10-K 1 form10k2002.txt 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 FOR THE FISCAL YEAR ENDED JUNE 30, 2002 COMMISSION FILE NUMBER 0-26038 RESMED INC (Exact name of Registrant as specified in its Charter) DELAWARE (State or other jurisdiction of incorporation or organization) 98-0152841 (IRS Employer Identification No.) 14040 DANIELSON STREET POWAY, CA 92064-6857 UNITED STATES OF AMERICA (Address of principal executive offices) (858) 746-2400 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS: Common Stock, $.004 Par Value Rights to Purchase Series A Junior Participating Preferred Stock NAME OF EACH EXCHANGE UPON WHICH REGISTERED: New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to 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 6, 2002, computed by reference to the closing sale price of such stock on the New York Stock Exchange, was approximately $834,476,000. (All directors, executive officers, and 10% stockholders of Registrant are considered affiliates.) At September 6, 2002, registrant had 32,912,599 shares of Common Stock, $.004 par value, issued and outstanding. This number excludes 360,347 shares held by the registrant as treasury shares. Portions of registrant's definitive Proxy Statement for its November 11, 2002 meeting of stockholders are incorporated by reference into Part III of this report.

RESMED INC ______________________ TABLE OF CONTENTS ______________________ PAGE Part I Item 1 Business 3 Item 2 Properties 17 Item 3 Legal Proceedings 17 Item 4 Submission of Matters to a Vote of Security Holders 18 Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 18 Item 6 Selected Financial Data 20 Item 7 Management's Discussion and Analysis of Financial Condition and 21 Results of Financial Operation Item 7A Quantitative and Qualitative Disclosures About Market and Business Risks 29 Item 8 Consolidated Financial Statements and Supplementary Data 37 Item 9 Changes in and Disagreements with Accountants on Accounting and 38 Financial Disclosure Part III Item 10 Directors and Executive Officers of the Registrant 38 Item 11 Executive Compensation 38 Item 12 Security Ownership of Certain Beneficial Owners and Management 39 Item 13 Certain Relationships and Related Transactions 39 Part IV Item 14 Exhibits, Consolidated Financial Statement Schedule and Reports on Form 8-K 39

Sullivan, VPAP, AutoSet, Bubble Mask, Bubble Cushion, SmartStart, ResCap, Mirage, HumidAire, Aero-Click, minni Max nCPAP, Moritz II biLEVEL, Aero-Fix, Twister remove, SELFSET, MESAMIV; Poly-MESAM, MEPAL, Auto VPAP, AutoScan, AutoSet CS, AutoSet T, AutoView, IPAP MAX, ResControl, SCAN, S6, Ultra Mirage, VPAP MAX, AutoSet.com, AutoSet-CS.com, and ResMed are our trademarks. As used in this 10-K, the terms "we," "us," and "our" refer to ResMed Inc., a Delaware corporation, and its subsidiaries, on a consolidated basis, unless otherwise stated. -2- PART I ITEM 1 BUSINESS GENERAL We are a leading developer, manufacturer and distributor of medical equipment for treating, diagnosing, and managing sleep disordered breathing, or SDB. SDB includes obstructive sleep apnea, or OSA, and other respiratory disorders that occur during sleep. When we were formed in 1989, our primary purpose was to commercialize a treatment for OSA developed by Professor Colin Sullivan of the University of Sydney, the current Chairman of our Medical Advisory Board. This treatment, nasal Continuous Positive Airway Pressure, or CPAP, was the first successful noninvasive treatment for OSA. CPAP systems deliver pressurized air, typically through a nasal mask, to prevent collapse of the upper airway during sleep. Since the development of nasal CPAP, we have developed a number of innovative products for SDB, including flow generators, diagnostic products, mask systems, headgear and other accessories. Our growth has been fuelled by geographic expansion, increased awareness of SDB as a significant health concern among physicians and patients, and our research and product development effort. We employ approximately 1,250 people and sell our products in over 60 countries through a combination of wholly owned subsidiaries and independent distributors. CORPORATE HISTORY ResMed Inc., a Delaware corporation, was formed in March 1994 as the ultimate holding company for our domestic, Australian and European operating subsidiaries. On June 1, 1995, we completed an initial public offering of common stock and on June 2, 1995 our common stock commenced trading on The NASDAQ National Market. On September 30, 1999 we transferred our principal public listing to the New York Stock Exchange, trading under the ticker symbol RMD. On November 25, 1999, we established a secondary listing of our shares via Chess Depositary Instruments, or CDIs, on the Australian Stock Exchange, also under the symbol RMD. Ten CDIs on the ASX represent one share of our common stock on the NYSE. On July 1, 2002, we converted our ASX listing status from a foreign exempt listing to a full listing. Our Australian subsidiary, ResMed Holdings Limited, was originally organized in 1989 by Dr. Peter Farrell to acquire from Baxter Center for Medical Research Pty Limited, or Baxter, the rights to certain technology relating to CPAP treatment 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. Since formation we have acquired a number of operating businesses with both Labhardt Ag and Servo Magnetics Inc acquired during fiscal 2002, on November 15, 2001 and May 14, 2002 respectively. Previously we have acquired MAP Medizin Technologie GmbH, Dieter W. Priess Medtechnik, Premium Medical SARL, Innovmedics Pte Ltd and EINAR Egnell AB, our German, French, Singaporean and Swedish distributors, on February 16, 2001, February 7, 1996, June 12, 1996, November 1, 1997 and January 31, 2000, respectively. During the 1999 fiscal year we made an equity investment in Flaga hf, based in Iceland. We now market Flaga's polysomnographic products under the Embla and Embletta label in the United States and selected other markets. -3- THE MARKET Sleep is a complex neurological process that includes two distinct states: rapid eye movement, or REM, sleep and non-rapid eye movement, or non-REM, sleep. REM sleep, which is about 20-25% of total sleep experienced by 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 upper airway has no rigid support and is held open by active contraction of upper airway muscles. Normally, during REM sleep and deeper levels of non-REM sleep, upper airway muscles relax and the airway narrows. Individuals with narrow upper airways or poor muscle tone are prone to temporary collapses of the upper airway during sleep, or apneas, or near closures of the upper airways, or hypopneas. These breathing irregularities result in a lowering of blood oxygen concentration, causing the central nervous system to react to the lack of oxygen or increased carbon dioxide and signaling the body to respond. Typically, the individual subconsciously arouses from sleep, causing the throat muscles to contract, 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. Sufferers of OSA typically experience ten or more such cycles per hour. While these awakenings greatly impair the quality of sleep, the individual is not normally aware of these disruptions. 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. Despite the high prevalence of OSA, there is a general lack of awareness of OSA among both the medical community and the general public. It is estimated that less than 10% of those 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. 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, may have an increased incidence of OSA. Recent studies have also shown that SDB is associated with hypertension, the leading risk factor for the development of stroke and heart disease, and that over 50% of post stroke patients and patients with congestive heart failure have SDB. SLEEP DISORDERED BREATHING AND OBSTRUCTIVE SLEEP APNEA Sleep disordered breathing, or SDB, encompasses all physiological processes that cause detrimental breathing patterns during sleep. Manifestations include OSA, central sleep apnea, or CSA, and hypoventilation syndromes that occur during sleep. Hypoventilation syndromes are generally associated with obesity, chronic obstructive lung disease, neuromuscular disease and upper airway resistance changes. OSA is the most common form of SDB. 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, depression and irritability. OSA sufferers also may experience an increase in heart rate and an elevation of -4- blood pressure during the cycle of apneas. Several studies 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. 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, and studies have linked OSA to increased occurrences of traffic and workplace accidents. Generally, an individual seeking treatment for the symptoms of OSA is referred by a general practitioner to a specialist 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 heart rate and blood oxygen levels. These tests allow sleep clinicians to detect any sleep disturbances such as apneas, hypopneas or subconscious awakenings. We estimate that there are currently more than 2,000 sleep clinics in the United States, a substantial portion of which are affiliated with hospitals. The number of sleep clinics has expanded significantly from approximately 100 such facilities in 1985. 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, by contrast, is a non-invasive means of treating OSA. Nasal CPAP was first used as a treatment for OSA in 1980 by Dr. Colin Sullivan, the Chairman of our Medical Advisory Board. CPAP systems were commercialized for treatment of OSA in the United States in the mid 1980's. Today, use of nasal positive airway pressure is generally acknowledged as the most effective and least invasive therapy for managing OSA. 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 positive pressure. The patient breathes in air from the 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. CPAP is not a cure but a therapy for managing OSA, and therefore, must be used on a daily basis as long as treatment is required. 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. In more recent years, 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; bilevel flow generators, including VPAP systems, which provide different air pressures for inhalation and exhalation; heated humidification systems to make the airflow more comfortable; and auto titration devices which reduce the average pressure delivered during the night. -5- BUSINESS STRATEGY We believe that the SDB market will continue to grow in the future due to a number of factors including increasing awareness of OSA, improved understanding of the role of SDB treatment in the management of cardiac, neurologic and related disorders, and an increase in home-based diagnosis. Our strategy for expanding our business operations and capitalizing on the growth of the SDB market consists of the following key elements. CONTINUE PRODUCT DEVELOPMENT AND INNOVATION. We are committed to ongoing innovation in developing products for the diagnosis and treatment of SDB. We have been a leading innovator of products designed to more effectively treat apneas, increase patient comfort and encourage compliance with prescribed therapy. For example, in 1999 we introduced the Mirage Full Face Mask. This mask contains an inflatable air pocket, which conforms to the patient's facial contours, creating a more comfortable and better seal. Additionally, in 2002 we introduced the AutoSet Spirit flow generator, our second generation autotitrating device that adapts to the patient's breathing patterns to more effectively prevent apneas. We believe that continued product development and innovation are key factors to our ongoing success. Approximately 14% of our employees are devoted to research and development activities. In fiscal year 2002, we invested $14.9 million, or 7.3% of our revenues, in research and development. EXPAND GEOGRAPHIC PRESENCE. We market our products in over 60 countries to sleep clinics, home health care dealers and third party payers. We intend to increase our sales and marketing efforts in our principal markets, as well as expand our presence into new geographic regions. INCREASE PUBLIC AND CLINICAL AWARENESS. We intend to continue to expand our existing promotional activities to increase awareness of SDB and our treatment alternatives. These promotional activities target the population with predisposition to SDB as well as primary care physicians and specialists, such as cardiologists, neurologists and pulmonologists. In addition, we also target special interest groups, including the National Stroke Association, the American Heart Association and the National Sleep Foundation. In addition during fiscal 2002, the Company donated a total of $2.3 million to the ResMed Sleep Disordered Breathing Foundations in the United States and Australia to further enhance research and awareness of SDB. The foundations' contributions represent ResMed's continuing commitment to core medical research into sleep disordered breathing, particularly the treatment of obstructive sleep apnea. EXPAND INTO NEW CLINICAL APPLICATIONS. We continually seek to identify new applications of our technology for significant unmet medical needs. SDB is associated with a number of symptoms beyond fatigue and irritability. Recent studies have established a clinical association between OSA and both stroke and congestive heart failure. We are currently developing a device, which has not been approved for sale in the United States, for the treatment of Cheyne-Stokes breathing in patients with congestive heart failure. In addition, we maintain close working relationships with a number of prominent physicians to explore new medical applications for our products and technology. LEVERAGE THE EXPERIENCE OF OUR MANAGEMENT TEAM AND MEDICAL ADVISORY BOARD. Our senior management team has extensive experience in the medical device industry in general, and in the field of SDB in particular. Our Medical Advisory Board is comprised of experts in the field of SDB, including Dr. Colin Sullivan, the inventor of nasal CPAP. We intend to continue to leverage the experience and expertise of these individuals to maintain our innovative approach to the development of products and increase awareness of the serious medical problems caused by SDB. -6- PRODUCTS Our portfolio of products for the treatment of OSA and other forms of SDB includes flow generators, diagnostic products, mask systems, headgear and other accessories. FLOW GENERATORS We produce nasal CPAP, VPAP and AutoSet systems for the diagnosis, titration and treatment of SDB. The flow generator systems deliver positive airway pressure through a small nasal mask (or sometimes a full-face mask). Our VPAP units deliver ultra-quiet, comfortable bilevel therapy. There are two preset pressures: a higher pressure as the patient breathes in, and a lower pressure as the patient breathes out. Breathing out against a lower pressure makes treatment more comfortable, particularly for patients who need high pressure levels or for those with impaired breathing ability. AutoSet systems are based on a proprietary technology to monitor breathing that can also be used in the diagnosis and treatment of OSA. CPAP and VPAP flow generators, together with our diagnostic products, accounted for approximately 58%, 57% and 60% of our net revenues in fiscal years 2002, 2001 and 2000, respectively.

--------------------------------------------------------------------------------------------------------------------- Date of Flow Generators Description Commercial Introduction --------------------------------------------------------------------------------------------------------------------- VPAP Bilevel portable device providing different pressure levels for inhalation and exhalation, improved pressure switching and reduced noise output and spontaneous VPAP II breath triggering. March 1996 Bilevel portable device providing different pressure levels for inhalation and Moritz S# exhalation with integrated humidifier. October 2001* COMFORT Bilevel device with limited features. March 1996 Bilevel portable device with spontaneous and spontaneous/timed breath triggering VPAP II ST modes of operation. April 1996 VPAP II ST A Bilevel device with power failure alarms. August 1998 Bilevel ST device with spontaneous and spontaneous/timed breath triggering modes Moritz ST# of operation, and with power failure alarms, system with integrated humidifier. October 2001* Bilevel ventilatory support system for the treatment of adult patients with VPAP MAX+ respiratory insufficiency or respiratory failure. November 1998 AUTOSET AutoSet Spirit Modular, autotitrating device with optional integrated humidifier. September 2001 Autotitrating device, which continually adjusts CPAP treatment pressure based on AutoSet T patient airway resistance. March 1999 Delivers varying degrees of ventilatory assistance to stabilize breathing and reduce AutoSet CS# cheyne stokes respiration in congestive heart failure patients. December 1998 CPAP ResMed S7 series+ Continuous Positive Pressure flow generator. July 2002 ResMed S6 series Quiet, compact CPAP device with various comfort features. June 2000 Continuous Positive Pressure flow generator available with or without integrated Max II nCPAP# humidifier. Features low noise and reduced pressure swings. April 1997* Minni Max nCPAP# CPAP device with integrated and attachable humidifier and low noise levels. March 2000* ---------------------------------------------------------------------------------------------------------------------

*MAP product, not approved for marketing in the United States. + Sold in USA only # Sold outside USA only -7- MASK SYSTEMS Mask systems are one of the most important elements of an OSA treatment system. Masks are a primary determinant of patient comfort and as such may drive or impede patient compliance with therapy. We have been a consistent innovator in masks, improving patient comfort while minimizing size and weight. Masks, accessories and motors accounted for approximately 42%, 43% and 40% of our net revenues in fiscal years 2002, 2001 and 2000, respectively.

--------------------------------------------------------------------------------------------------------------------------------- Date of Mask Products Description Commercial Introduction ---------------------------------------------------------------------------------------------------------------------------------- Proprietary mask design with a contoured nasal cushion that adjusts to patient's Mirage Mask facial contours. Quiet, light and low profile. August 1997 Mirage-based full face mask system. Provides an effective method of applying ventilatory assist Noninvasive Positive Pressure Ventilation therapy. Can be used to Mirage Full Face Mask Series 2 address mouth- breathing problems in conventional bilevel or CPAP therapy. October 2001 Advanced version of the Mirage system with reduced noise characteristics and Ultra Mirage Mask improved forehead bridge. June 2000 Protege Mask+ Market entry mask. Upgradable to Ultra Mirage technology. May 2002 Nasal mask with only four major parts, allows simplified handling for patients and Papillon Mask# distributors. April 2002* ----------------------------------------------------------------------------------------------------------------------------------

* MAP product, not approved for marketing in the United States. + Sold in USA only # Sold outside USA only DIAGNOSTIC PRODUCTS We market sleep recorders for the diagnosis, titration and treatment of SDB in sleep clinics and hospitals. These diagnostic systems record relevant respiratory and sleep data, which can be analyzed by a sleep specialist or physician who can then tailor an appropriate OSA treatment regimen for the patient.

-------------------------------------------------------------------------------------------------------------------- Date of Diagnostic Products Description Commercial Introduction -------------------------------------------------------------------------------------------------------------------- Device to permit remote monitoring and adjustment of ResMed CPAP, VPAP, and AutoSet T Flow generators. An internal pressure transducer enables the clinician to interface with polysomnography to monitor airflow in both titration and ResControl diagnostic studies. September 1999 Digital sleep recorder that provides comprehensive sleep diagnosis in a sleep Embla+ laboratory. October 1999 Embletta+ Pocket-size digital recorder that performs ambulatory sleep studies. November 2000 MESAM IV Portable+ Portable diagnostic system that measures snore, heart rate, body position, and Diagnostic System+ oxygen saturation in conjunction with computer assisted analysis. December 1989* Poly-MESAM Portable+ Configurable cardio-respiratory polygraphy system up to 8 channels, includes Diagnostic System+ ECG, thorax and abdomen belts, PLMS sensor. February 1995* MEPAL Diagnostic+ System Polysomnography system designed for use in the sleep laboratory. February 1999* MEPAL mobil+ Diagnostic System Ambulatory polysomnography system. March 2001* --------------------------------------------------------------------------------------------------------------------

*MAP product, not approved for marketing in the United States. +Not manufactured by ResMed. -8- ACCESSORIES AND OTHER PRODUCTS To enhance patient comfort, convenience and compliance, we market a variety of other products and accessories. These products include humidifiers, such as the SULLIVAN HumidAire, which connect directly with the CPAP, VPAP and AutoSet T flow generators to humidify and heat the air delivered to the patient. Their use prevents the drying of nasal passages that can cause discomfort. Other optional accessories include a cold passover humidifier, carry bags and breathing circuits. MAP also offers a range of accessories, including the Twister remote, an intelligent remote control for use in the sleep lab environment to set and monitor flow generators, the Aero-Click connection system, which allows a quick, simple connect/disconnect between the mask and CPAP air delivery source and the AeroFix headgear, for the comfortable adjustment of masks for CPAP therapy. Since the May 2002 acquisition of Servo Magnetics Inc., we have sold custom electric motors for use in data storage and aerospace applications. PRODUCT DEVELOPMENT AND CLINICAL TRIALS We have a strong track record in innovation in the sleep market. In 1989, we introduced our first nasal CPAP device. Since then we have been committed to an ongoing program of product advancement and development. Currently, our product development efforts are focused on not only improving our current product offerings, but also expanding into new product applications. For example, in 1997, we introduced the Mirage Mask. This mask was based on the innovative Bubble Mask technology introduced in 1991, which used the principle of air inflation of the mask cushion to create a more comfortable and better seal by better conforming to patient facial contours. Additionally, in 1999, we introduced the AutoSet T Flow generator, an autotitrating device that adapts to the patient's breathing patterns to effectively prevent apneas. We continually seek to identify new applications of our technology for significant unmet medical needs. SDB is associated with a number of symptoms beyond fatigue and irritability. Recent studies have established a clinical association between SDB and hypertension, stroke, and congestive heart failure. For example, we are currently developing a device, which has not been approved for sale in the United States, for the treatment of Cheyne-Stokes breathing in patients with congestive heart failure. We also support clinical trials in the United States, Germany, France, the United Kingdom and Australia. We consult with physicians at major sleep centers throughout the world to identify technological trends in the treatment of SDB. Some of these physicians currently serve on our Medical Advisory Board. New product ideas are also identified by our marketing staff, direct sales force, network of distributors, manufacturers' representatives, customers, and patients. Typically, our internal development staff then performs new product development. In fiscal years 2002, 2001 and 2000, we invested $14,910,000, $11,146,000 and $8,499,000, respectively, on research and development. SALES AND MARKETING Our products are typically purchased by a home healthcare dealer who then sells the products to the patient. The decision to purchase our products, as opposed those of our competitors, is made or influenced by one or more of the following individuals or organizations: the prescribing physician and his or her staff, the home healthcare dealer, the insurer and the patient. We currently market our products in over 60 countries using a network of distributors, independent manufacturers' representatives and our direct sales force. We attempt to tailor our marketing approach to each national market, based on regional awareness of SDB as a health problem, physician referral patterns, consumer preferences and local reimbursement policies. -9- NORTH AMERICA AND LATIN AMERICA. In the United States, our sales and marketing activities are conducted through a field sales organization made up of regional territory representatives, program development specialists and diagnostic system specialists, regional sales directors, and independent manufacturers' representatives. Our United States field sales organization markets and sells products to more than 4,000 home health care dealer branch locations throughout the United States. Our direct sales force receives a base salary, plus commissions, while our independent sales representatives receive higher commissions, but no base salary. We also promote and market our products directly to sleep clinics. Patients who are diagnosed with OSA and prescribed CPAP treatment are typically referred by 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, fit the patient with the appropriate mask and set the flow generator pressure to the prescribed level. In the United States, our sales employees and manufacturers' representatives are managed by two regional Sales Managers and our Vice President of Sales. Our Canadian and Latin American sales are conducted through independent distributors. Sales in North America and Latin America accounted for 49%, 52% and 54% of our net revenues for fiscal years 2002, 2001 and 2000, respectively. EUROPE. We market our products in most major European countries. We have wholly owned subsidiaries in the United Kingdom, Germany, France, Netherlands, Austria, Sweden and Switzerland and we use independent distributors to sell our products in other areas of Europe. Distributors are selected in each country based on their knowledge of respiratory medicine and a commitment to SDB therapy. In each country in which we have a subsidiary, a local senior manager is responsible for direct national sales. Our Executive Vice President is responsible for coordination of all European activities and, in conjunction with local management, the direct sales activity in Europe. Sales in Europe accounted for 42%, 39% and 35% of our total net revenues for fiscal years 2002, 2001 and 2000, respectively. AUSTRALIA/REST OF WORLD. Marketing in Australia and the rest of the world is the responsibility of our Executive Vice President. Sales in Australia and the rest of the world accounted for 9%, 9% and 11% of our total net revenues for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. OTHER MARKETING EFFORTS. In addition to our sales efforts, we work with the following cardiovascular disease associations (CVD includes Coronary Artery Disease, Congestive Heart Failure, Hypertension, Stroke, and Transient Ischemic Attacks) to raise awareness of the co-morbidity of SDB in cardiovascular disease patients: (1) National Stroke Association: We have developed a strategic alliance with the National Stroke Association to increase awareness about the high prevalence of SDB in the stroke survivor population. (2) American Heart Association: We are working closely with the Western Affiliates of the American Heart Association on a number of local programs to increase awareness and education about SDB. We are also in discussions with the national American Heart/American Stroke associations regarding national programs initially targeting clinicians on the impact of SDB on both heart disease and stroke patients, as well as its role in the development of hypertension, a major risk factor for both heart disease and stroke. -10- (3) National Sleep Foundation: The National Sleep Foundation is a non profit organization dedicated to improving public health and safety by raising the level of awareness and education toward sleep related programs and research. We have been an active corporate partner and have supported the National Sleep Foundation for a number of years. We believe that our affiliations and continued work with these organizations raises the awareness of SDB as a significant health concern. MANUFACTURING Our principal manufacturing facilities are located in Sydney, Australia and comprise a 120,000 square foot manufacturing and research and development facility. Our manufacturing operations consist primarily of assembly and testing of our flow generators, masks and accessories. Of the numerous raw materials, parts and components purchased for assembly of our therapeutic and diagnostic sleep disorder products, most are off-the-shelf items available from multiple vendors. We generally manufacture to our internal sales forecasts and fill orders as received. Over the last two years the manufacturing processes have been transformed along world class manufacturing guidelines to flow lines staffed by dedicated teams. Each team is responsible for manufacture and quality of their product group and decisions are based on performance and quality measures including customer feedback. Our quality management system is based upon the requirements of ISO 9001, EN46001 (European Medical Standards), FDA Quality System Regulations for medical devices (21 CFR part 820) and the Medical Device Directive (93/42/EEC). Our Sydney, Australia facility is accredited to ISO 9001 and EN46001 and our San Diego, California facility is accredited to ISO 9002 and EN46002. These two sites have third party audits conducted by the ISO certification bodies at regular intervals. Our German manufacturing operation based in Munich operates in a facility of approximately 24,000 square feet. This facility is accredited to ISO 9001 and EN46001 and primarily assembles and tests flow generators for sale by our subsidiary MAP GmbH. Appropriate quality controls monitor and measure product assembly and performance. In addition to our Australian and German manufacturing operations we also manufacture high quality electric motors for both our flow generator devices and external customers, primarily in the data storage and aerospace sectors, at our Servo Magnetics Incorporated (SMI) facility at Canoga Park, California. The SMI facility is approximately 35,500 square feet . THIRD-PARTY REIMBURSEMENT The cost of medical care in many of the countries in which we operate is funded in substantial part by government and private insurance programs. Although we do not generally receive payments for our products directly from these payers, our success in major markets is dependent upon the ability of patients to obtain adequate reimbursement for our products. -11- In the United States, our products are purchased primarily by home health care dealers, hospitals or sleep clinics, which then invoice third-party payers directly. Domestic third-party payers include Medicare, Medicaid, and corporate health insurance plans. These payers may deny reimbursement if they determine that a device is not used in accordance with cost-effective treatment methods, or is experimental, unnecessary or inappropriate. The long-term trend towards managed health care, or legislative proposals to reform health care, could control or significantly influence the purchase of health care services and products and could result in lower prices for our products. In the United States, we sell our products primarily to home health care dealers and to sleep clinics; we do not file claims and bill governmental programs and other third-party payers directly for reimbursement for our products. Nevertheless, we are still subject to laws and regulations relating to governmental programs, and any violation of these laws and regulations could result in civil and criminal penalties, including fines. In particular, the federal Anti-Kickback Law prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending or arranging for a good or service, for which payment may be made under a Federal healthcare program such as the Medicare and Medicaid programs. The government has interpreted this law broadly to apply to the marketing and sales activities of manufacturers and distributors like us. Many states have adopted laws similar to the federal Anti-Kickback Law. We are also subject to other federal and state fraud laws applicable to payment from any third-party payer. These laws prohibit persons from knowingly and willfully filing false claims or executing a scheme to defraud any healthcare benefit program, including private third-party payers. These laws may apply to manufacturers and distributors who provide information on coverage, coding and reimbursement of their products to persons who bill third-party payers. We continuously strive to comply with these laws and believe that our arrangements do not violate these laws. Liability may still arise from the intentions or actions of the parties with whom we do business or from a different governmental agency interpretation of the laws. In some foreign markets, such as Spain, France and Germany, government reimbursement is currently available for purchase or rental of our products subject, however, to constraints such as price controls or unit sales limitations. In Australia and in some other foreign markets, there is currently limited or no reimbursement for devices that treat OSA. SERVICE AND WARRANTY We generally offer one-to-two year limited warranties on our flow generator products. Warranties on mask systems are for 90 days. In most markets, we rely on our distributors to repair our products with parts supplied by us. In the United States, home health care dealers generally arrange shipment of products to our San Diego facility for repair. We receive returns of our products from the field for various reasons. We believe that the level of returns experienced to date is consistent with levels typically experienced by manufacturers of similar devices. We provide for warranties and returns based on historical data. -12- COMPETITION The markets for our products are highly competitive. We believe that the principal competitive factors in all of our markets are product features, reliability and price. Reputation and efficient distribution are also important factors. We compete on a market-by-market basis with various companies, some of which have greater financial, research, manufacturing and marketing resources than ourselves. In the United States, our principal market, Respironics, Inc., DeVilbiss, a division of Sunrise Medical Inc., and Nellcor Puritan Bennett, a subsidiary of Tyco Inc., are the primary competitors for our CPAP products. Our principal European competitors are also Respironics, DeVilbiss, and Nellcor Puritan Bennett, as well as regional European manufacturers. The disparity between our resources and those of our competitors may increase as a result of the recent trend towards consolidation in the health care industry. In addition, our products compete with surgical procedures and dental appliances designed to treat OSA and other SDB related respiratory conditions. The development of new or innovative procedures or devices by others could result in our products becoming obsolete or noncompetitive, resulting in a material adverse effect on our business, financial condition and results of operations. Any product developed by us that gains regulatory clearance 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 we can develop products, complete clinical testing and regulatory clearance processes and supply commercial quantities of the product to the market are expected to be important competitive factors. In addition, our ability to compete will continue to be dependent on the extent to which we are successful in protecting our patents and other intellectual property. PATENTS AND PROPRIETARY RIGHTS AND RELATED LITIGATION Through our subsidiaries ResMed Limited and MAP Medizintechnik fur Arzt und Patient GmbH, we own or have licensed rights to 72 issued United States patents (including 15 design patents) and 116 issued foreign patents. In addition, there are 90 pending United States patent applications (including 9 design patent applications) and 218 pending foreign patent applications. Some of these patents and patent applications relate to significant aspects and features of our products. These include U.S. patents relating to CPAP devices, 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 our AutoSet device. Of our patents, two United States patents and three foreign patents are due to expire in the next five years, with one foreign patent due to expire in each of the years 2004, 2005 and 2007 and two United States patents in 2007. We believe that the expiration of these patents will not have a material adverse impact on our competitive position. We rely on a combination of patents, trade secrets, trade marks and non-disclosure agreements to protect our proprietary technology and rights. ResMed Limited is pursuing infringement actions against two of its competitors and is investigating possible infringement by others. See Item 3 - "Legal Proceedings". Additional litigation may be necessary to attempt to enforce patents issued to us, to protect our rights, or to defend third-party claims of infringement by us 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 us with consistent rights and benefits. -13- GOVERNMENT REGULATIONS Our products are subject to extensive regulation particularly as to safety, efficacy and adherence to FDA Quality System Regulation, or QSR, 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. Non compliance 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 us to enter into supply contracts, and criminal prosecution. 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, or PMA, prior to it being introduced into the U.S. market. Our products currently marketed in the United States are marketed in reliance on 510(k) pre-marketing clearances as either Class I or Class II devices. 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 approval 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, all of our domestic and Australian manufacturing facilities are subject to inspection on a routine basis by the FDA. We believe that our design, manufacturing and quality control procedures are in substantial compliance with the FDA's regulatory requirements. MAP's facilities are not subject to FDA regulation, because none of MAP's products is currently marketed in the United States. Sales of medical devices outside the United States are subject to regulatory requirements that vary widely from country to country. Approval for sale of our medical devices in Europe is through the CE mark process. Where appropriate, our products are CE marked to the European Union's Medical Device Directive. Under the CE marketing scheme, our products are classified as either Class I or Class II; our devices are listed in the United States with FDA; in Australia with the Therapeutic Goods Administration, or TGA; and in Canada with Health Canada. -14- EMPLOYEES As of June 30, 2002, we had 1,250 employees or full time consultants, of which 503 persons were employed in warehousing and manufacturing, 178 in research and development, 337 in sales and marketing and 232 in administration. Of our employees and consultants, 597 were located in Australia, 317 in the United States, 318 in Europe and 18 in Asia. We believe that the success of our business will depend, in part, on our ability to attract and retain qualified personnel. None of our employees is covered by a collective bargaining agreement. We believe that our relationship with our employees is good. MEDICAL ADVISORY BOARD Our Medical Advisory Board, or MAB, consists of physicians specializing in the field of sleep disordered breathing. MAB members meet as a group twice a year with members of our senior management and members of our research and marketing departments to advise us on technology trends in SDB and other developments in sleep disorders medicine. MAB members are also available to consult on an as-needed basis with our senior management. In alphabetical order, MAB members include: CLAUDIO BASSETTI, Dr. Claudio Bassetti is a Professor in the Faculty of Medicine, University of Zurich, where he is the Director and Vice-Chairman of the Neurological Clinic. A member of the American Academy of Neurology and the American Sleep Disorders Association, Dr. Bassetti is also a member of the scientific board of the European Sleep Research Society, and an associate editor of 'Sleep Medicine'. He is on the editorial board of 'Swiss Archives of Neurology and Psychiatry and has produced over 100 publications. Dr. Bassetti is a leader in studying the implications of sleep disordered breathing on stroke. MICHAEL COPPOLA, MD, is a leading pulmonary critical care and sleep disorders physician in private practice in Massachusetts. He is an attending physician at Baystate Medical Center and Mercy Hospital in Springfield, MA and a Fellow of the American College of Chest Physicians. He is Chairman of the Massachusetts Sleep Breathing Disorders Society. He is also the Medical Director of Winmar Diagnostics, a sleep disordered breathing specialty company, and Associate Clinical Professor of Medicine at Tufts University School of Medicine. TERENCE M. DAVIDSON, MD, FACS, is Professor of Surgery in the Division of Otolaryngology - Head and Neck Surgery at the University of California, San Diego, School of Medicine. He is Section Chief of Head and Neck Surgery at the Veterans Administration San Diego Healthcare System and Associate Dean for Continuing Medical Education at UCSD. He is also director of the UCSD Head and Neck Surgery Sleep Clinic in La Jolla, CA. ANTHONY N. DEMARIA, MD is Professor of Medicine and Chief, Division of Cardiology at the University of California, San Diego, specializing in cardiac imaging techniques, particularly echocardiography. He is a Diplomat in the American Board of Internal Medicine and is board certified by the Subspecialty Board in Cardiovascular Disease. He is Past President of both the American College of Cardiology and the American Society of Echocardiography. Dr. DeMaria is currently the Editor-in-Chief Elect of the Journal of the American College of Cardiology and has authored or co-authored over 400 articles for medical journals. NEIL J. DOUGLAS, MD, FRCP, is Professor of Respiratory and Sleep Medicine, University of Edinburgh, an Honorary Consultant Physician, Royal Infirmary of Edinburgh and Director of the Scottish National Sleep Laboratory. He is Dean of the Royal College of Physicians of Edinburgh and Vice Chairman of the UK Royal Colleges Committee of CME Directors and a member of the Working Party on Sleep Apnea of the Royal College of Physicians of London. He is a past Chairman of the British Sleep Society and past Secretary of the British Thoracic Society. He has published over 200 papers on breathing during sleep. -15- NICHOLAS HILL, MD, is Professor of Medicine at Brown University and Director of Critical Care Services at Rhode Island Hospital and Pulmonary Medicine at the Miriam Hospital, both in Providence. He is a Fellow of the American College of Chest Physicians and a member of the Planning Committee for the American Thoracic Society. BARRY J. MAKE, MD, is Director, Emphysema Center and Pulmonary Rehabilitation National Jewish Medical and Research Center, and Professor of Pulmonary Sciences and Critical Care Medicine of the University of Colorado School of Medicine. He has served on numerous national and international committees for respiratory and cardiovascular diseases. His research and clinical work has resulted in a large number of publications on mechanisms, treatment and rehabilitation of chronic respiratory disease. BARBARA PHILLIPS, MD, MSPH, FCCP, is Professor of Pulmonary, Critical Care, and Sleep Medicine at the University of Kentucky College of Medicine. She directs the Sleep Center, Sleep Clinics, and Sleep Fellowship at the Samaritan Sleep Center in Lexington, KY. She is a Board member of the American Academy of Sleep Medicine, a recipient of a Sleep Academic Award from the National Institutes of Health, past president of the American Board of Sleep Medicine, and a past member of the Advisory Board to the National Center of Sleep Disorders Research. Her research interests are the epidemiology of sleep-disordered breathing and sleep disorders in the aged. COLIN SULLIVAN, MD, PhD, FRACP, FAA is Chairman of the MAB and the inventor of nasal CPAP for treating obstructive sleep apnea. He is Professor of Medicine and Director of the David Read Research Laboratory and Director of the Australian Centre for Advanced Medical Technology at the Sydney University Medical School. He is Head of the Centre for Respiratory Failure and Sleep Disorders, as well as a thoracic physician at the Royal Prince Alfred Hospital. He is also Academic head of the Pediatric Sleep Laboratory, New Children's Hospital, and Sydney Children's Hospital. Dr. Sullivan is a Fellow of the Royal Australian College of Physicians, and Fellow of the Australian Academy of Science. HELMUT TESCHLER, MD, is Associate Professor and Head of the Department of Respiratory Medicine and Sleep Medicine, Ruhrlandklinik, Medical Faculty, University of Essen, Germany. He is a Fellow of each of the following Associations: German Pneumology Society, American Thoracic Society, European Respiratory Society and American Sleep Disorders Association. J. WOODROW WEISS, MD, is Associate Professor of Medicine and Co-Chairman of the Division of Sleep Medicine at Harvard Medical School, as well as Chief, Pulmonary & Critical Care Medicine, Beth Israel Deaconess Medical Center, Boston, MA. B. TUCKER WOODSON, MD, FACS, is an Associate Professor of Otolaryngology and Communication Sciences at the Medical College of Wisconsin. He is a Fellow of the American Academy of Otolaryngology - Head and Neck Surgery and the American College of Surgeons. Dr. Woodson is the Director of the Medical College of Wisconsin/Froedert Memorial Lutheran Hospital Center for Sleep. He is active on multiple committees for the American Academy of Sleep Medicine and American Academy of Otolaryngology. -16- ITEM 2 PROPERTIES Our principal executive offices and U.S. distribution facilities, consisting of approximately 144,000 square feet, are located in Poway (North San Diego County), California in a building we own. We lease facilities for our manufacturing operations in Sydney, Australia in a 120,000 square foot facility and in Canoga Park, California in a 35,500 square foot facility. Sales and warehousing facilities are leased in Oxford, England; Moenchengladbach, Germany; Lyon, France; Trollhaettan, Sweden and Singapore. Prior to moving our executive offices and distribution facilities to Poway, California, we leased space for this purpose in San Diego, California. Our lease on those premises expires in 2005. In August 2000, we began subleasing those premises to another company. MAP's principal offices are located in Munich Germany in a 45,000 square foot facility leased by us. MAP's subsidiaries also lease sales and warehouse facilities in Lyss, Switzerland; Villach, Austria and s'Hertogenbosch, The Netherlands. ITEM 3 LEGAL PROCEEDINGS We are currently engaged in litigation relating to the enforcement and defense of certain of our patents. In January 1995, we filed a complaint in the United States District Court for the Southern District of California seeking monetary damages from and injunctive relief against Respironics for alleged infringement of three of our patents. In February 1995, Respironics filed a complaint in the United States District Court for the Western District of Pennsylvania against us seeking a declaratory judgment that Respironics does not infringe claims of these patents and that our patents are invalid and unenforceable. The two actions were combined and are proceeding in the United States District Court for the Western District of Pennsylvania. In June 1996, we filed an additional complaint against Respironics for infringement of a fourth ResMed patent, and that complaint was consolidated with the earlier action. As of this date, Respironics has brought three partial summary judgment motions for non-infringement of the ResMed patents; the Court has granted each of the motions. In December 1999, in response to the Court's ruling on Respironics' third summary judgment motion, the parties jointly stipulated to a dismissal of charges of infringement under the fourth ResMed patent, with us reserving the right to reassert the charges in the event of a favorable ruling on appeal. It is our intention to appeal the summary judgment rulings after a final judgment in the consolidated litigation has been entered in the District Court proceedings. In January 2001, MAP Medizin-Technologie GmbH filed a lawsuit in the Civil Chamber of Munich Court against Hofrichter GmbH seeking actual and exemplary monetary damages for the unauthorized and infringing use of our trademarks and patents. An initial decision has been made in favor of MAP. Hofrichter has filed an appeal and has sought Court determination that the MAP patents do not apply to certain Hofrichter products. On August 26, 2002, ResMed filed a lawsuit in Federal District Court in San Diego against Fisher & Paykel Healthcare. The ResMed complaint seeks a judgment that selected Fisher & Paykel Healthcare mask products (ACLAIM and ACLAIM 2 masks) infringe patents held by ResMed. The complaint further charges the defendant with the copying of ResMed proprietary mask technology and alleges trade dress and common law violations relating to the appearance of ResMed mask products. -17- While we are prosecuting the above actions, there can be no assurance that we will be successful. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock commenced trading on June 2, 1995 on The NASDAQ National Market under the symbol "RESM". On September 30, 1999, we transferred our primary listing to the New York Stock Exchange (NYSE) under the symbol "RMD". The following table sets forth for the fiscal periods indicated the high and low closing prices for the Common Stock as reported by the New York Stock Exchange.

2002 2001 -------------- -------------- High Low High Low -------------- -------------- Quarter One, ended September 30, $60.95 $45.90 $38.38 $24.63 Quarter Two, ended December 31, 61.75 50.47 41.50 25.50 Quarter Three, ended March 31, 53.15 36.36 47.00 36.65 Quarter Four, ended June 30, 40.34 24.70 57.68 37.91

As of September 6, 2002, there were 85 holders of record of our Common Stock. We have not paid any cash dividends on our common stock since prior to the initial public offering of our common stock and we do not currently intend to pay cash dividends in the foreseeable future. We anticipate that all of our earnings and other cash resources, if any, will be retained for the operation and expansion of our business and for general corporate purposes. SALE OF UNREGISTERED SECURITIES On June 20, 2001, we issued $150.0 million of 4% convertible subordinated notes due 2006 to initial purchasers including Merrill Lynch, Pierce Fenner & Smith Incorporated, Deutsche Banc Alex. Brown Inc., William Blair & Company, LLC, Macquarie Bank, and UBS Warburg LLC. The discount to the initial purchasers on their purchase of the notes was $4.7 million. On July 3, 2001, we issued an additional $30.0 million in notes to the initial purchasers upon exercise of the initial purchasers' over allotment option, with an additional discount to the initial purchasers of $0.9 million. This increased the total amount of convertible subordinated notes issued to $180.0 million, with a total discount to the initial purchasers of $5.6 million. During fiscal 2002, we repurchased $56.8 million face value of our convertible subordinated notes. The total purchase price of the notes was $49.1 million, including $0.6 million in accrued interest. We recognized a gain of $4.0 million, net of tax of $2.5 million, on these transactions. As at June 30, 2002, we had convertible subordinated notes outstanding of $123.3 million. -18- The notes and the common stock issuable upon conversion of the notes (the "Securities") were not registered under the Securities Act or any other state or foreign securities laws at the time of issue. The notes were offered and sold only to "qualified institutional buyers" as defined in Rule 144A or in offshore transactions outside the United States that met the requirements of Rule 903 of Regulation S under the Securities Act. The Securities were subsequently registered for resale under the Securities Act (Registration No. 333-70500) effective October 9, 2001; and consequently the Securities may be resold in accordance with the prospectus that is part of the registration statement by the selling security holders named in the prospectus or a supplement to the prospectus. Other sales of the Securities may only be made in compliance with the registration requirements of the Securities Act and all other applicable securities laws, or pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and any other applicable securities laws. The notes are subject to an indenture between us and American Stock Transfer & Trust Company, as trustee. The notes are convertible, at the option of the holder, at any time on or prior to maturity, into shares of our common stock at a conversion price of $60.60 per share, which is equal to a conversion rate of 16.5017 shares per $1,000 principal amount of notes. The conversion price is subject to adjustment. The notes bear interest at 4% per year, payable semiannually on June 20 and December 20 of each year, beginning December 20, 2001. We may redeem some or all of the notes at any time before June 20, 2004 at a redemption price of $1,000 per $1,000 principal amount of notes, plus accrued and unpaid interest, if any, to the redemption date, if (a) the closing price of our common stock has exceeded 150% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day before the date of mailing of the provisional redemption notice and (b) a shelf registration statement covering resale of the notes and the common stock issuable upon conversion of the notes is effective and available for use and expected to remain effective and available for use for the 30 days following the provisional redemption date. Upon any such provisional redemption, we will make an additional payment in cash equal to $166.67 per $1,000 principal amount of notes, less the amount of any interest actually paid on the notes before the provisional redemption date. We may also redeem some or all of the notes at any time on or after June 22, 2004, but prior to June 20, 2005, at a redemption price equal to 101.6% of the principal amount of notes redeemed and at any time after June 19, 2005, at a redemption price equal to 100.8% of the principal amount of notes redeemed, plus in any case, accrued and unpaid interest, if any, to the redemption date, if the closing price of our common stock has exceeded 130% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day before the date of mailing of the optional redemption notice. The notes are general unsecured obligations and are subordinated to all of our existing and future senior indebtedness and will be effectively subordinated to all of the indebtedness and liabilities of our subsidiaries. The indenture governing the notes will not limit the incurrence by us or our subsidiaries of senior indebtedness or other indebtedness. The notes mature on June 20, 2006. On May 14, 2002, we issued 853,448 shares of our common stock to one individual as partial consideration for our acquisition of Servo Magnetics Incorporated. We relied on the exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended. No solicitation was made in connection with this issuance, other than negotiation of the acquisition, and we obtained representations from the recipient regarding his investment intent, experience and sophistication. -19- ITEM 6 SELECTED FINANCIAL DATA The following table summarizes certain selected consolidated financial data for, and as of the end of, each of the fiscal years in the five-year period ended June 30, 2002. The data set forth below should be read in conjunction with the Consolidated Financial Statements and related Notes included elsewhere in this Report.

Years Ended June 30, ------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME DATA: 2002 2001 2000 1999 1998 (In thousands, except per share data) ------------------------------------------------- Net revenues $204,076 $155,156 $115,615 $88,627 $66,519 Cost of sales 70,827 50,377 36,991 29,416 23,069 Gross profit 133,249 104,779 78,624 59,211 43,450 Selling, general and administrative expenses 64,481 49,364 36,987 27,414 21,093 Provision for restructure - 550 - - - In-process research and development write off 350 17,677 - - - Research and development expenses 14,910 11,146 8,499 6,542 4,994 Donations to Research Foundations 2,349 - - - - Total operating expenses 82,090 78,737 45,486 33,956 26,087 Income from operations 51,159 26,042 33,138 25,255 17,363 Other income (expenses): Interest income (expense), net (3,224) (762) 801 779 1,011 Government grants - 72 279 833 611 Other, net 108 1,962 (52) (2,290) (2,873) Gain on extinguishment of debt 6,549 - - - - Total other income (expenses) 3,433 1,272 1,028 (678) (1,251) Income before income taxes 54,592 27,314 34,166 24,577 16,112 Income taxes 17,086 15,684 11,940 8,475 5,501 Net income $ 37,506 $ 11,630 $ 22,226 $16,102 $10,611 Basic earnings per share $ 1.17 $ 0.37 $ 0.74 $ 0.55 $ 0.37 Diluted earnings per share $ 1.10 $ 0.35 $ 0.69 $ 0.52 $ 0.35 Basic shares outstanding 32,174 31,129 30,153 29,416 29,000 Diluted shares outstanding 34,080 33,484 32,303 31,068 30,044

-------------------------------------------------------------------------------------- As of June 30, CONSOLIDATED BALANCE SHEET DATA 2002 2001 2000 1999 1998 (In thousands) -------------------------------------------------------------------------------------- Working capital $144,666 $144,272 $ 47,550 $32,529 $32,759 Total assets 376,191 288,090 115,594 89,889 64,618 Long-term debt, less current maturities 123,250 150,000 - - - Total stockholders' equity 192,930 100,366 93,972 71,647 50,773

-20- ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Management's discussion and analysis of financial condition and results of operations should be read in conjunction with selected financial data and consolidated financial statements and notes, included herein. We design, manufacture and market equipment for the diagnosis and treatment of sleep disordered breathing conditions, including obstructive sleep apnea. Our net revenues are generated from the sale of our various flow generator devices, nasal mask systems, accessories and other products, and, to a lesser extent from royalties and sales of custom motors. We have invested significant resources in research and development and product enhancement. Since 1989, we have developed several innovations to the original CPAP device to increase patient comfort and to improve ease of product use. We have been developing products for automated treatment, titration and monitoring of OSA, such as the AutoSet T and AutoSet Spirit flow generators. Our research and development expenses have been subsidized in part by grants and tax incentives from the Australian federal government. LABHARDT ACQUISITION On November 15, 2001, we acquired all the common stock of Labhardt Ag, our Swiss distributor, for total cash consideration, including acquisition costs, of $5.5 million. The acquisition has been accounted for as a purchase and accordingly, the results of operations of Labhardt Ag have been included in our consolidated financial statements from November 15, 2001. The excess of the purchase price over the fair value of the net identifiable assets acquired of $1.3 million has been recorded as goodwill. SMI ACQUISITION On May 14, 2002, we acquired all of the common stock of Servo Magnetics Incorporated ("SMI") through a merger with our wholly-owned subsidiary, Servo Magnetics Acquisitions Inc, for total consideration, including acquisition costs, of $32.6 million. Consideration included the issue of 853,448 shares for fair value of $24.8 million with the balance of the acquisition price paid in cash. Upon consummation of the merger, the surviving corporation, Servo Magnetics Acquisition Inc., changed its name to Servo Magnetics Inc. The acquisition has been accounted for as a purchase and accordingly, the results of operations of SMI have been included in our consolidated financial statements from May 14, 2002. The excess of the purchase price over the fair value of the net identifiable assets acquired of $1.9 million has been recorded as goodwill. Purchased in-process research and development of $350,000 was expensed upon acquisition of SMI because technological feasibility of the products under development had not been established and no further alternative uses existed. The value of in process technology was calculated by identifying research projects in areas for which technological feasibility had not been established, estimating the costs to develop the purchased in process technology into commercially viable products, estimating the resulting net cash flows from such products, discounting the net cash flows to present value, and applying the reduced percentage completion of the projects thereto. The discount rate used in the analysis was 19% and was based on the risk profile of the acquired assets. -21- Purchased research and development projects related to electrical motor systems used in medical devices and health equipment. Key assumptions used in the analysis included gross margins of approximately 34%. As of the date of acquisition, new motor systems for use in these devices are expected to be completed and commercially available by fiscal 2004. These projects have estimated costs to complete totalling approximately $450,000. We believe that the assumptions used to value the acquired intangible assets were reasonable at the time of acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project revenues, development costs or profitability, or events associated with such projects, will transpire as estimated. For these reasons, among others, actual results may vary from the projected results. TAX EXPENSE Our income tax rate is governed by the laws of the regions in which our income is recognized. To date, a substantial portion of our income has been subject to income tax in Australia where the statutory rate was 30% in fiscal 2002 and was 34% in fiscal 2001 and 2000 respectively. During fiscal 2002, 2001 and 2000, our effective tax rate has fluctuated between approximately 31% and approximately 35%. 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 125% 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 us under applicable tax laws. FISCAL YEAR ENDED JUNE 30, 2002, COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001 NET REVENUES. Net revenue increased in fiscal 2002 to $204.1 million from $155.2 million in fiscal 2001, an increase of $48.9 million or 32%. This increase was primarily attributable to an increase in unit sales of our flow generators and accessories in both domestic and international markets and also to the acquisition on February 16, 2001 of MAP Medizin-Technologie GmbH "MAP". GROSS PROFIT. Gross profit increased in fiscal 2002 to $133.2 million from $104.8 million in fiscal 2001, an increase of $28.5 million or 27%. Gross profit as a percentage of net revenue declined in fiscal 2002 to 65% from 68% in fiscal 2001. The decline in gross margins reflects a change in geographical sales mix (after adjusting for MAP sales), with a relatively higher percentage of domestic sales, which achieve lower margins, compared to international markets. The decline also reflects that gross margins in our acquired subsidiary, MAP, are historically lower than the average margins achieved by our Company as a whole. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased in 2002 to $64.5 million from $49.4 million for 2001, an increase of $15.1 million or 31%. As a percentage of net revenue, selling, general and administrative expenses in fiscal 2002 was 32%, consistent with fiscal 2001. The increase in selling, general and administrative expenses was primarily due to the addition of 98 personnel in sales and administration and other expenses related to the increase in our sales. SG&A in fiscal 2002 also included a provision of $1.0 million against an outstanding receivable from American Home Patient Inc. (AHP), a significant customer, who filed for Chapter 11 Bankruptcy Protection on July 31, 2002. AHP's filing for Chapter 11 Bankruptcy Protection is not expected to materially impact our business. -22- PROVISION FOR RESTRUCTURE. In fiscal 2001, subsequent to the purchase of MAP, we restructured MAP's French activities and took a charge of $0.6 million associated with the closure of MAP's unprofitable French operations. We did not incur any restructure charges in fiscal 2002. IN PROCESS RESEARCH AND DEVELOPMENT WRITE-OFF. In fiscal 2002, purchased in process research and development of $0.4 million was expensed upon the acquisition of SMI because technological feasibility of the products under development had not been established and no further alternative uses existed. In fiscal 2001, purchased in process research and development of $17.7 million was expensed upon acquisition of MAP because technological feasibility of the products under development had not been established and no further alternative uses existed. DONATIONS TO FOUNDATIONS. In fiscal 2002, we committed $2.3 million to the establishment of two ResMed Sleep Disordered Breathing Foundations, one in the United States and one in Australia. The Foundations' overall mission is to educate both the public and physicians about the inherent dangers of untreated SDB/OSA, particularly as it relates to traffic and workplace accidents as well as cerebrovascular and cardiovascular disease. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased in fiscal 2002 to $14.9 million from $11.1 million in fiscal 2001, an increase of $3.8 million or 34%. As a percentage of net revenue, research and development expenses increased to 7.3% in fiscal 2002 compared to 7.2% in fiscal 2001. The increase in research and development expenses was due to increased salaries associated with an increase in personnel and increased charges for consulting fees, clinical trials and technical assessments incurred to facilitate development of new products and also includes research and development expenditures of MAP. OTHER INCOME (EXPENSE). Other income (expense), net, increased in fiscal 2002 to a net income of $3.4 million from net income of $1.3 million in fiscal 2001. The increase in other income primarily reflects a gain on extinguishment of debt of $6.5 million partially offset by increased net interest expense associated with our convertible notes and foreign exchange losses. INCOME TAXES. The Company's effective income tax rate declined to approximately 31.3% in fiscal 2002 from approximately 34.4% (excluding a non-recurring in process research and development write-down of $17.7 million and restructuring charge of $0.6 million) in fiscal 2001. The lower tax rate was primarily due to the lowering of the corporate income tax rate in Australia from 34% to 30% effective July 1, 2001. The Company also benefits from a 125% tax deduction on research and development expenditures in Australia, which further reduces the effective tax rate on Australian sourced income. FISCAL YEAR ENDED JUNE 30, 2001 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2000 NET REVENUES. Net revenues increased in fiscal 2001 to $155.2 million from $155.6 million in fiscal 2000, an increase of $39.5 million or 34%. This increase was primarily attributable to an increase in unit sales of our flow generators and accessories in North and Latin America where net revenues increased to $79.9 million from $62.7 million and in Europe, where net revenues increased to $60.5 million from $40.5 million. Net revenues were unfavorably impacted by a decline in European foreign exchange rates. -23- GROSS PROFIT. Gross profit increased in fiscal 2001 to $104.8 million from $78.6 million in fiscal 2000, an increase of $26.2 million or 33%. The increase resulted primarily from increased unit sales during fiscal 2001. Gross profit as a percentage of net revenues was 68%, consistent with fiscal 2000. Lower flow generator selling prices were offset by a decline in the Australian dollar, improved manufacturing efficiencies and increased sales of higher margin mask system units. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased in 2001 to $49.4 million from $37.0 million for 2000, an increase of $12.4 million or 33%. As a percentage of net revenues, selling, general and administrative expenses were steady in fiscal 2001, compared to fiscal 2002 at 32%. The gross increase in expenses was due primarily to an increase to 471 from 281 in the number of sales and administrative personnel and other expenses related to the increase in our sales. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased in fiscal 2001 to $11.1 million from $8.5 million in fiscal 2001, an increase of $2.6 million or 31%. As a percentage of net revenues, research and development expenses remained static in fiscal 2001 at 7%. The dollar increase in research and development expenses was due primarily to an increase in clinical trial costs, personnel and external consultancy fees. OTHER INCOME (EXPENSE). Other income (expense) improved in fiscal 2001 to $1.3 million from $1.0 million for fiscal 2000, an increase of $0.3 million. This improvement was due primarily to foreign currency gains incurred in our foreign currency hedging structures, partially offset by interest expense associated with the purchase of MAP. Net foreign currency gains for fiscal 2001 were $2.0 million compared to net foreign currency losses of $0.2 million in 2000. INCOME TAXES. Our effective income tax rate for fiscal 2001 before MAP acquisition charges of $0.6 million for restructuring costs and in-process research and development write off of $17.7 million was 34.4% down from 34.9% for fiscal 2000. This reduction was primarily due to the reduction in Australian corporate tax rates from 36% to 34% on July 1, 2000 and to additional research and development expenses in Australia for which we received a 125% deduction for income tax purposes. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2002 and June 30, 2001, we had cash and cash equivalents and marketable securities available-for-sale of approximately $92.8 million and $102.8 million, respectively. Working capital approximated $144.7 million and $144.3 million at June 30, 2002 and June 30, 2001 respectively. During the year ended June 30, 2002, we generated cash of $35.6 million from operations, primarily as a result of increased profit from operations offset by increases in inventory and accounts receivable balances. During the year ended June 30, 2001 approximately $29.5 million of cash was generated by operations. Capital expenditures for the year ended June 30, 2002 and 2001 aggregated $28.2 million and $27.5 million respectively. The majority of the expenditures for the year ended June 30, 2002 related to the purchase of land in Sydney described below, a computer system upgrade and acquisition of production tooling and equipment. The capital expenditures in the year ended June 30, 2001 primarily reflected the capital expenditure of $17.2 million on the company's US headquarters in Poway, California in July 2000. As a result of these capital expenditures, our balance sheet reflects net property plant and equipment of approximately $79.3 million at June 30, 2002 compared to $55.1 million at June 30, 2001. -24- On July 3, 2001, we issued $30.0 million in over allotments for our 4% convertible subordinated notes issue, increasing the total amount of convertible subordinated notes then outstanding to $180.0 million. During fiscal 2002, we repurchased $56.8 million face value of our convertible subordinated notes. The total purchase price of the notes was $49.1 million, including $0.6 million in accrued interest. We recognized a gain of $4.0 million, net of tax of $2.5 million, on these transactions. As at June 30, 2002, we had convertible subordinated notes outstanding of $123.3 million. We may from time to time seek to retire our convertible subordinated notes through cash purchases and/or exchanges for equity securities in open market purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, and current or future contractual obligations of the Company, if any, that may directly or indirectly apply to such transactions. On November 15, 2001, we acquired all of the common stock of Labhardt Ag, our Swiss distributor, for total cash consideration, including acquisition costs, of $5.5 million. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of Labhardt Ag have been included in our consolidated financial statements from November 15, 2001. The excess of the purchase price over the fair value of the net identifiable assets acquired of $1.3 million has been recorded as goodwill. On May 14, 2002 we acquired all of the common stock of Servo Magnetics Inc. ("SMI") for total consideration, including acquisition costs, of $32.6 million. Consideration included the issue of 853,448 shares for fair value of $24.8 million, with the balance of the acquisition cost paid in cash. Subsequent to the acquisition, we repaid all SMI's existing bank loans totaling $3.0 million. The acquisition has been accounted for as a purchase and accordingly, the results of operations of SMI have been included in the Company's consolidated financial statements from May 14, 2002. The excess of the purchase price over the fair value of the net identifiable assets acquired of $1.9 million has been recorded as goodwill. On October 2, 2001, we paid $1.4 million as final consideration associated with the purchase of MAP on February 16, 2001. The amount has been recorded as goodwill. On April 26, 2002, we settled our purchase of a 30-acre site at Norwest Business Park, located northwest of Sydney, Australia. The acquisition cost was $23.6 million, including deferred payments of $5.7 million due in October 2002 and $5.7 million due in April 2003. We expect the first building, a manufacturing facility, to be operational on this site in December 2003. New research and development and office facilities are expected to be completed in 2004. We estimate that the building costs will be approximately $30.0 million. On May 8, 2002, we completed a sale and leaseback transaction of our Australian facility located at North Ryde in Sydney, Australia. The property was sold for $18.5 million with a three-year leaseback and a further one-year option. The profit before tax on sale of the property of $5.5 million will be amortized over the lease period. The cash made available from the sale will be utilized for the construction of our new facilities at Norwest Business Park also located in Sydney, Australia. -25- On June 6, 2002, the Board of Directors authorized the Company to repurchase up to 4 million shares of its outstanding common stock. For fiscal year 2002, we repurchased 290,047 shares at a cost of $7.9 million. We may continue to repurchase shares of our common stock for cash in the open market, or in negotiated or block transactions, from time to time as market and business conditions warrant. Details of contractual obligations at June 30, 2002 are as follows:

Payments Due by Period Less than 1 year 1-3 years 4-5 years After 5 years Long-Term Debt - 123,250 - - Operating Leases 4,326 9,523 1,202 - Unconditional Purchase Obligations 11,552 - - - Total Contractual Cash Obligations 15,878 132,773 1,202 -

Details of other commercial commitments at June 30, 2002 are as follows:

In $000's Amount of Commitment Expiration Per Period Total Amounts ----------------------------------------------------- Committed Less than 1 year 1-3 years 4-5 years Over 5 years ----------------------------------------------------- Lines of Credit - - - - - Standby Letters of Credit - - - - - Guarantees(1) 13,678 11,821 663 - 1,194 Standby Repurchase Obligations - - - - - Other Commercial Commitments - - - - - Total Commercial Commitments 13,678 11,821 663 - 1,194

(1) The above guarantees relate to guarantees provided by banks. Guarantees of $11.8 million relate to deferred payments due on our land purchase at Norwest and have been recorded as a liability in our financial accounts. The guarantees are secured by cash deposits held with the bank. The balance of the guarantees relate to guarantees required by statutory authorities as a pre-requisite to developing our site at Norwest and requirements under contractual obligations with insurance companies transacting with our German subsidiaries. The results of our international operations are affected by changes in exchange rates between currencies. Changes in exchange rates may negatively affect our consolidated net revenue and gross profit margins from international operations. We are exposed to the risk that the dollar value equivalent of anticipated cash flows will be adversely affected by changes in foreign currency exchange rates. We manage this risk through foreign currency option contracts. We expect to satisfy all of our short term and long term liquidity requirements through a combination of cash on hand and cash generated from operations. CRITICAL ACCOUNTING PRINCIPLES AND ESTIMATES In response to the SEC's Release numbers 33-8040 "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" and 33-8056, "Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations," we have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, including those related to allowance for doubtful accounts, inventory reserves, warranty obligations, impaired assets, intangible assets, income taxes, revenue recognition and contingencies and litigation. We state these accounting policies in the notes to the financial statements and at relevant sections in this discussion and analysis. The estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions. -26- We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements: (1) Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which results in bad debt expense. We determine the adequacy of this allowance by continually evaluating individual customer receivables, considering customer's financial condition, credit history and current economic conditions. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. (2) Inventory Adjustments. Inventories are stated at lower of cost or market and are determined by the first-in, first-out method. We review the components of inventory on a regular basis for excess, obsolete and impaired inventory based on estimated future usage and sales. The likelihood of any material inventory write-downs is dependent on changes in competitive conditions, new product introductions by us or our competitors, or rapid changes in customer demand. (3) Valuation of Goodwill, Intangible and Other Long-Lived Assets. We use assumptions in establishing the carrying value, fair value and estimated lives of our long-lived assets and goodwill. The criteria used for these evaluations include management's estimate of the asset's continuing ability to generate positive income from operations and positive cash flow in future periods compared to the carrying value of the asset, as well as the strategic significance of any identifiable intangible asset in our business objectives. If assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Useful lives and related amortization or depreciation expense are based on our estimate of the period that the assets will generate revenues or otherwise be used by the Company. Factors that would influence the likelihood of a material change in our reported results include significant changes in the asset's ability to generate positive cash flow, loss of legal ownership or title to the asset, a significant decline in the economic and competitive environment on which the asset depends, significant changes in our strategic business objectives, utilization of the asset, and a significant change in the economic and/or political conditions in certain countries. (4) Valuation of Deferred Income Taxes. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The likelihood of a material change in our expected realization of these assets is dependent on future taxable income, our ability to deduct tax loss carryforwards against future taxable income, the effectiveness of our tax planning and strategies among the various tax jurisdictions that we operate in, and any significant changes in the tax treatment received on our business combinations. (5) Provision for Warranty. We provide for the estimated cost of product warranties at the time the related revenue is recognized. The amount of this provision is determined by using a financial model which takes into consideration actual historical expenses and potential risks associated with the Company's different products. This financial model is then used to calculate the future probable expenses related to warranty and the required level of the warranty provision. Although we engage in product improvement programs and processes, our warranty obligation is affected by product failure rates and costs incurred to correct those product failures. Should actual product failure rates or estimated costs to repair those product failures differ from our estimates, revisions to our estimated warranty provision would be required. -27- NEW ACCOUNTING PRONOUNCEMENTS In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 146, Accounting for Restructuring Costs. SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts, and relocating plant facilities or personnel. Under SFAS 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. SFAS 146 will require a company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a company may not restate its previously issued financial statements and the new Statement grandfathers the accounting for liabilities that a company had previously recorded under Emerging Issues Task Force Issue 94-3. The Company believes that it will not have a material impact on the results of operations, financial position and liquidity of the Company. The FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002, which is effective for fiscal years beginning after May 15, 2002, but may be adopted early. SFAS 145 rescinds SFAS 4 and SFAS 64, which required that all gains and losses from debt extinguishment of debt be aggregated, and if material, classified as an extraordinary item. As a result, gains and losses from debt extinguishment are to be classified as extraordinary only if they meet the criteria set forth in Accounting Principles Board Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 145 also requires that sale-leaseback accounting be used for capital lease modifications with economic effects similar to sale-leaseback transactions. The Company has elected to early adopt SFAS No. 145 and has classified gains from the extinguishment of debt as other income in its Consolidated Statements of Income. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." For long-lived assets to be held and used, SFAS No. 144 retains the requirements of SFAS No. 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value. Further, SFAS No. 144 eliminates the requirement to allocate goodwill to long-lived assets to be tested for impairment, describes a probability-weighted cash flow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated for the amount of possible future cash flows, and establishes a "primary-asset" approach to determine the cash flow estimation period. For long-lived assets to be disposed of other than by sale (e.g. assets abandoned, exchanged or distributed to owners in a spin-off), SFAS No. 144 requires that such assets be considered held and used until disposed of. Further, an impairment loss should be recognized at the date an asset is exchanged for a similar productive asset or distributed to owners in a spin-off if the carrying amount exceeds its fair value. The Company believes that it will not have a material impact on the results of operations, financial position and liquidity of the Company. -28- In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. As allowed under the Standard, the Company has adopted SFAS 142 effective July 1, 2001. SFAS 142 requires goodwill and intangible assets with indefinite useful lives to no longer be amortized, but instead be tested for impairment at least annually. With the adoption of SFAS 142, the Company reassessed the useful lives and residual values of all acquired intangible assets to make any necessary amortization period adjustments. Based on that assessment, only goodwill was determined to have an indefinite useful life and no adjustments were made to the amortization period or residual values of other intangible assets. In accordance with SFAS 142 the Company has completed its initial assessment of goodwill impairment. The results of the review indicated that no impaired goodwill currently exists. Effective July 1, 2001, the Company adopted SFAS No. 141, "Business Combinations". SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. The Company believes that it will not have a material impact on the results of operations, financial position and liquidity of the Company. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET AND BUSINESS RISKS FOREIGN CURRENCY MARKET RISK Our functional currency is the U.S. dollar, although we transact business in various foreign currencies including a number of major European currencies, as well as the Australian dollar. We have significant foreign currency exposure through both our Australian manufacturing activities and international sales operations. We have established a foreign currency hedging program using purchased currency options to hedge foreign-currency-denominated financial assets, liabilities and manufacturing expenditure. The goal of this hedging program is to economically guarantee or lock in the exchange rates on our foreign currency exposures denominated in Euro's and the Australian dollar. Under this program, increases or decreases in our foreign-currency-denominated financial assets, liabilities, and firm commitments are partially offset by gains and losses on the hedging instruments. -29- The table below provides information (in US dollars) on our foreign-currency denominated financial assets by legal entity functional currency:

Foreign Currency Financial Assets AUD USD EUR GBP SGD NZD SEK CHF AUD Functional Currency Entities: Assets $ - 24,118,963 7,317,495 2,582,023 1,481,516 180,690 505,691 837,331 Liability - (1,793,640) - (2,748,233) - - - - Net Total $ - 22,325,323 7,317,495 (166,210) 1,481,516 180,690 505,691 837,331 USD Functional Currency Entities: Assets $17,297,437 - - - - - - - Liability - - - - - - - - Net Total $17,297,437 - - - - - - - Euro Functional Currency Entities: Assets $ 4,773,000 65,504 - - - - - 1,200,726 Liability - (3,740) - - - - - - Net Total $ 4,773,000 61,764 - - - - - 1,200,726

The table below provides information about our foreign currency derivative financial instruments and presents such information in U.S. dollar equivalents. The table summarizes information on instruments and transactions that are sensitive to foreign currency exchange rates, including foreign currency call options held at June 30, 2002. The table presents the notional amounts and weighted average exchange rates by contractual maturity dates for our foreign currency derivative financial instruments. These notional amounts generally are used to calculate payments to be exchanged under the options contracts.

Fair Value Assets / (Liabilities) (In thousands except exchange rates) FY 2003 FY 2004 Total As of June 30, 2002 2001 Foreign Exchange Call Options (Receive AUS$/Pay U.S.$) Option amount $ 54,000 $ 66,000 $ 120,000 $2,341 $ 577 Average contractual exchange rate AUS $1 = USD 0.549 AUS$1=USD 0.591 AUS $1 = USD 0.571 (Receive AUS$/Pay Euro) Option amount $ 40,473 - $ 40,473 $ 423 $ 20 Average contractual exchange rate AUS $1 = Euro 0.592 AUS $1 = Euro 0.592

INTEREST RATE RISK We are exposed to risk associated with changes in interest rates affecting the return on investments. At June 30, 2002, we maintained a portion of our cash and cash equivalents in financial instruments with original maturities of three months or less. We maintain a short-term investment portfolio containing financial instruments in which the majority have original maturities of greater than three months but less than twelve months. These financial instruments, principally comprised of corporate obligations, are subject to interest rate risk and will decline in value if interest rates increase. A hypothetical 100 basis point change in interest rates during the twelve months ended June 30, 2002, would have resulted in approximately $0.3 million change in pretax income. We do not use derivative financial instruments in our investment portfolio. -30- FORWARD-LOOKING STATEMENTS This report on Form 10-K contains or may contain certain forward-looking statements and information that are based on the beliefs of our management as well as estimates and assumptions made by, and information currently available to our management. The words "believe," "expect," "anticipate," "estimate," "plan," "future" and other similar expressions generally identify forward-looking statements, including, in particular, statements regarding the development and approval of new products and product applications, market expansion, pending litigation and the development of new markets for the Company's products, such as cardiovascular and stroke markets. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on these forward-looking statements. Such forward-looking statements reflect the views of our management at the time such statements are made and are subject to a number of risks, uncertainties, estimates and assumptions, including, without limitation, and in addition to those identified in the text surrounding such statements, those identified below and elsewhere in this report. In addition, important factors to consider in evaluating such forward-looking statements include changes or developments in social, economic, market, legal or regulatory circumstances, changes in our business or growth strategy or an inability to execute our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors, the actions or omissions of third parties, including suppliers, customers, competitors and governmental authorities, and various other factors. Should any one or more of these risks or uncertainties materialize, or the underlying estimates or assumptions prove incorrect, actual results may vary significantly from those expressed in such forward-looking statements, and there can be no assurance that the forward-looking statements contained in this report will in fact occur. RISK FACTORS The risks and uncertainties that may affect our business, financial condition or results of operations include the following: OUR INABILITY TO COMPETE SUCCESSFULLY IN OUR MARKETS MAY HARM OUR BUSINESS. The markets for our SDB products are highly competitive and are characterized by frequent product improvements and evolving technology. Our ability to compete successfully depends, in part, on our ability to develop innovative new products and to be the first to market with those products. The development of innovative new products by our competitors or the discovery of alternative treatments or potential cures for the conditions that our products treat could result in our products becoming noncompetitive or obsolete. Additionally, some of our competitors have greater financial, research and development, manufacturing and marketing resources than we do. The past several years have seen a trend towards consolidation in the health care industry and in the markets for our products. Industry consolidation could result in greater competition if our competitors combine their resources or if our competitors are acquired by other companies with greater resources than ours. This competition could increase pressure on us to reduce the selling prices of our products or could cause us to increase our spending on research and development and sales and marketing. If we are unable to develop innovative new products, maintain competitive pricing, and offer products that consumers perceive to be as reliable as those of our competitors, our sales or gross margins could decrease which would harm our business. -31- OUR BUSINESS DEPENDS ON OUR ABILITY TO MARKET EFFECTIVELY TO DEALERS OF HOME HEALTH CARE PRODUCTS AND SLEEP CLINICS. We market our products primarily to home health care dealers and to sleep clinics that diagnose OSA and other sleep disorders. We believe that home health care dealers and sleep clinics play a significant role in determining which brand of product a patient will use. For example, in the United States, when a physician at a sleep clinic prescribes the use of a product, the patient typically purchases the product from a home health care dealer. The physician may or may not prescribe a specific brand of product. If a specific brand is prescribed, we believe the brand prescribed depends upon the brand of product that is used in the sleep clinic. If a specific brand is not prescribed, the home health care dealer may recommend a specific brand. Occasionally, even if the physician prescribes a specific brand, a home health care dealer may substitute a competitive product for the patient. We have limited resources to market to the more than 2,000 U.S. sleep clinics and the more than 4,000 home health care dealer branch locations, most of which use, sell or recommend several brands of products. In addition, home health care dealers have experienced price pressures as government and third-party reimbursement have declined for home care products, and home health care dealers are requiring price discounts and longer periods of time to pay for products purchased from us. We cannot assure you that sleep clinic physicians will continue to prescribe our products, or that home health care dealers or patients will not substitute competing products when a prescription specifying our products has been written. The success of our business depends on our ability to market effectively to home health care dealers and sleep clinics and to ensure that our products are properly marketed and sold by these third parties. We intend to expand our marketing activities to target the population with a predisposition to SDB as well as primary care physicians and specialists. We cannot assure you that these marketing efforts will be successful in increasing awareness of our products. IF WE ARE UNABLE TO SUPPORT OUR CONTINUED GROWTH, OUR BUSINESS COULD SUFFER. We have experienced rapid and substantial growth. As we continue to grow, the complexity of our operations increases, placing greater demands on our management. Our ability to manage our growth effectively depends upon our ability to implement and improve our financial and management information systems on a timely basis and to effect other changes in our business. Unexpected difficulties during expansion, the failure to attract and retain qualified employees, the failure to successfully replace or upgrade our management information systems, the failure to manage costs or our inability to respond effectively to growth or plan for future expansion could cause our growth to stop. If we fail to manage our growth, our business could suffer. IF WE FAIL TO INTEGRATE OUR RECENT ACQUISITION IN GERMANY WITH OUR OPERATIONS, OUR BUSINESS COULD SUFFER. On February 16, 2001, we acquired all of the outstanding shares of MAP located near Munich, Germany. We are currently in the process of integrating our operations with those of MAP. The integration requires significant efforts from each company. We may find it difficult to integrate the operations of MAP. MAP personnel may leave MAP because of the acquisition and MAP licensees, distributors or suppliers may terminate their arrangements with MAP, or demand amended terms to these arrangements. Additionally, our management may have their attention diverted while trying to integrate the two companies. This diversion or these difficulties in integration could have an adverse impact on us. If we are not able to successfully integrate the operations of MAP, we may not realize the anticipated benefits of the MAP acquisition. -32- WE MANUFACTURE SUBSTANTIALLY ALL OF OUR PRODUCTS OUTSIDE THE UNITED STATES AND SELL A SIGNIFICANT PORTION OF OUR PRODUCTS IN NON-U.S. MARKETS, SUBJECTING US TO VARIOUS RISKS RELATING TO INTERNATIONAL ACTIVITIES THAT COULD ADVERSELY AFFECT OUR OVERALL PROFITABILITY. Sales outside North and Latin America accounted for approximately 51%, 48%, and 46% of our net revenues in fiscal years 2002, 2001 and 2000, respectively. We expect that sales within these areas will account for approximately 50% of our net revenues in the foreseeable future. Our sales outside of North America and our operations in Europe, Australia and Asia are subject to several difficulties and risks that are separate and distinct from those we face in our domestic operations, including: - fluctuations in currency exchange rates; - tariffs and other trade barriers; - compliance with foreign medical device manufacturing regulations; - reduction in third party payer reimbursement for our products; - inability to obtain import licenses; - changes in trade policies and in domestic and foreign tax policies; - possible changes in export or import restrictions; and - the modification or introduction of other governmental policies with potentially adverse effects. FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES COULD RESULT IN DECLINES IN OUR REPORTED SALES AND EARNINGS. Since our international sales and a significant portion of our manufacturing costs are denominated in local currencies and not in U.S. dollars, our reported sales and earnings are subject to fluctuations in foreign exchange rates. We had foreign currency transaction losses in recent periods and may have further losses in the future. We expect that international sales will continue to be a significant portion of our business and that a significant portion of our manufacturing costs will continue to be denominated in Australian dollars. GOVERNMENT AND PRIVATE INSURANCE PLANS MAY NOT REIMBURSE PATIENTS FOR OUR PRODUCTS, WHICH COULD RESULT IN REDUCTIONS IN SALES OR SELLING PRICES FOR OUR PRODUCTS. Our ability to sell our products depends in large part on the extent to which reimbursement for the cost of our products will be available from government health administration authorities, private health insurers and other organizations. These third party payors are increasingly challenging the prices charged for medical products and services. Therefore, even if a product is approved for marketing, we cannot assure you that reimbursement will be allowed for such product or that the reimbursement amount will be adequate or, if adequate, will not subsequently be reduced. For example, in some markets, such as Spain, France and Germany, government reimbursement is currently available for purchase or rental of our products but is subject to constraints such as price controls or unit sales limitations. In other markets, such as Australia and the United Kingdom, there is currently limited or no reimbursement for devices that treat sleep disordered breathing related respiratory conditions. Additionally, future legislation or regulation concerning the health care industry or third party or governmental coverage and reimbursement, particularly, legislation or regulation limiting consumers' reimbursement rights may harm our business. As we continue to develop new products, those products will generally not qualify for reimbursement, if at all, until they are approved for marketing. In the United States, we sell our products primarily to home health care dealers and to sleep clinics. We do not file claims and bill governmental programs and other third party payors directly for reimbursement for our products. However, we are still subject to laws and regulations relating to governmental reimbursement programs, particularly Medicaid and Medicare. -33- In particular, the federal Anti-Kickback Law prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. The government has interpreted this law broadly to apply to the marketing and sales activities of manufacturers and distributors like us. Many states have adopted laws similar to the federal Anti-Kickback Law. We are also subject to other federal and state fraud laws applicable to payment from any third party payer. These laws prohibit persons from knowingly and willfully filing false claims or executing a scheme to defraud any healthcare benefit program, including private third party payors. These laws may apply to manufacturers and distributors who provide information on coverage, coding, and reimbursement of their products to persons who do bill third party payors. Any violation of these laws and regulations could result in civil and criminal penalties, including fines. COMPLYING WITH FDA AND OTHER REGULATIONS IS AN EXPENSIVE AND TIME-CONSUMING PROCESS, AND ANY FAILURE TO COMPLY COULD RESULT IN SUBSTANTIAL PENALTIES. We are subject to various federal, state, local and international regulations regarding the testing, manufacture, distribution, marketing, promotion, record keeping and reporting of our products. In particular, our failure to comply with FDA regulations could result in, among other things, recalls of our products, substantial fines and/or criminal charges against us and our employees. PRODUCT SALES, INTRODUCTIONS OR MODIFICATIONS MAY BE DELAYED OR CANCELED AS A RESULT OF THE FDA OR SIMILAR FOREIGN REGULATIONS, WHICH COULD CAUSE OUR SALES TO DECLINE. Before we can market or sell a new medical device in the United States, we must obtain FDA clearance, which can be a lengthy and time-consuming process. We generally receive clearance from the FDA to market our products in the United States under Section 510(k) of the Federal Food, Drug, and Cosmetic Act or our products are exempt from the 510(k) clearance process. We have modified some of our 510(k) approved products without submitting new 510(k) notices, which we do not believe were required. However, if the FDA disagrees with us and requires us to submit new 510(k) notifications for modifications to our existing products, we may be required to stop marketing the products while the FDA reviews the 510(k) notification. Any new product introduction or existing product modification could be subjected to a lengthier, more rigorous FDA examination process. For example, in certain cases we may need to conduct clinical trials of a new product prior to submitting a 510(k) notice. Additionally, we may be required to obtain premarket approvals for our products. The requirements of these more rigorous processes could delay product introductions and increase the costs associated with FDA compliance. Marketing and sale of our products outside the United States are also subject to regulatory clearances and approvals, and if we fail to obtain these regulatory approvals, our sales could suffer. We cannot assure you that any new products we develop will receive required regulatory approvals from U.S. or foreign regulatory agencies. OFF LABEL MARKETING OF OUR PRODUCTS COULD RESULT IN SUBSTANTIAL PENALTIES. Clearance under Section 510(k) only permits us to market our products for the uses indicated on the labeling cleared by the FDA. We may request additional label indications for our current products, and the FDA may deny those requests outright, require additional expensive clinical data to support any additional indications or impose limitations on the intended use of any cleared products as a condition of clearance. If the FDA determines that we have marketed our products for off label use, we could be subject to fines, injunctions or other penalties. -34- DISRUPTIONS IN THE SUPPLY OF COMPONENTS FROM OUR SINGLE SOURCE SUPPLIERS COULD RESULT IN A SIGNIFICANT REDUCTION IN SALES AND PROFITABILITY. We purchase uniquely configured components for our devices from single-source suppliers. We cannot assure you that a replacement supplier would be able to configure its components for our devices on a timely basis or, in the alternative, that we would be able to reconfigure our devices to integrate the replacement part. A reduction or stoppage in supply while a replacement supplier reconfigures its components, or while we reconfigure our components for the replacement part, would limit our ability to manufacture our devices, which could result in a significant reduction in sales and profitability. We cannot assure you that our inventories would be adequate to meet our production needs during any prolonged interruption of supply. OUR INTELLECTUAL PROPERTY MAY NOT PROTECT OUR PRODUCTS, AND OUR PRODUCTS MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. We rely on a combination of patents, trade secrets and non-disclosure agreements to protect our intellectual property. Our success depends, in part, on our ability to obtain and maintain United States and foreign patent protection for our products, their uses and our processes to preserve our trade secrets and to operate without infringing on the proprietary rights of third parties. We have a number of pending patent applications, and we do not know whether any patents will issue from any of these applications. We do not know whether any of the claims in our issued patents or pending applications will provide us with any significant protection against competitive products or otherwise be commercially valuable. Legal standards regarding the validity of patents and the proper scope of their claims are still evolving, and there is no consistent law or policy regarding the valid breadth of claims. Additionally, there may be third party patents, patent applications and other intellectual property relevant to our products and technology which are not known to us and that block or compete with our products. We face the risks that: - third parties will infringe our intellectual property rights; - our non-disclosure agreements will be breached; - we will not have adequate remedies for infringement; - our trade secrets will become known to or independently developed by our competitors; or - any third parties will be issued patents that may prevent the sale of our products or require us to license and pay fees or royalties in order for us to be able to market some of our products. We are currently engaged in litigation relating to the enforcement and defense of a number of our patents. Additional litigation may be necessary to enforce patents issued to us, to protect our proprietary rights, or to defend third party claims that we have infringed upon proprietary rights of others. The defense and prosecution of patent claims, including these pending claims, as well as participation in other inter-party proceedings, can be expensive and time consuming, even in those instances in which the outcome is favorable to us. If the outcome of any litigation or proceeding brought against us were adverse, we could be subject to significant liabilities to third parties, could be required to obtain licenses from third parties or could be required to cease sales of the affected products. Additionally, the laws regarding the enforceability of patents vary from country to country, and we cannot assure you that any patent issues we face will be uniformly resolved, or that local laws will provide us with consistent rights and benefits. -35- WE ARE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT MAY EXCEED THE SCOPE AND AMOUNT OF OUR INSURANCE COVERAGE, WHICH WOULD EXPOSE US TO LIABILITY FOR UNINSURED CLAIMS. We are subject to potential product liability claims as a result of the design, manufacture and marketing of medical devices. Any product liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates. In addition, we would have to pay any amount awarded by a court in excess of our policy limits. Our insurance policies have various exclusions, and thus we may be subject to a product liability claim for which we have no insurance coverage, in which case, we may have to pay the entire amount of any award. We cannot assure you that our insurance coverage will be adequate or that all claims brought against us will be covered by our insurance. Insurance varies in cost and can be difficult to obtain, and we cannot assure you that we will be able to obtain insurance in the future on terms acceptable to us or at all. A successful product liability claim brought against us in excess of our insurance coverage, if any, may require us to pay substantial amounts, which could harm our business. OUR BUSINESS COULD SUFFER IF WE LOSE THE SERVICES OF KEY MEMBERS OF OUR MANAGEMENT. We are dependent upon the continued services of key members of our senior management and a limited number of key employees and consultants. The loss of the services of any one of these individuals could significantly disrupt our operations. Additionally, our future success will depend, among other factors, on our ability to continue to hire and retain the necessary qualified scientific, technical and managerial personnel. We compete for such personnel with numerous other companies, academic institutions and organizations. OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATION FOR A VARIETY OF REASONS. Our operating results have, from time to time, fluctuated on a quarterly basis and may be subject to similar fluctuations in the future. These fluctuations may result from a number of factors, including: - the introduction of new products by us or our competitors; - the geographic mix of product sales; - the success of our marketing efforts in new regions; - changes in third party reimbursement; - timing of regulatory clearances and approvals; - timing of orders by distributors; - expenditures incurred for research and development; - competitive pricing in different regions; - seasonality; - the cost and effect of promotional and marketing programs; and - the effect of foreign currency transaction gains or losses. IF A NATURAL OR MAN MADE DISASTER STRIKES OUR MANUFACTURING FACILITIES, WE WILL BE UNABLE TO MANUFACTURE OUR PRODUCTS FOR A SUBSTANTIAL AMOUNT OF TIME AND OUR SALES WILL DECLINE. We manufacture a significant portion of our products in our facilities in Australia. These facilities and the manufacturing equipment we use to produce our products would be costly to replace and could require substantial lead time to repair or replace. The facilities may be affected by natural or man made disasters and in the event it was affected by a disaster, we would be forced to rely on third party manufacturers. Although we believe we possess adequate insurance for damage to our property and the disruption of our business from casualties, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. -36- DELAWARE LAW, PROVISIONS IN OUR CHARTER AND OUR SHAREHOLDER RIGHTS PLAN COULD MAKE THE ACQUISITION OF OUR COMPANY BY ANOTHER COMPANY MORE DIFFICULT. Provisions of our certificate of incorporation may have the effect of delaying or preventing changes in control or management which might be beneficial to us or our securityholders. In particular, our board of directors is divided into three classes, serving for staggered three-year terms. Because of this classification it will require at least two annual meetings to elect directors constituting a majority of our board of directors. Additionally, our board of directors has the authority to issue up to 2,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without further vote or action by the stockholders. Under our stockholder rights plan, we have also issued purchase rights to the holders of our common stock that entitle those holders to purchase our Series A Junior Participating Preferred Stock at a discount, under certain circumstances. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over the market price of our common stock and may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. YOU MAY NOT BE ABLE TO ENFORCE THE JUDGMENTS OF U.S. COURTS AGAINST SOME OF OUR ASSETS OR OFFICERS AND DIRECTORS A substantial portion of our assets are located outside the United States. Additionally, two of our seven directors and three of our eight officers reside outside the United States, along with all or a substantial portion of the assets of these persons. As a result, it may not be possible for investors to enforce judgments of U.S. courts relating to any liabilities under U.S. securities laws against our assets, those persons or their assets. In addition, we have been advised by our Australian counsel that some doubt exists as to the ability of investors to pursue claims based on U.S. securities laws against these assets or these persons in Australian courts. The information contained in this section is not intended to be an exhaustive description of the risks and uncertainties inherent in our business or in our strategic plans. Please see Item 1 "Business" and Item 3 "Legal Proceedings".

ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA a) Index to Consolidated Financial Statements Page ---- Independent Auditors' Report F1 Consolidated Balance Sheets as of June 30, 2002 and 2001 F2 Consolidated Statements of Income for the years ended June 30, 2002, 2001 and 2000 F3 Consolidated Statements of Stockholders' Equity for the years ended June 30, 2002, 2001 and 2000 F4 Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000 F5 Notes to Consolidated Financial Statements F6 Schedule II - Valuation and Qualifying Accounts and Reserves 42

-37- b) Supplementary Data Quarterly Financial Information (unaudited). The quarterly results for the years ended June 30, 2002 and 2001 are summarized below (in thousands, except per share amounts):

First Second Third Fourth Fiscal 2002 Quarter Quarter Quarter Quarter Year ------------------------------------------------------------------------------------- Net revenues $ 46,129 $ 48,924 $ 52,776 $ 56,247 $204,076 Gross profit 30,833 31,837 33,771 36,808 133,249 Net income 8,538 8,779 10,379 9,810 37,506 Basic earnings per share $ 0.27 $ 0.27 $ 0.32 $ 0.30 $ 1.17 Diluted earnings per share $ 0.25 $ 0.26 $ 0.31 $ 0.29 $ 1.10 First Second Third Fourth Fiscal 2001 Quarter Quarter Quarter Quarter Year ------------------------------------------------------------------------------------- Net revenues $ 31,082 $ 34,366 $ 42,680 $ 47,028 $155,156 Gross profit 21,087 23,021 28,923 31,748 104,779 Net income (loss) 6,580 6,898 (10,194) 8,346 11,630 Basic earnings (loss) per share $ 0.21 $ 0.22 ($0.33) $ 0.27 $ 0.37 Diluted earnings (loss) per share $ 0.20 $ 0.21 ($0.30) $ 0.25 $ 0.35

NB. Per share amounts for each quarter are computed independently, and, due to the computation formula, the sum of the four quarters may not equal the year. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference to our definitive Proxy Statement for our November 11, 2002, meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2002. On August 21, 2002, Dana Voien was appointed Senior Vice President, New Business, Marketing and Clinical Education Affairs and replaced Dr Deirdre Stewart as an Officer of the Company. Dr Stewart has been appointed to the new position of Vice President, Strategic Clinical Initiatives. On September 1, 2002, David Pendarvis was appointed Vice President, Global General Counsel and an Officer of the Company. Norman DeWitt, ResMed's former General Counsel and former officer, will be leaving full-time employment with ResMed by the end of this calendar year. ITEM 11 EXECUTIVE COMPENSATION Incorporated by reference to our definitive Proxy Statement for our November 11, 2002, meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2002. -38- ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to our definitive Proxy Statement for our November 11, 2002, meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2002. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS No material transactions. PART IV ITEM 14 EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULE, AND REPORTS ON FORM 8-K a) The following documents are filed as part of this report: 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. 2. EXHIBITS 2.1 Sale and Assignment Agreement, dated as of February 16, 2001 between ResMed Inc, ResMed Beteiligungs GmbH and the shareholders of MAP Medizin-Technologie GmbH* 2.2 Agreement and Plan of Merger dated as of May 14, 2002 among ResMed Inc., Servo Magnetics Acquisition Inc., Servo Magnetics Incorporated and Mr Leslie Hoffman. 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** 4.2 Rights agreement dated as of April 23, 1997*** 4.3 Indenture dated as of June 20, 2001, between ResMed Inc and American Stock Transfer & Trust Company****** 4.4 Registration Rights Agreement dated as of June 20, 2001, by and between ResMed Inc., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Banc Alex Brown Inc., William Blair & Company, L.L.C., Macquarie Bank Limited and UBS Warburg LLC****** 4.5 Registration Rights Agreement dated as of May 14, 2002 between ResMed Inc., and Mr Leslie Hoffman 10.1 1995 Stock Option Plan** 10.2 1997 Equity Participation Plan**** 10.3 Licensing Agreement between the University of Sydney and ResMed Limited dated May 17, 1991, as amended** 10.4 Consulting Agreement between Colin Sullivan and ResMed Limited effective from 1 January 1998***** 10.5 Loan Agreement between the Australian Trade Commission and ResMed Limited dated May 3, 1994** -39- ITEM 14 EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULE, AND REPORTS ON FORM 8-K (CONTINUED) 10.6 Lease for 10121 Carroll Canyon Road, San Diego CA 92131-1109, USA***** 10.7 Sale and Leaseback Agreements for 97 Waterloo Rd, North Ryde, Australia 10.8 Employment Agreement dated as of May 14, 2002, between Servo Magnetics Acquisition Inc., and Mr Leslie Hoffman. 10.9 Agreement for the purchase of Lot 6001, Norwest Boulevarde, Norwest Business Park, Baulkham Hills, Australia 11.1 Computation of Earnings per Common Share 21.1 Subsidiaries of the Registrant 23.1 Independent Auditors' Consent and Report on Schedule *Incorporated by reference to the Registrant's Report on Form 8-K dated March 2, 2001. **Incorporated by reference to the Registrant's Registration Statement on Form S-1 (No. 33-91094) declared effective on June 1, 1995. ***Incorporated by reference to the Registrant's Registration Statement on Form 8-A12G filed on April 25, 1997. ****Incorporated by reference to the Registrant's 1997 Proxy Statement. *****Incorporated by reference to the Registrant's Report on Form 10-K dated June 30, 1998. ******Incorporated by reference to the Registrant's Report on Form 10-K dated June 30, 2001. b) Reports on Form 8-K None. -40- 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, 2002, and 2001, 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, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 6 to the consolidated financial statements, the Company has adopted the provisions of SFAS No. 142 "Accounting for Goodwill and Other Intangible Assets" and accordingly has changed its method of accounting for goodwill. /S/ KPMG LLP San Diego, California August 9, 2002 -F1-

RESMED INC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2002 AND 2001 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) June 30, June 30, 2002 2001 ASSETS Current assets: Cash and cash equivalents $ 72,860 $ 40,136 Marketable securities available for sale (note 3) 19,979 62,616 Accounts receivable, net of allowance for doubtful accounts of $1,938 and $892 at June 30, 2002 and 2001, respectively 46,199 32,248 Inventories, net (note 4) 41,173 29,994 Deferred income taxes (note 11) 9,289 4,152 Prepaid expenses and other current assets 4,213 8,736 Total current assets 193,713 177,882 --------- --------- Property, plant and equipment, net of accumulated depreciation of 31,084 at June 30, 2002 and $19,930 at June 30, 2001 (note 5) 79,279 55,092 Patents, net of accumulated amortization of $1,862 and $1,030 at June 30, 2002 and 2001, respectively 2,653 1,390 Goodwill (note 6) 92,536 47,870 Other assets 8,010 5,856 Total non current assets 182,478 110,208 --------- --------- Total assets $376,191 $288,090 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 11,605 $ 7,971 Accrued expenses (note 7) 17,052 16,751 Income taxes payable 6,905 8,888 Payable for property purchase 11,552 - Current portion of deferred profit on sale-leaseback 1,933 - Total current liabilities 49,047 33,610 Non current liabilities: Deferred revenue 7,259 4,114 Convertible subordinated notes (note 8) 123,250 150,000 Deferred profit on sale-leaseback 3,705 - Total non current liabilities 134,214 154,114 Total liabilities 183,261 187,724 Stockholders' equity: (note 9) Preferred stock, $.01 par value, 2,000,000 shares authorized; none issued - - Series A Junior Participating preferred stock, $0.01 par value, 250,000 shares authorized; none issued - - Common stock, $.004 par value, 100,000,000 shares authorized; Issued and outstanding 33,108,207 at June 30, 2002 and 31,478,780 at June 30, 2001 132 126 Additional paid-in capital 94,153 52,675 Retained earnings 114,643 77,137 Treasury stock (7,873) - Accumulated other comprehensive loss (8,125) (29,572) Total stockholders' equity 192,930 100,366 Commitments and contingencies (notes 14 and 17) - - --------- --------- Total liabilities and stockholders' equity $376,191 $288,090 ========== =========

See accompanying notes to consolidated financial statements. -F2-

RESMED INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 2002, 2001 AND 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA) June 30, June 30, June 30, 2002 2001 2000 Net revenues $204,076 $155,156 $115,615 Cost of sales 70,827 50,377 36,991 Gross profit 133,249 104,779 78,624 Operating expenses: Selling, general and administrative 64,481 49,364 36,987 Provision for restructure (note 7) - 550 - In-process research and development write off (note 15) 350 17,677 - Research and development 14,910 11,146 8,499 Donations to Research Foundations 2,349 - - Total operating expenses 82,090 78,737 45,486 Income from operations 51,159 26,042 33,138 Other income (expenses): Gain on extinguishment of debt 6,549 - - Interest income (expense), net (3,224) (762) 801 Government grants - 72 279 Other, net (note 10) 108 1,962 (52) Total other income (expenses), net 3,433 1,272 1,028 Income before income taxes 54,592 27,314 34,166 Income taxes (note 11) 17,086 15,684 11,940 Net income $ 37,506 $ 11,630 $ 22,226 Basic earnings per share $ 1.17 $ 0.37 $ 0.74 Diluted earnings per share $ 1.10 $ 0.35 $ 0.69 Basic shares outstanding 32,174 31,129 30,153 Diluted shares outstanding 34,080 33,484 32,303

See accompanying notes to consolidated financial statements. -F3-

RESMED INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 2002, 2001 AND 2000 (IN THOUSANDS) ------------------------------------------------------------------------------------------------------------------------------ Accumulated Common Stock Additional Treasury Stock Other ------------ Paid-in -------------- Retained Comprehensive Shares Amount Capital Shares Amount Earnings Income (loss) Total ------------------------------------------------------------------------------------------------------------------------------ BALANCE, JUNE 30, 1999 29,616 $118 $33,677 $ 43,281 ($5,429) $ 71,647 Common stock issued to consultants 10 - 126 - - 126 Common stock issued on exercise of options (note 9) 968 4 6,376 - - 6,380 Tax benefit from exercise of options - - 1,316 - - 1,316 Comprehensive income: Net income - - - 22,226 - 22,226 Other comprehensive income Foreign currency translation adjustments (7,723) (7,723) Comprehensive income ------------------------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 2000 30,594 122 41,495 65,507 (13,152) 93,972 Common stock issued on exercise of options (note 9) 885 4 7,939 - - 7,943 Tax benefit from exercise of options - - 3,241 - - 3,241 Comprehensive income: Net income - - - 11,630 - 11,630 Other comprehensive income Foreign currency translation adjustments - - - - (16,420) (16,420) Comprehensive income/(loss) ------------------------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 2001 31,479 126 52,675 77,137 (29,572) 100,366 Common stock issued on exercise of options (note 9) 776 3 9,778 - 9,781 Common stock issued for acquisitions 853 3 24,781 24,784 Treasury stock purchases (290) (7,873) (7,873) Tax benefit from exercise of options - - 6,919 - 6,919 Comprehensive income: Net income 37,506 37,506 Other comprehensive income Foreign currency translation adjustments 21,342 21,342 Unrealized gains on marketable securities 105 105 Comprehensive income/(loss) ------------------------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 2002 33,108 $132 $94,153 (290) $(7,873) $114,643 $ (8,125) $192,930 ------------------------------------------------------------------------------------------------------------------------------- (TABLE CONTINUED) ------------------------------------------------------------------ Comprehensive Income ------------------------------------------------------------------ BALANCE, JUNE 30, 1999 Common stock issued to consultants Common stock issued on exercise of options (note 9) Tax benefit from exercise of options Comprehensive income: Net income $ 22,226 Other comprehensive income Foreign currency translation adjustments (7,723) Comprehensive income $ 14,503 ------------------------------------------------------------------ BALANCE, JUNE 30, 2000 Common stock issued on exercise of options (note 9) Tax benefit from exercise of options Comprehensive income: Net income $ 11,630 Other comprehensive income Foreign currency translation adjustments (16,420) Comprehensive income/(loss) $ (4,790) ------------------------------------------------------------------ BALANCE, JUNE 30, 2001 Common stock issued on exercise of options (note 9) Common stock issued for acquisitions Treasury stock purchases Tax benefit from exercise of options Comprehensive income: Net income 37,506 Other comprehensive income Foreign currency translation adjustments 21,342 Unrealized gains on marketable securities 105 Comprehensive income/(loss) $ 58,953 ------------------------------------------------------------------ BALANCE, JUNE 30, 2002 ------------------------------------------------------------------

See accompanying notes to consolidated financial statements. -F4-

RESMED INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2002, 2001 AND 2000 (IN THOUSANDS) June 30, June 30, June 30, 2002 2001 2000 Cash flows from operating activities: Net income: $ 37,506 $ 11,630 $ 22,226 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,972 7,015 6,248 Goodwill amortization - 1,430 690 Provision for service warranties (85) 174 184 Deferred income taxes (6,153) (2,306) 77 Foreign currency options revaluation 767 2,766 2,158 Deferred borrowing costs 1,254 - - Tax benefit from stock options exercised 6,919 3,241 1,316 Gain on extinguishment of debt (6,549) - - Other, net (162) - 126 Restructuring provision - 550 - Purchased in-process research and development write off 350 17,677 - Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable, net (9,765) (5,531) (7,394) Inventories, net (7,063) (8,130) (6,027) Prepaid expenses and other current assets 4,785 (3,470) (1,572) Accounts payable, accrued expenses and other liabilities 3,864 4,474 2,243 Net cash provided by operating activities 35,640 29,520 20,275 ---------- ---------- --------- Cash flows from investing activities: Purchases of property, plant and equipment (28,185) (27,459) (16,168) Purchases of marketable securities - available for sale (393,072) (79,879) (36,804) Proceeds from sale of marketable securities - available for sale 435,871 20,976 38,717 Patent registration costs (1,720) (516) (961) Business acquisitions, net of cash acquired of $812 (note 15) (13,871) (55,070) (576) Purchases of investments (3,987) (2,602) (2,732) Proceeds from sale-leaseback 18,500 - - Net cash provided by (used in) investing activities 13,536 (144,550) (18,524) ---------- ---------- --------- Cash flows from financing activities: Proceeds from issuance of common stock, net 9,781 7,943 6,380 Repayment of borrowings (3,022) (82,854) - Proceeds from borrowings, net of borrowing costs 28,402 213,937 - Redemption of borrowings (48,454) - - Purchases of treasury stock (7,873) - - Net cash provided by (used in) financing activities (21,166) 139,026 6,380 ---------- ---------- --------- Effect of exchange rate changes on cash 4,714 (2,110) (989) Net increase in cash and cash equivalents 32,724 21,886 7,142 Cash and cash equivalents at beginning of the year 40,136 18,250 11,108 Cash and cash equivalents at end of the year $ 72,860 $ 40,136 $ 18,250 ---------- ---------- --------- Supplemental disclosure of cash flow information: Income taxes paid $ 18,328 $ 12,908 $ 9,716 Interest paid 6,557 1,439 - Fair value of assets acquired in acquisitions $ 9,060 $ 33,139 $ 383 Liabilities assumed (5,872) (24,821) (36) Goodwill on acquisition 36,279 47,119 229 Fair value of shares issued for acquisitions (24,784) - - Cash paid for acquisition, including acquisition costs $ 14,683 $ 55,437 $ 576 ---------- ---------- ---------

See accompanying notes to consolidated financial statements. -F5- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 1. ORGANIZATION AND BASIS OF PRESENTATION ResMed Inc (the "Company") is a Delaware corporation formed in March 1994 as a holding company for ResMed Holdings Ltd (RHL), a company resident in Australia. The Company designs, manufactures and markets devices for the evaluation and treatment of sleep disordered breathing, primarily obstructive sleep apnea. The Company's corporate offices are based in San Diego, California with its principal manufacturing operation located in Australia. Other major distribution and sales sites are located in the United States, United Kingdom, France, Germany, Sweden, Switzerland and Singapore. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated on consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from management's estimates. (b) Revenue Recognition Revenue on product sales is recorded at the time of shipment. Royalty revenue from license agreements is recorded when earned. Service revenue received in advance from service contracts is initially capitalized and progressively recognized as revenue over the life of the service contract. Revenue from sale of marketing or distribution rights is initially capitalized and progressively recognized as revenue over the life of the contract. (c) Cash and Cash Equivalents Cash equivalents including certificates of deposit, commercial paper and other highly liquid investments are stated at cost, which approximates market. Investments with original maturities of 90 days or less are considered to be cash equivalents for purposes of the consolidated statements of cash flows. (d) Inventories Inventories are stated at the lower of cost or market, determined principally by the first-in, first-out method. (e) Property, Plant and Equipment Property, plant 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. Straight-line and accelerated methods of depreciation are used for tax purposes. Maintenance and repairs are charged to expense as incurred. -F6- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f) 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, the unamortized costs are written off immediately. (g) Goodwill In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. As allowed under the Standard, the Company has adopted SFAS 142 effective July 1, 2001. SFAS 142 requires goodwill and intangible assets with indefinite useful lives to no longer be amortized, but instead be tested for impairment at least annually. With the adoption of SFAS 142, the Company reassessed the useful lives and residual values of all acquired intangible assets to make any necessary amortization period adjustments. Based on that assessment, only goodwill was determined to have an indefinite useful life and no adjustments were made to the amortization period or residual values of other intangible assets. In accordance with SFAS 142 the Company has completed its initial assessment of goodwill impairment. The results of the review indicated that no impaired goodwill currently exists. Amortization expense of goodwill was $nil, $1,430,000 and $690,000 for the years ended June 30, 2002, 2001 and 2000, respectively. (h) Government Grants Government grants revenue is recognized when earned. Grants have been obtained by the Company from the Australian Federal Government to support the continued development of the Company's proprietary positive airway pressure technology and to assist development of export markets. Grants have been recognized in the amount of $nil, $72,000 and $279,000 for the years ended June 30, 2002, 2001 and 2000, respectively. (i) Foreign Currency The consolidated financial statements of the Company's non-U.S. subsidiaries, whose functional currencies are other than U.S. dollars, are translated into U.S. dollars for financial reporting purposes. 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, and revenue and expense transactions are translated at average exchange rates for the year. Cumulative translation adjustments are recognized as part of comprehensive income, as described in Note 16, and are included in accumulated other comprehensive loss in the consolidated balance sheet until such time as the subsidiary is sold or substantially or completely liquidated. Gains and losses on transactions, denominated in other than the functional currency of the entity, are reflected in operations. -F7- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) Research and Development Research and development costs are expensed in the period incurred. (k) Earnings Per Share The weighted average shares used to calculate basic earnings per share were 32,174,000, 31,129,000, and 30,153,000 for the years ended June 30, 2002, 2001 and 2000, respectively. The difference between basic earnings per share and diluted earnings per share is attributable to the impact of outstanding stock options during the periods presented. Stock options had the effect of increasing the number of shares used in the calculation (by application of the treasury stock method) by 1,906,000, 2,355,000 and 2,150,000 for the years ended June 30, 2002, 2001 and 2000, respectively. (l) Financial Instruments The carrying value of financial instruments, such as of cash and cash equivalents, marketable securities - available for sale, accounts receivable, government grants receivable and accounts payable approximate their fair value because of their short term nature. The estimated fair value of the Company's long-term debt at June 30, 2002 approximates $102.5 million compared with the carrying value of $123.3 million. Foreign currency option contracts are marked to market and therefore reflect their fair value. The Company does not hold or issue financial instruments for trading purposes. 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. (m) 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. 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 and manufacturing costs, principally denominated in Australian dollars and Euros. The terms of such foreign currency option contracts generally do not exceed three years. 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 statements of income. Unrealized gains and losses on currency derivatives are determined based on dealer quoted prices. -F8- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (m) Foreign Exchange Risk Management (continued) The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments. The credit exposure of foreign exchange options at June 30, 2002 was $2.8 million, which represents the positive fair value of options held by the Company. The Company held foreign currency option contracts with notional amounts totaling $160.5 million and $223.8 million at June 30, 2002 and 2001, respectively to hedge foreign currency items. These contracts mature at various dates prior to July 2004. (n) Income Taxes The Company accounts for income taxes under the asset and liability method. 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. 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. (o) Marketable Securities 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 accumulated other comprehensive income (loss). Realized gains and losses are included in other income or expense. At June 30, 2002 and 2001, 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. (p) Warranty Estimated future warranty obligations related to certain products are provided by charges to operations in the period in which the related revenue is recognized. -F9- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (q) Impairment of Long-Lived Assets The Company periodically evaluates the carrying value of long-lived assets to be held and used, including certain identifiable intangible assets, when events and circumstances indicate that the carrying amount of an asset may not be recovered. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. (r) Capitalized Software Production Costs Software development costs have been capitalized and will be amortized to the cost of product revenues over the estimated economic lives (generally three to five years) of the products that include such software. Total net capitalized software production costs were $1,132,000 and $nil at June 30, 2002 and 2001 respectively. 3. MARKETABLE SECURITIES The estimated fair value of marketable securities available for sale as of June 30, 2002 and 2001, was $19,979,000 and $62,616,000, respectively. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. 4. INVENTORIES Inventories, net were comprised of the following as of June 30, 2002 and 2001 (in thousands):

2002 2001 Raw materials $ 8,130 $ 7,584 Work in progress 2,057 98 Finished goods 30,986 22,312 $41,173 $29,994 ------- -------

-F10- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is comprised of the following as of June 30, 2002 and 2001 (in thousands):

2002 2001 Machinery and equipment $ 19,381 $ 10,930 Computer equipment 20,520 12,829 Furniture and fixtures 9,204 8,667 Vehicles 1,531 1,219 Clinical, demonstration and rental equipment 11,651 8,194 Leasehold improvements 685 663 Land 27,121 5,333 Buildings 19,188 27,187 Construction in Progress 1,082 - 110,363 75,022 --------- --------- Accumulated depreciation and amortization (31,084) (19,930) $ 79,279 $ 55,092 --------- ---------

6. GOODWILL AND OTHER INTANGIBLE ASSETS The Company adopted SFAS 142 on July 1, 2001. The following table reconciles the prior year's reported operating income and net income to their respective pro-forma balances adjusted to exclude goodwill amortization expense which is no longer recorded under SFAS 142, for the years ended June 30, 2002, 2001 and 2000, (In $ thousands, except per share amounts).

2002 2001 2000 OPERATING INCOME: Reported income from operations $51,159 $26,042 $33,138 Add back: goodwill amortization - 1,430 690 Adjusted income from operations $51,159 $27,472 $33,828 ------- ------- ------- NET INCOME: Reported net income $37,506 $11,630 $22,226 Add back: goodwill amortization after tax - 1,430 690 Adjusted net income $37,506 $13,060 $22,916 ------- ------- ------- BASIC EARNINGS PER SHARE: Reported basic earnings per share $ 1.17 $ 0.37 $ 0.74 Goodwill amortization after tax - $ 0.05 $ 0.02 Adjusted basic earnings per share $ 1.17 $ 0.42 $ 0.76 ------- ------- ------- DILUTED EARNINGS PER SHARE: Reported diluted earnings per share $ 1.10 $ 0.35 $ 0.69 Goodwill amortization after tax - $ 0.04 $ 0.02 Adjusted diluted earnings per share $ 1.10 $ 0.39 $ 0.71 ------- ------- -------

-F11- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 6. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) Changes in the carrying amount of goodwill for the year ended June 30, 2002, were as follows:

In US$ thousands) 2002 Balance at June 30, 2001 $47,870 Foreign currency translation adjustments 8,387 Goodwill on acquisition of Labhardt Ag (Note 15) 4,161 Goodwill on acquisition of Servo Magnetics Inc (Note 15) 30,701 Contingent payment for MAP (Note 15) 1,417 Balance at June 30, 2002 $92,536 -------

Other intangible assets amounted to $2.7 million (net of accumulated amortization of $1.9 million) and $1.4 million (net of accumulated amortization of $1.0 million) at June 30, 2002 and 2001, respectively. These intangible assets consist of patents and are amortized over the estimated useful life of the patent, generally five years. There are no expected residual values related to these intangible assets. 7. ACCRUED EXPENSES Accrued expenses at June 30, 2002 and 2001 consist of the following (in thousands):

2002 2001 Service warranties $ 744 $ 739 Consulting and professional fees 596 809 Royalties 55 290 Value added taxes due 847 6,033 Employee related costs 6,817 4,687 Deferred revenue 1,779 1,388 Research foundation grants 1,344 - Convertible note interest 137 164 Provision for restructure - 375 Promotional programs 2,746 1,198 Other 1,987 1,068 $17,052 $16,751 ------- -------

During the year ended June 30, 2001, the Company took a restructuring charge of $550,000 associated with the sale and closure of MAP's unprofitable French operation. At June 30, 2002 and 2001, the provision for restructure was $nil and $375,000, respectively. 8. LONG-TERM DEBT

Long-term debt at June 30, 2002 and 2001 consists of the following (in thousands): 2002 2001 Outstanding at beginning of year $150,000 $ - Issued 30,000 150,000 Repurchased (56,750) - Outstanding at end of year $123,250 $150,000 --------- --------

-F12- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 8. LONG-TERM DEBT (CONTINUED) On June 20, 2001 the Company issued $150.0 million of 4% convertible subordinated notes that are due to mature on June 20, 2006. On July 3, 2001, the Company received an additional $30.0 million in over allotments. This increased the total amount of convertible subordinated notes issued to $180.0 million. The Company may redeem some or all of the notes at any time before June 20, 2004 at a redemption price of $1,000 per $1,000 principal amount of notes, plus accrued and unpaid interest, if any, to the redemption date, if the closing price of the Company's common stock has exceeded 150% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day before the date of mailing of the provisional redemption notice. Upon any such provisional redemption, the Company will make an additional payment in cash equal to $166.67 per $1,000 principal amount of notes, less the amount of any interest actually paid on the notes before the provisional redemption date. The Company may also redeem some or all of the notes at any time on or after June 22, 2004, but prior to June 20, 2005, at a redemption price equal to 101.6% of the principal amount of notes redeemed, and at any time after June 19, 2005, at a redemption price of 100.8% of the principal amount of notes, plus in any case accrued and unpaid interest, if any, to the redemption date, if the closing price of the Company's common stock has exceeded 130% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day before the date of mailing of the optional redemption notice. The notes are general unsecured obligations and are subordinated to all of the Company's existing and future senior indebtedness and will be effectively subordinated to all of the indebtedness and liabilities of the Company's subsidiaries. The indenture governing the notes does not limit the Company or its subsidiaries from incurring senior indebtedness or other indebtedness. During fiscal 2002, the Company repurchased $56.8 million face value of its convertible subordinated notes. The total purchase price of the notes was $49.1 million, including $0.6 million in accrued interest. The Company recognized a gain of $4.0 million, net of tax of $2.5 million on these transactions. As at June 30, 2002, the Company had convertible subordinated notes outstanding of $123.3 million. The notes are convertible, at the option of the holder, at any time on or prior to maturity, into shares of common stock of ResMed Inc. The notes are convertible at a conversion price of $60.60 per share, which is equal to a conversion rate of 16.5017 shares per $1,000 principal amount of notes, subject to adjustment. Interest is to be paid on the notes on June 20 and December 20 of each year. The notes are general unsecured obligations and are subordinated to all of the Company's existing and future senior indebtedness and will be effectively subordinated to all of the indebtedness and liabilities of the Company's subsidiaries. The indenture governing the notes will not limit the Company or its subsidiaries from incurring senior indebtedness or other indebtedness. -F13- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 9. STOCKHOLDERS' EQUITY STOCK OPTIONS - The Company has granted stock options to personnel, including officers and directors in accordance with both the 1995 Option Plan and the 1997 Equity Participation Plan (collectively the "Plans"). These options have expiration dates of ten years from the 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. In August 1997 as part of the introduction of the 1997 Equity Participation Plan, the Company cancelled 43,880 options, being all non-issued options remaining under the 1995 Option Plan. The following table summarizes option activity:

Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise 2002 Price 2001 Price ($) 2000 Price ($) Outstanding at beginning of year 3,852,818 $17.14 3,298,022 $ 10.12 3,142,272 $ 7.32 Granted 1,328,600 50.18 1,569,690 27.27 1,336,900 14.14 Exercised (775,803) 12.61 (884,859) 8.98 (967,985) 6.59 Forfeited (204,617) 26.75 (130,035) 17.78 (213,165) 10.04 Outstanding at end of year 4,200,998 $27.94 3,852,818 $ 17.14 3,298,022 $ 10.12 Price range of granted options $33.15-$52.20 $ 24-$40 $ 13-$27 Options exercisable at end of year 1,631,044 13.76 1,240,427 $ 8.02 1,368,286 $ 6.92

The total number of shares of Common Stock authorized for issuance upon exercise of options and other awards, or upon vesting of restricted or deferred stock awards, under the 1997 Plan was initially established at 1,000,000 and increases at the beginning of each fiscal year, commencing on July 1, 1998, by an amount equal to 4% of the outstanding Common Stock on the last day of the preceding fiscal year. The maximum number of shares of Common Stock issuable upon exercise of incentive stock options granted under the 1997 Plan, however, cannot exceed 8,000,000. Furthermore, the maximum number of shares which may be subject to options, rights or other awards granted under the 1997 Plan to any individual in any calendar year cannot exceed 300,000. The following table summarizes information about stock options outstanding at June 30, 2002.

Number Outstanding at Weighted Average Number Exercisable at Exercise Prices at June 30, 2002 Remaining Contractual Life June 30, 2002 0 - $10 508,810 4.01 508,810 11 - $20 1,107,355 6.75 747,166 21 - $30 973,803 8.43 267,121 31 - $40 357,330 8.88 104,446 41 - $50 50,300 9.37 3,501 51 - $60 1,203,400 9.09 0 -------------------------------------------------------------------------------------------- 4,200,998 7.69 1,631,044 --------------------------------------------------------------------------------------------

-F14- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 9. STOCKHOLDERS' EQUITY (CONTINUED)

The following table summarizes outstanding stock option plan balances as at June 30, 2002 Number of securities Number of securities to be issued upon Weighted-average remaining available for exercise of outstanding exercise price of future issuance under Plan Category options outstanding option equity compensation plans Equity compensation plans approved by security holders 4,200,998 $27.94 763,491 Equity compensation plans not approved by security holders - - - Total 4,200,998 $27.94 763,491

The Company applies APB Opinion No. 25 in accounting for its Plans and as all stock options are issued at market price on date of issue, no compensation cost has been recognized for its stock options. Had the Company determined compensation cost under SFAS 123, the fair value at the grant date for its stock options would have reduced the Company's net income to the pro forma amounts indicated below:

2002 2001 2000 Net income (in thousands): As reported $37,506 $11,630 $22,226 Pro forma 18,531 2,859 17,511 Basic earnings per common share: As reported $ 1.17 $ 0.37 $ 0.74 Pro forma $ 0.58 $ 0.09 $ 0.58 Diluted income per common and common equivalent share: As reported $ 1.10 $ 0.35 $ 0.69 Pro forma $ 0.54 $ 0.09 $ 0.54

The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: weighted average risk-free interest rates of 4.8% for fiscal 2002, and 6.0% and 6.5% for fiscal 2001 and 2000, respectively; no dividend yield; expected option lives of 5.5 years for fiscal 2002 and 4.8 and 3.8 years for fiscal 2001 and 2000, respectively; and volatility of 60% for 2002 and 61% and 55% for fiscal 2001 and 2000. Fair Value of compensation costs by period of Grant are noted below (in thousands except per share data): -F15-

RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 Average Fair Year of Grant FY02 FY01 FY00 Exercise Fair Value at Value at Price Date of Grant June 30, 2002 2002 $21,074 $ - $ - $50.18 $26.10 $11.98 2001 7,142 10,272 - 27.27 13.41 14.96 2000 971 2,540 5,201 14.14 6.56 18.59 1999 5 682 1,803 11.31 5.27 19.80 1998 - - 250 6.08 2.13 24.95 -------------------------------------------------------------------------------------- Compensation Cost $29,192 $13,494 $7,254 -------------------------------------------------------------------------------------- Tax Effected $18,975 $ 8,771 $4,715 --------------------------------------------------------------------------------------

The following table summarizes stock option grants by recipient, with executive employees as defined pursuant to Section 16(b) of Securities Exchange Act of 1934 separately disclosed. As at June 30, 2002, the Company has 8 executive employees.

June 30, June 30, June 30, 2002 2001 2000 Directors 73,000 21,000 48,000 Executives 167,000 167,500 166,770 Staff 1,088,600 1,381,190 1,122,130 Gross Options Issued 1,328,600 1,569,690 1,336,900 --------- --------- --------- Employees 1,250 953 605 ========= ========= ========= Average Options per Employee 1,063 1,647 2,210 --------- --------- ---------

PREFERRED STOCK. In April 1997, the board of directors authorized 2,000,000 shares of $0.01 par value preferred stock. No such shares were issued or outstanding at June 30, 2002. STOCK PURCHASE RIGHTS. In April 1997, the Company implemented a plan to protect stockholders' rights in the event of a proposed takeover of the Company. Under the plan, each share of the Company's outstanding common stock carries one right to purchase Series A Junior Participating Preferred Stock (the "Right"). The Right enables the holder, under certain circumstances, to purchase common stock of the Company or of the acquiring person at a substantially discounted price ten days after a person or group publicly announces it has acquired or has tendered an offer for 20% or more of the Company's outstanding common stock. The Rights are redeemable at $0.01 per Right and expire in 2007. COMMON STOCK. During fiscal 2000, the Board of Directors declared a two-for-one split of the Company's common stock, effective March 31, 2000. Stockholders' equity has been restated for all periods presented to give retroactive recognition to the stock split by reclassifying from additional paid-in capital to common stock, the par value of the additional shares as a result of the stock split. On June 6, 2002, the Board of Directors authorized the Company to repurchase up to 4.0 million shares of outstanding common stock. During fiscal year 2002, the Company repurchased 290,047 shares at a cost of $7.9 million. Shares that are repurchased are classified as treasury stock pending future use and reduce the number of shares outstanding used in calculating earnings per share. -F16- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 10. OTHER, NET Other, net is comprised of the following at June 30, 2002, 2001 and 2000 (in thousands):

2002 2001 2000 License fees $ 148 $ 125 $ 167 Gain/(loss) on foreign currency hedging position (767) (2,766) (1,863) Gain/(loss) on foreign currency transactions 182 4,747 1,681 Realized gain on sale of marketable securities 301 - - Other 244 (144) (37)

----------------------------------------------------------------------------- $108 $1,962 $(52) ----------------------------------------------------------------------------- 11. INCOME TAXES Income before income taxes for the years ended June 30, 2002, 2001, and 2000, was taxed under the following jurisdictions (in thousands):

2002 2001 2000 U.S. $ 418 $ 3,482 $ 4,644 Non-U.S. 54,174 23,832 29,522 $54,592 $27,314 $34,166

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

2002 2001 2000 Current: Federal $ 4,962 $ 2,938 $ 1,396 State 752 203 77 Non-U.S. 17,525 14,790 10,390 23,239 17,931 11,863 Deferred: Federal (3,494) (652) 390 State (568) 90 14 Non-U.S. (2,091) (1,685) (327) (6,153) (2,247) 77 Provision for income taxes $17,086 $15,684 $11,940

-F17- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 11. 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): 2002 2001 2000 Computed "expected" tax expense $19,108 $ 9,287 $11,616 Increase (decrease) in income taxes resulting from: Non-deductible expenses 116 460 715 Research and development credit (888) (781) (430) Tax effect of intercompany dividends 2,577 (3,885) (508) Utilization of net operating loss carryforwards - (5) (4) Write-off of net operating losses due to business cessation 1,046 - - Change in valuation allowance (2,614) 4,431 22 Effect of non-U.S. tax rates (3,379) 4 714 State income taxes, net of U.S. tax benefit 363 356 235 In-process research and development write-off 123 6,010 - Provision for restructure - 187 - Other 634 (380) (420) $17,086 $15,684 $11,940 ======== ======== ========

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, 2002 and 2001 (in thousands):

2002 2001 ======== ======== Deferred tax assets: Employee benefit obligations $ 940 $ 573 Inventory 289 - Provision for service warranties 195 203 Provision for doubtful debts 648 317 Net operating loss carryforwards 1,088 2,206 Deferred foreign tax credits 7,291 7,193 AMT tax credit 1,675 - Accrual for legal costs 54 5 Intercompany profit in inventories 5,606 3,492 Property, plant and equipment - 189 Deferred gain on sale-leaseback 1,740 - Other accruals 1,679 663 21,205 14,925 -------- -------- Less valuation allowance (2,950) (5,592) Deferred tax assets $18,255 $ 9,333 Deferred tax liabilities: Patents ($74) ($382) Capitalized software (451) (495) Unrealized gain on foreign currency options (829) (179) Unrealized foreign exchange gains (238) - Property, plant and equipment (1,595) - Undistributed German income (3,355) (2,104) Deferred tax deductible goodwill amortization (2,410) (1,698) Other receivables - (197) Other (14) (126) Deferred tax liabilities (8,966) (5,181) Net deferred tax asset $ 9,289 $ 4,152 -------- --------

-F18- RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 11. INCOME TAXES (CONTINUED) The valuation allowance at June 30, 2002, primarily relates to a provision for uncertainty as to the utilization of deferred foreign tax credits of $2,787,000 and net operating loss carryforwards of $163,000 relating to Singapore and Malaysia. The net change in the valuation allowance was a decline of $2,642,000 for the year ended June 30, 2002, in comparison to an increase of $5,506,000 and an increase of $22,000, for the years ended June 30, 2001 and 2000, respectively. The measurement of deferred 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 2002, 2001 and 2000 were reduced by $nil, $5,000 and $4,000 respectively, through the utilization of net operating loss carryforwards. 12. EMPLOYEE RETIREMENT PLANS The Company contributes to a number of employee retirement plans for the benefit of its employees. These plans are detailed as follows: (1) Australia. The Company contributes to defined contribution pension plans for each employee 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. The Company contributes to the plans at the rate of 8% of the salaries of all Australian employees. This rate increased to 9% effective July 1, 2002. Total Company contributions to the plans for the years ended June 30, 2002, 2001, and 2000 were $968,000, $814,000 and $632,000, respectively. (2) United Kingdom. The Company contributes to a defined contribution plan for each permanent United Kingdom employee. All employees, after serving a three month qualifying period, are entitled to benefit on retirement, disability or death. Employees may contribute additional funds to the plan. The Company contributes to the plans at the rate of 3% of the salaries. Total Company contributions to the plan were $16,000, $7,000 and $8,000 in fiscal 2002, 2001, and 2000 respectively. (3) United States. The Company sponsors a defined contribution pension plan available to substantially all domestic employees. Company contributions to this plan are based on a percentage of employee contributions to a maximum of 3% of employee salaries. The cost of this plan to the Company was $245,000, $158,000 and $123,000 in fiscal 2002, 2001 and 2000 respectively. 13. SEGMENT INFORMATION The Company operates solely in the sleep disordered breathing sector of the respiratory medicine industry. The Company therefore believes that, given the single market focus of its operations and the inter-dependence of its products that the Company operates as a single operating segment. The Company assesses performance and allocates resources on the basis of a single operating entity. Financial information by geographic area for the years ended June 30, 2002, 2001 and 2000, is summarized below (in thousands): -F19- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 13. SEGMENT INFORMATION (CONTINUED)

Rest of U.S.A Germany Australia France World Total 2002 Revenue from external customers $95,463 35,386 5,569 20,957 46,701 $204,076 Long lived assets $34,127 3,738 46,370 599 2,455 $ 87,289 2001 Revenue from external customers $74,981 25,646 5,318 17,592 31,619 $155,156 Long lived assets $30,475 3,063 25,130 555 1,725 $ 60,948 2000 Revenue from external customers $58,419 14,317 4,444 11,949 26,486 $115,615 Long lived assets $ 8,126 1,248 27,595 622 1,863 $ 39,454

Net revenues from external customers is based on the location of the customer. Long-lived assets of geographic areas are those assets used in the Company's operations in each geographical area and excludes patents, deferred tax assets and goodwill. 14. COMMITMENTS The Company leases buildings, motor vehicles and office equipment under operating leases. Rental charges for these items are expensed as incurred. At June 30, 2002 the Company had the following future minimum lease payments under non-cancelable operating leases (in thousands):

Operating Sub lease Total net minimum Years Leases rental lease payments income 2003 $ 4,326 $247 $ 4,079 2004 4,339 257 4,082 2005 3,967 268 3,699 2006 1,217 68 1,149 2007 991 - 991 Thereafter 211 - 211 Total minimum lease payments $15,051 $840 $14,211

Rent expenses under operating leases for the years ended June 30, 2002, 2001 and 2000 were approximately $2,267,000, $1,087,000 and $744,000, respectively. -F20- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 15. BUSINESS ACQUISITIONS FISCAL YEAR ENDED JUNE 30, 2002 SERVO MAGNETICS INC (SMI). On May 14, 2002, the Company acquired all of the common stock of Servo Magnetics Incorporated through a merger with our wholly-owned subsidiary, Servo Magnetics Acquisition Inc., for total consideration, including acquisition costs, of $32.6 million. Consideration included the issue of 853,448 shares for fair value of $24.8 million with the balance of the acquisition cost paid in cash. Upon consummation of the merger, the surviving corporation, Servo Magnetics Acquisition Inc., changed its name to Servo Magnetics, Inc. The acquisition has been accounted for as a purchase and accordingly, the results of operations of SMI have been included in the Company's consolidated financial statements from May 14, 2002. The excess of the purchase price over the fair value of the net identifiable assets acquired of $1.9 million has been recorded as goodwill. Purchased in-process research and development of $350,000 was expensed upon acquisition of SMI because technological feasibility of the products under development had not been established and no further alternative uses existed. The value of in process technology was calculated by identifying research projects in areas for which technological feasibility had not been established, estimating the costs to develop the purchased in process technology into commercially viable products, estimating the resulting net cash flows from such products, discounting the net cash flows to present value, and applying the reduced percentage completion of the projects thereto. The discount rates used in the analysis were 19% and were based on the risk profile of the acquired assets. Purchased research and development projects related to electrical motor systems used in the company's flow generator devices and other medical and data storage equipment. Key assumptions used in the analysis included gross margins of 34%. As of the date of acquisition, new motor systems for use in medical and health applications are expected to be completed and commercially available by 2004. These projects have estimated costs to complete totaling approximately $0.5 million. The Company believes that the assumptions used to value acquired intangible assets noted above were reasonable at the time of acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project revenues, development costs or profitability, or events associated with such projects, will transpire as estimated. For these reasons, among others, actual results may vary from the projected results. LABHARDT AG. On November 15, 2001, the Company's wholly owned subsidiary ResMed International Inc. acquired all the Common Stock of Labhardt Ag, its Swiss distributor for total cash consideration including acquisition costs of $5.5 million. The acquisition has been accounted for as a purchase and accordingly, the results of operations of Labhardt have been included in the Company's consolidated financial statements from November 15, 2001. The excess of the purchase price over the fair value of the net identifiable assets acquired of $1.3 million has been recorded as goodwill. Pro-forma financial information related to SMI and Labhardt Ag are not included as the effects would not be significant to the consolidated financial statements. -F21- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 15. BUSINESS ACQUISITION (CONTINUED) FISCAL YEAR ENDED JUNE 30, 2001 MAP MEDIZIN-TECHNOLOGIE GMBH (MAP). On February 16, 2001 the Company's fully owned German Subsidiary, ResMed Beteiligungs GmbH, acquired all the common stock of MAP Medizin-Technologie GmbH ("MAP'') for total consideration, including acquisition costs, of $55.4 million. MAP is a leading German designer, manufacturer and distributor of medical devices for the diagnosis and treatment of SDB, with a particular focus on OSA. The acquisition has been accounted for as a purchase and accordingly, the results of operations of MAP have been included in the Company's consolidated financial statements from February 16, 2001. The excess of the purchase price over the fair value of the net identifiable assets acquired of $47.1 million has been recorded as goodwill. Purchased in-process research and development of $17,677,000 was expensed upon acquisition of MAP because technological feasibility of the products under development had not been established and no further alternative uses existed. The value of in process technology was calculated by identifying research projects in areas for which technological feasibility had not been established, estimating the costs to develop the purchased in process technology into commercially viable products, estimating the resulting net cash flows from such products, discounting the net cash flows to present value, and applying the reduced percentage completion of the projects thereto. The discount rates used in the analysis were between 27% and 33% and were based on the risk profile of the acquired assets. All purchased research and development projects related to medical equipment for the treatment of sleep disordered breathing, primarily relating to the development of mask interface systems and autotitrating devices for the treatment of obstructive sleep apnea and associated disorders. Key assumptions used in the analysis included gross margins ranging from 70% to 80%. As of the date of acquisition, the mask interface systems are expected to be completed and commercially available in 2002 and versions of the autotitrating devices between 2003 and 2005. These projects have estimated costs to complete totalling approximately $2.0 million. The Company believes that the assumptions used to value the acquired intangible assets were reasonable at the time of acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project revenues, development costs or profitability, or events associated with such projects, will transpire as estimated. For these reasons, among others, actual results may vary from the projected results. The following unaudited pro-forma financial information presents the combined results of operations of the Company and MAP as if the acquisition had occurred as of the beginning of the years ended June 30, 2001 and 2000, respectively and after giving effect to certain adjustments, including amortization of goodwill and increased interest expense associated with debt funding the acquisition. The pro-forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and MAP constituted a single entity during such years. -F22- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 15. BUSINESS ACQUISITION (CONTINUED)

(In thousands except per share data) 2001 2000 Net revenue $172,250 $138,396 Net income 28,556 17,612 Basic earnings per share $ 0.92 $ 0.58 Diluted earnings per share $ 0.85 $ 0.55 Basic shares outstanding 31,129 30,153 Diluted shares outstanding 33,484 32,303

During the December 2001, the Company paid an amount of $1.4 million as final consideration associated with the purchase of MAP. The amount has been recorded as goodwill. EINAR EGNELL AB. On January 31, 2000, the Company's wholly owned Swedish subsidiary, ResMed Sweden AB, acquired the business and associated assets of Einar Egnell AB, its Swedish distributor for $576,000 in cash. The acquisition has been accounted for as a purchase and accordingly, the results of operations of the Einar Egnell business have been included in the Company's consolidated financial statements from January 31, 2000. The excess of the purchase price over the fair value of the net identifiable assets acquired of $229,000 has been recorded as goodwill. 16. COMPREHENSIVE INCOME As of July 1, 1999, the Company adopted Statement of Financial Accounting Standards No. 130, 'Reporting Comprehensive Income' which established standards for the reporting and display of comprehensive income and its components in the financial statements. Movements in comprehensive income (loss) for the year ended June 30, 2002 are presented below (in thousands):

Foreign Unrealized Accumulated Other Retained Accumulated Currency Gains on Comprehensive Earnings Comprehensive Items Securities Income (Loss) Income (Loss) Beginning balance, July 1, 2001 ($29,572) - ($29,572) $ 77,137 $ 47,565 Current period change 21,342 105 21,447 37,506 58,953 Ending balance, June 30, 2002 ($8,230) 105 ($8,125) $114,643 $106,518

Comprehensive income/(loss) for the years ended June 30, 2002, June 30, 2001 and June 30, 2000 was $59.0 million, ($4.8) million and $14.5 million, respectively. The Company does not provide for US income taxes on foreign currency translation adjustments since it does not provide for such taxes on undistributed earnings of foreign subsidiaries. Accumulated other comprehensive loss at June 30, 2002 and June 30, 2001 consisted of foreign currency translation adjustments with net debit balances of $8.2 million and $29.6 million, respectively and unrealized gains on securities of $105,000 (net of tax of $57,000) and zero, respectively. -F23- RESMED INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001 17. LEGAL ACTIONS The Company is currently engaged in litigation relating to the enforcement and defense of certain of its patents. In January 1995, the Company filed a complaint in the United States District Court for the Southern District of California seeking monetary damages from and injunctive relief against Respironics for alleged infringement of three ResMed patents. In February 1995, Respironics filed a complaint in the United States District Court for the Western District of Pennsylvania 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 were combined and are proceeding in the United States District Court for the Western District of Pennsylvania. In June 1996, the Company filed an additional complaint against Respironics for infringement of a fourth ResMed patent, and that complaint was consolidated with the earlier action. As of this date, Respironics has brought three partial summary judgment motions for non-infringement of the ResMed patents; the Court has granted each of the motions. In December 1999, in response to the Court's ruling on Respironics' third summary judgment motion, the parties jointly stipulated to a dismissal of charges of infringement under the fourth ResMed patent, with ResMed reserving the right to reassert the charges in the event of a favorable ruling on appeal. It is ResMed's intention to appeal the summary judgment rulings after a final judgment in the consolidated litigation has been entered in the District Court proceedings. In January 2001, MAP Medizin-Technologie GmbH filed a lawsuit in the Civil Chamber of Munich Court against Hofrichter GmbH seeking actual and exemplary monetary damages for the unauthorized and infringing use of the Company's trademarks and patents. An initial decision has been made in favor of MAP. Hofrichter has filed an appeal and have sort Court determination that the MAP patents do not apply to certain Hofrichter products. On August 26, 2002, ResMed filed a lawsuit in Federal District Court in San Diego against Fisher & Paykel Healthcare. The ResMed complaint seeks a judgment that selected Fisher & Paykel Healthcare mask products (ACLAIM and ACLAIM 2 masks) infringe patents held by ResMed. The complaint further charges the defendant with the copying of ResMed proprietary mask technology and alleges trade dress and common law violations relating to the appearance of ResMed mask products. While the Company is prosecuting the above actions, there can be no assurance that the Company will be successful. -F24- 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 September 9, 2002 ResMed Inc /S/ PETER C. FARRELL _ _______________________ Peter C. Farrell President and Chief Executive Officer /S/ ADRIAN M. SMITH _ _______________________ Adrian M. Smith Vice President Finance and Chief 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 /S/ PETER C. FARRELL Chief Executive Officer, September 9, 2002 Peter C. Farrell President, Chairman of the Board (Principal Executive Officer) /S/ CHRISTOPHER G. ROBERTS Director September 9, 2002 Christopher G. Roberts /S/ MICHAEL A. QUINN Director September 9, 2002 Michael A. Quinn /S/ GARY W. PACE Director September 9, 2002 Gary W. Pace /S/ DONAGH MCCARTHY Director September 9, 2002 Donagh McCarthy /S/ CHRISTOPHER A. BARTLETT Director September 9, 2002 Christopher Bartlett /S/ LOUIS A. SIMPSON Director September 9, 2002 Louis Simpson

-41- CERTIFICATIONS I, Peter C. Farrell, certify that: 1. I have reviewed this annual report on Form 10-K of ResMed Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 9, 2002 /S/ PETER C. FARRELL ------------------------------ Peter C. Farrell President and Chief Executive Officer I, Adrian M. Smith, certify that: 1. I have reviewed this annual report on Form 10-K of ResMed Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 9, 2002 /S/ ADRIAN M. SMITH ------------------------------ Adrian M. Smith Vice President Finance and Chief Financial Officer -42- SCHEDULE II

RESMED INC AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED JUNE 30, 2002, 2001 AND 2000 (IN THOUSANDS) Balance at Charged to Other Balance at Beginning of costs and deductions) end of period Period expenses Year ended June 30, 2002: Applied against asset account Allowance for doubtful accounts $892 1,542 (496) 1,938 Year ended June 30, 2001: Applied against asset account Allowance for doubtful accounts $833 681 (622) 892 Year ended June 30, 2000: Applied against asset account Allowance for doubtful accounts $421 632 (220) 833

See accompanying independent auditor's report. -43- EXHIBIT INDEX 2.1 Sale and Assignment Agreement dated as of February 16, 2001, between ResMed Inc, ResMed Beteilingungs GmbH and the shareholders of MAP Medizin-Technologie GmbH* 2.2 Agreement and Plan of Merger dated as of May 14, 2002 among ResMed Inc., Servo Magnetics Acquisition Inc., Servo Magnetics Incorporated and Mr Leslie Hoffman. 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** 4.2 Rights agreement dated as of April 23, 1997*** 4.3 Indenture dated as of June 20, 2001, between ResMed Inc and American Stock Transfer & Trust Company****** 4.4 Registration Rights Agreement dated as of June 20, 2001, by and between ResMed Inc, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Banc Alex Brown Inc., William Blair & Company, L.L.C., Macquarie Bank Limited and UBS Warburg LLC****** 4.5 Registration Rights Agreement dated as of May 14, 2002 between ResMed Inc., and Mr Leslie Hoffman. 10.1 1995 Stock Option Plan** 10.2 1997 Equity Participation Plan**** 10.3 Licensing Agreement between the University of Sydney and ResMed Limited dated May 17, 1991, as amended** 10.4 Consulting Agreement between Colin Sullivan and ResMed Limited effective from 1 January 1998***** 10.5 Loan Agreement between the Australian Trade Commission and ResMed Limited dated May 3, 1994** 10.6 Lease for 1091 Carroll Canyon Road, San Diego 92131-1109, U.S.A.***** 10.7 Sale and Leaseback Agreements for 97 Waterloo Rd, North Ryde, Australia 10.8 Employment Agreement dated as of May 14, 2002, between Servo Magnetics Acquisition Inc., and Mr Leslie Hoffman. 10.9 Agreement for the purchase of Lot 6001, Norwest Boulevarde, Norwest Business Park, Baulkham Hills, Australia 11.1 Computation of Earnings per Common Share 21.1 Subsidiaries of the Registrant 23.1 Independent Auditors' Consent and Report on Schedule ---------------------- *Incorporated by reference to the Registrant's Report on Form 8-K dated March 2, 2001. **Incorporated by reference to the Registrant's Registration Statement on Form S-1 (No. 33-91094) declared effective on June 1, 1995. ***Incorporated by reference to the Registrant's Registration Statement on Form 8-A12G filed on April 25, 1997. ****Incorporated by reference to the Registrant's 1997 Proxy Statement. *****Incorporated by reference to the Registrant's Report on Form 10-K dated June 30, 1998. ******Incorporated by reference to the Registrant's Report on Form 10-K dated June 30, 2001. -44-

EXHIBIT 11.1 ------------- RESMED INC AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year Ended June 30, 2002 2001 2000 BASIC EARNINGS Net income $37,506 $11,630 $22,226 Shares Weighted average number of common shares outstanding 32,174 31,99 30,153 Basic earnings per share $ 1.17 $ 0.37 $ 0.74 DILUTED EARNINGS Net income $37,506 $11,630 $22,226 Shares Weighted average number of common shares outstanding 32,174 31,99 30,153 Additional shares assuming conversion of stock options under treasury stock method 1,906 2,355 2,150 Weighted average number of common and common equivalent shares outstanding as adjusted 34,080 33,484 32,303 Diluted earnings per share $ 1.10 $ 0.35 $ 0.69

See accompanying independent auditor's report. ---------------------------------------------- -45- 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 Asia Pacific 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) ResMed Singapore Pte Ltd (a Singaporean corporation)** ResMed (Malaysia) Sdn Bhd (a Malaysian Corporation)** ResMed New Zealand Limited (a New Zealand Corporation)** ResMed R&D Limited (incorporated under the laws of New South Wales, Australia)* ResMed Sweden AB (a Swedish corporation)** ResMed KK (a Japanese corporation)** ResMed Beteiligungs GmbH (a German corporation) MAP Medizin-Technologie GmbH (a German corporation)*** MAP Medizintechnik f r Arzt und Patient GmbH & Co Kg (a German corporation)**** MAP Medizintechnik f r Arzt und Patient GmbH (a Swiss corporation)**** MAP Hirsch Medizintechnik f r Arzt und Patient GmbH (an Austrian corporation)**** MAP Techniques Avanc es pour M decins et Patients SA (a French corporation)**** Blue Medic SA (a French corporation)**** MAP Medische Techniek voor Arts en Patient BV (a Dutch corporation)**** Labhardt Ag (A Swiss corporation)** Servo Magnetics Inc. (a Delaware corporation) ResMed Spain SL (a Spanish corporation)** ------------------- *A subsidiary of ResMed Holdings Limited ** A subsidiary of ResMed International Inc *** A subsidiary of ResMed Beteiligungs GmbH **** A subsidiary of MAP Medizin-Technologie GmbH -46- EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE The Board of Directors and Stockholders ResMed Inc: The audits referred to in our report dated August 9, 2002, included the related financial statement schedule as of June 30, 2002 and for each of the years in the three-year period ended June 30, 2002. 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. Our report refers to a change in the method of accounting for goodwill. We consent to incorporation by reference in the registration statements, (Nos. 333-08013 and 333-88231) on Form S-8 and the registration statement (No. 333-70500) on Form S3 of ResMed Inc. of our reports included herein. /S/ KPMG LLP San Diego, California September 9, 2002 -47-