death.
Employees may contribute additional funds to the plans. ResMed contributes to
the plans at the rate of 5% - 5.5% of the salaries of all Australian
employees. Additionally, certain executives, at their discretion, may direct
that an additional percentage of their total salary and benefit package be
contributed to their individual plan account. Total Company contributions to
the plans, for the years ended June 30, 1994, 1995 and 1996 were $131,000,
$157,000 and $374,000, respectively.

12. SIGNIFICANT CUSTOMERS

ResMed's customers are located primarily in the United States, Europe and
Australia. One customer, Medical Gases of Australia, accounted for
approximately, 18%, 10% and 7% of net sales in 1994, 1995 and 1996,
respectively, and another customer, Priess, located in Germany, accounted for
approximately 19%, 15% and 8% of net sales in 1994, 1995 and 1996,
respectively. The business of Priess was acquired by ResMed on February 7,
1996.

13. DEPENDENCE ON KEY SUPPLIERS

The Company purchases two key components for its CPAP devices from two
single source suppliers. Management is attempting to qualify additional
sources of supply for these components however, there can be no assurance that
a replacement supplier could be located on a timely basis or that available
inventories would be adequate to meet the Company's production needs during
any prolonged interruption of supply. The Company's supplier for one such
component is located in Europe. Operations in Europe are subject to the risks
normally associated with foreign operations including, but not limited to,
possible changes in export or import restrictions and the modification or
introduction of other governmental policies with potentially adverse effects.
A reduction or stoppage in supply, or the Company's inability to develop
alternate supply sources, if required, would limit its ability to manufacture
its CPAP devices and therefore could adversely affect its business, financial
condition and results of operations.

- -F16-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

14. GEOGRAPHIC SEGMENT INFORMATION

ResMed operates primarily in the respiratory medicine industry.
Geographic segments have been classified into three regions; America, Europe
and Australia/Rest of World. North America includes the U.S., Canada and
South America, Australia/Rest of World includes Australia, New Zealand, South
Africa and Asia.

Financial information by geographic region for the years ended June 30,
1994, 1995 and 1996, is summarized below (in thousands):

Corporate,
Australia/ unallocated
North Rest of and
America Europe World eliminations Total

1994
- --------------------------------

Net revenues $ 6,502 4,171 3,184 - 13,857
Transfers among areas - - 4,115 (4,115) -
___________ ___________ ___________ ___________ ___________
Total revenues $ 6,502 4,171 7,299 (4,115) 13,857
=========== =========== =========== =========== ===========
Income from operations $ 440 832 17 - 1,289
=========== =========== =========== =========== ===========
Identifiable assets $ 2,137 293 6,408 514 9,352
=========== =========== =========== =========== ===========
Depreciation and amortization $ 10 1 244 - 255
=========== =========== =========== =========== ===========
Capital expenditures $ 9 10 383 - 402
=========== =========== =========== =========== ===========
1995
- --------------------------------

Net revenues $ 12,549 6,757 4,195 - 23,501
Transfers among areas - - 6,551 (6,551) -
___________ ___________ ___________ ___________ ___________
Total revenues $ 12,549 6,757 10,746 (6,551) 23,501
=========== =========== =========== =========== ===========
Income (loss) from operations $ 1,296 3,803 (2,312) - 2,787
=========== =========== =========== =========== ===========
Identifiable assets $ 3,721 462 11,199 19,631 35,013
=========== =========== =========== =========== ===========
Depreciation and amortization $ 195 7 388 - 590
=========== =========== =========== =========== ===========
Capital expenditures $ 334 25 1,431 - 1,790
=========== =========== =========== =========== ===========
1996
- --------------------------------

Net revenues 16,830 12,400 5,332 - 34,562
Transfers among areas - - 4,062 (4,062) -
___________ ___________ ___________ ___________ ___________
Total revenues 16,830 12,400 9,394 (4,062) 34,562
=========== =========== =========== =========== ===========
Income (loss) from operations 1,504 5,066 (2,771) (204) 3,595
=========== =========== =========== =========== ===========
Identifiable assets 5,508 6,671 18,241 11,973 42,393
=========== =========== =========== =========== ===========
Depreciation and amortization 261 346 670 - 1,277
=========== =========== =========== =========== ===========
Capital expenditures 461 7,078 1,218 - 8,757
=========== =========== =========== =========== ===========

- -F17-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

14 GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)

Net revenues which represent net sales to unaffiliated customers, is
based on the location of the customers. Transfers between geographic areas
are recorded at amounts generally above cost and in accordance with the rules
and regulations of the respective governing tax authorities. Operating income
or loss consists of total net sales less operating expenses, and does not
include either interest and other income, net, or income taxes. Identifiable
assets of geographic areas are those assets used in the Company's operations
in each area.

15. RELATED PARTY TRANSACTIONS

For the years ended June 30, 1994, 1995 and 1996, legal and consulting
service fees in the amount of $414,000, $282,000 and $314,000, were paid to
certain directors of subsidiaries and director-related entities and
shareholders

Included in these amounts are payments made to Dr. Colin Sullivan for the
years ended June 30, 1994 and June 30, 1995 in which years he was a director
of a subsidiary. Dr. Sullivan provides consulting services to the Company
pursuant to a consulting agreement that terminates on December 31, 1997
(subject to extension for an additional five year term) for which he receives
annual payments based on the net sales (as defined in the Consulting
Agreement) of certain of the Company's products, subject to a $90,000 per
annum minimum payment. The Company also reimburses Dr. Sullivan for his
out-of-pocket expenses in performing such consulting services.

The Company has also agreed to pay such amounts to Dr. Sullivan for a
period of 24 months following the termination of his consulting relationship
with the Company in exchange for his agreement not to compete with the Company
during this period. Total payments to Dr. Sullivan were, $147,000,
$228,000 and $314,000 for the Company's fiscal years ended June 30, 1994,
1995 and 1996, respectively.

16. COMMITMENTS

The Company leased certain equipment and fixtures under capital leases.
Included in property and equipment are approximately $62,000 and $Nil of
assets held under capital leases at June 30, 1995 and June 30, 1996,
respectively. Accumulated amortization related to leased assets was
approximately $38,000 and $Nil at June 30, 1995 and 1996, respectively.

In addition, the Company also leases buildings, motor vehicles and office
equipment under operating leases. Rental charges for these items are expensed
as incurred. At June 30, 1996 the Company had the following future minimum
lease payments under non cancelable operating leases.

- -F18-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

16. COMMITMENTS (CONTINUED)

Operating
Years leases
- ------------------------------- ----------

1997 $ 559
1998 554
1999 481
2000 173
Thereafter 101
_________
Total minimum lease payments $ 1,868
=========

Rent expense under operating leases for the years ended June 30, 1994,
1995 and 1996 was approximately $104,000, $162,000 and $467,000, respectively.

17. BUSINESS ACQUISITION

Priess

On February 7, 1996 the Company's fully owned German subsidiary ResMed
Priess GmbH acquired the business and associated assets of Dieter W Priess
Medizintechnik (Priess), its German distributor for $6,350,000 in cash from
a 4% stockholder of the company. Priess is based in Moenchengladbach, Germany
and is engaged in the distribution and sale of respiratory products. The
acquisition has been accounted for as a purchase and, accordingly, the results
of operations of Priess have been included in the Company's consolidated
financial statements from February 7, 1996. The excess of the purchase price
over the fair value of the net identifiable assets acquired of $4,461,000 has
been recorded as goodwill and is being amortized on a straight-line basis over
15 years. The purchase agreement also provides for additional payments of up
to $4,000,000 over the next four years contingent on future sales revenues of
Priess. The additional payments, if any, will be accounted for as additional
goodwill.

$ '000
----------

Fair value of assets acquired
Inventory 1,524
Property plant and equipment 532
_________
2,056
_________
Goodwill on acquisition 4,461
_________
Cash consideration 6,517
=========

- -F19-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

17. BUSINESS ACQUISITION (CONTINUED)

The following unaudited pro forma financial information presents the
combined results of operations of the Company and Priess as if the acquisition
had occurred as of the beginning of the years ended June 30, 1995 and June 30,
1996, after giving effect to certain adjustments, including amortization of
goodwill, additional depreciation expense, reduced interest income from use of
IPO funds relating to the acquisition, and related income tax effects. The
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and Priess constituted a
single entity during such periods.

Year Ended
June 30,
1995 1996
------- ------

Net sales 29,381 38,558

Net income 3,547 5,476

Net income per common and common equivalent share:
Primary 0.80 0.76
Assuming full dilution 0.79 0.76

Premium Medical Purchase

On June 12, 1996 the Company's fully owned French subsidiary ResMed SA
acquired the business and associated assets of Premium Medical SARL (Premium),
its French distributor for $348,000 in cash. Premium was based in Paris,
France and was engaged in the sale and distribution of respiratory products.
The acquisition has been accounted for as a purchase and, accordingly, the
results of operations of the Premium business have been included in the
Company's consolidated financial statements from June 12, 1996. The excess of
the purchase price over the fair value of the net identifiable assets acquired
of $115,000 has been recorded as goodwill and is being amortized on a
straight-line basis over 5 years.

$ '000
----------

Fair value of assets acquired
Inventory 229
Property plant and equipment 4
_________
233
_________
Goodwill on acquisition 115
_________
Cash consideration $ 348
=========

- -F20-

RESMED INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

18. LEGAL ACTIONS

In October 1994, in Australia, a patent held by ResMed was revoked on
appeal on the grounds that the patent was not entitled to claim priority to a
"provisional" application, which was filed before the inventor's publication.
As a result of this claim, ResMed based in part on advice from legal counsel,
at June 30, 1994 accrued approximately $300,000 for costs associated with this
patent litigation which remains outstanding at June 30, 1996. This amount is
included in accrued expenses on the consolidated balance sheets.

In January 1995, the Company filed a complaint for patent infringement in
the United States District Court against Respironics Inc., a Delaware
registered company. In response, in February 1995, Respironics filed a
complaint against the Company that asserts, (i) Respironics does not infringe
the subject patents; and (ii) that the subject patents are invalid and
unenforceable. In June 1996 the Company initiated a further action in
Pennsylvania against Respironics regarding alleged infringement of the
Company's continuation patent, granted June 4, 1996, related to the delayed
timer feature. The action is continuing and is expected to be defended by
Respironics. Management believes, based in part on advice from legal
counsel, that this action will not have a material adverse effect on the
operations or financial position of the Company.

In May 1995, Respironics and its Australian distributor filed a statement
of claim against the Company and its President in the Federal Court of
Australia, New South Wales District Registry. The statement of claim alleges
that the Company engaged in unfair trade practices, including the misuse of
the power afforded by its Australian patents and dominant market position in
violation of the Australian Trade Practices Act. The statement of claim
asserts damage claims in the aggregate amount of approximately $730,000,
constituting lost profit on sales. While the Company intends to defend this
action, there can be no assurance that the Company will be successful in
defending such action or that the Company will not be required to make
significant payments to the claimants. Furthermore, the Company expects to
incur ongoing legal costs in defending such action.

19. RECENT ACCOUNTING DEVELOPMENTS

In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
Effective for fiscal years beginning after December 15, 1995. SFAS 121
provides guidance for recognition and measurement of impairment of long-lived
assets, certain identifiable intangible assets and goodwill related both to
assets to be held and used and assets to be disposed of. The adoption of SFAS
121 is not expected to have a material effect on the Company's financial
position or results of operations.

In October 1995, the Financial Accounting Standards Board issued SFAS
123, "Accounting for Stock-Based Compensation," effective for fiscal years
beginning after December 15, 1995. Under the provisions of SFAS 123, the
Company is encouraged, but not required, to measure compensation costs related
to its employee stock compensation under the fair value method. The Company
has elected not to recognize compensation expense under this methodology. The
Company will adopt the pro forma method of disclosure under SFAS 123 in fiscal
year ended June 30, 1997.

- -F21-

SIGNATURES

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

DATED ResMed Inc.

By: PETER C FARRELL
_____________________
Peter C. Farrell, President and Chief Executive Officer
(Principal Executive Officer)

By: ADRIAN M SMITH
_____________________
Adrian M. Smith, Chief Financial Officer
(Principal Financial Officer)

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

Signature Title Date

Chief Executive Officer, President, September 25, 1996
PETER C FARRELL Chairman of the Board (Principal
__________________________ Executive Officer)
Peter C. Farrell

CHRISTOPHER G ROBERTS September 25, 1996
__________________________
Christopher G. Roberts Director

MICHAEL A QUINN September 25, 1996
__________________________
Michael A. Quinn Director

GARY W PACE September 25, 1996
__________________________
Gary W. Pace Director

DONAGH MCCARTHY September 25, 1996
__________________________
Donagh McCarthy Director

Schedule II

RESMED INC AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED JUNE 30, 1994, 1995 AND 1996, RESPECTIVELY
(IN THOUSANDS)

Balance at Charged to Other Balance at
beginning of costs and (deductions) end of
period expenses additions period

Year ended June 30, 1994
Applied against asset account:
Allowance for doubtful accounts $ 15 20 - 35
===== ===== ===== =====

Year ended June 30, 1995
Applied against asset accounts:
Allowance for doubtful accounts $ 35 112 (3) 144
===== ===== ===== =====

Year ended June 30, 1996
Applied against asset account
Allowance for doubtful accounts 144 31 - 175
===== ===== ===== =====

EXHIBIT INDEX

2.1 Purchase Agreement dated February 7, 1996 between Dieter W Priess
Medizinische technische Ger te and ResMed-Priess GmbH (I, GR).

23.1 Consent of KPMG Deutsche Treuhand Gesellschaft.

99.3 Press Release, dated February 12, 1996, issued by ResMed, Inc.

b) The following documents are filed as part of this report:

1.1 Consolidated Financial Statements and Schedule.

The consolidated financial statements and schedule of the Company and its
consolidated subsidiaries are set forth in the "Index to Consolidated
Financial Statements" under Item 8 of this report.

3. Exhibits. The following exhibits are filed as a part of this report:

3.1 Certificate of Incorporation of Registrant, as amended*
3.2 By-laws of Registrant*
4.1 Form of certificate evidencing shares of Common Stock*
10.1 1995 Stock Option Plan*
10.2 Licensing Agreement between the University of Sydney and ResMed
Limited dated May 17, 1991, as amended*
10.3 Amended and Restated Consulting Agreement between Colin Sullivan and
ResMed Limited dated September 2, 1994*
10.4 Loan Agreement between the Australian Trade Commission and ResMed
Limited dated May 3, 1994*
10.5 Lease for 82 Waterloo Road, Sydney, Australia*
10.6 Lease for 5744 Pacific Center Boulevard, San Diego, USA*
11.1 Statement re: Computation of Earning per Share
16.1 Letter regarding change in Certifying Accountant*
21.1 Subsidiaries of the Registrant
23.1 Consent and Report on Schedules of KPMG Peat Marwick LLP
27.1 Financial Data Schedule

* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 33-91094) declared effective on June 1, 1995.

Exhibit 11.1
RESMED INC AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Year Ended June 30,
--------------------
1994 1995 1996
---------- ---------- ----------

PRIMARY EARNINGS
Net income $ 1,232 2,833 4,503
========= ========= =========
Shares
Weighted average number of common
shares outstanding 3,137 3,905 7,090
Additional shares assuming conversion of
stock options under treasury stock method 502 545 109
_________ _________ _________
Weighted average number of common
shares and common equivalent outstanding
as adjusted 3,639 4,450 7,199
========= ========= =========

Primary earnings per common and common
equivalent share: $ 0.34 $ 0.63 $ 0.63
========= ========= =========

FULLY DILUTED EARNINGS
Net Income $ 1,232 2,833 4,503
========= ========= =========

Shares
Weighted average number of common
shares outstanding 3,137 3,905 7,090
Additional shares assuming conversion of
stock options under treasury stock method 502 608 128
_________ _________ _________
Weighted average number of common and
common equivalent shares outstanding 3,639 4,513 7,218
as adjusted
========= ========= =========

Fully diluted earnings per common and
common equivalent share: $ 0.34 $ 0.62 $ 0.62
========= ========= =========

Exhibit 21.1
RESMED INC
SUBSIDIARIES OF THE REGISTRANT

ResMed Holdings Limited (incorporated under the laws of New South Wales,
Australia)

ResMed Limited (incorporated under the laws of New South Wales, Australia)*

ResMed Corporation (a Minnesota corporation)*

ResMed (UK) Limited (a United Kingdom corporation)*

ResMed International Inc (a Delaware corporation)

ResMed Priess GmbH and Co Kg (a German corporation)**

ResMed SA (a French corporation)**

ResMed Priess GmbH (a German corporation)

*A subsidiary of ResMed Holdings Limited
** A subsidiary of ResMed International Inc

Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES

The Board of Directors and Stockholders
ResMed Inc:

The audits referred to in our report dated August 12, 1996, included the
related financial statement schedules as of June 30, 1996 and for each of the
years in the three-year period ended June 30, 1996. This financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.

We consent to incorporation by reference in the registration statement (No.
333-08013) on Form S-8 of ResMed Inc of our report dated August 12, 1996,
relating to the consolidated balance sheets of ResMed Inc and subsidiaries as
of June 30, 1995 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1996, and the related schedules, which report appears in
the June 30, 1996 annual report on Form 10-K of ResMed Inc.

/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
San Diego, California
September 23, 1996

Exhibit 27.1
RESMED INC

This schedule contains summary financial information extracted from ResMed
Inc's Annual June 30, 1996 financial report and is qualified in its entirety
by reference to such financial statements.

Period Type 12 Months 12 Months
Fiscal-Year-End June 30, 1996 June 30, 1995
Period-End June 30, 1996 June 30, 1995

Exchange-Rate 1 1
Cash 5,510,000 3,256,000
Securities 18,021,000 20,510,000
Receivables 6,252,000 3,729,000
Allowances (144,000) (175,000)
Inventory 6,134,000 4,350,000
Current-Assets 37,846,000 33,013,000
PP&E 3,284,000 1,981,000
Depreciation 0 0
Total-Assets 46,946,000 35,313,000
Current-Liabilities 7,382,000 5,659,000
Bonds 0 0
Preferred-Mandatory 0 0
Preferred 0 0
Common 29,000 26,000
Other-Se 38,957,000 28,841,000
Total-Liability-And-Equity 46,946,000 35,313,000
Sales 34,562,000 23,501,000
Total-Revenues 34,562,000 23,501,000
CGS 16,990,000 11,271,000
Total-Costs 0 0
Other-Expenses 0 0
Loss-Provision 0 0
Interest-Expense 0 0
Income-Pretax 6,561,000 3,781,000
Income-Tax 2,058,000 948,000
Income-Continuing 4,503,000 2,833,000
Discontinued 0 0
Extraordinary 0 0
Changes 0 0
Net-Income 4,503,000 2,833,000
EPS-Primary 63 63
EPS-Diluted 62 62