UNITED STATES

SECURITIES AND EXCHANGE COMMISSION WASHINGTON,

Washington, D.C. 20549 ________________________________


FORM 10-K ________________________________ [X]


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE

For the fiscal year ended June 30, 2003 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) 2005

Commission file number:001-15317

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)

(IRS Employer Identification No)

14040 DANIELSON STREET POWAY,Danielson Street

Poway, CA 92064-6857 UNITED STATES OF AMERICA (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

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,

(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 SERIESPar 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 REGISTRANTJunior

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 SECTIONhas filed all reports required to be filed by Section 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OFor 15(d) of the Securities Exchange Act of 1934 DURING THE PRECEDINGduring the preceding 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS)months (or for such shorter period that the registrant was required to file such reports), ANDand (2) HAS BEEN SUBJECT TO FILING REQUIREMENTS FOR THE PASThas been subject to such filing requirements for the past 90 DAYS. YES [X] NOdays.    Yes [ x ]    No [  ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 OF REGULATIONSof 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 PARTof 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 FORMof this Form 10-K OR ANY AMENDMENT TO THIS FORMor any amendment to this Form 10-K [  ] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT)

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES [X] NOYes [ x ]    No [  ] THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF REGISTRANT AS OF SEPTEMBER 5, 2003, COMPUTED BY REFERENCE TO THE CLOSING SALE PRICE OF SUCH STOCK ON THE NEW YORK STOCK EXCHANGE, WAS APPROXIMATELY $1,372,490,000. (ALL DIRECTORS, EXECUTIVE OFFICERS, AND

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]    No [ x ]

The aggregate market value of the voting stock held by non-affiliates of registrant as of December 31, 2004, computed by reference to the closing sale price of such stock on the New York Stock Exchange, was approximately $1,479,029,000. (All directors, executive officers, and 10% STOCKHOLDERS OF REGISTRANT ARE CONSIDERED AFFILIATES.stockholders of Registrant are considered affiliates.) AT SEPTEMBER 5, 2003, REGISTRANT HAD 33,815,865 SHARES OF COMMON STOCK,

At August 23, 2005, registrant had 35,186,782 shares of Common Stock, $.004 PAR VALUE, ISSUED AND OUTSTANDING. THIS NUMBER EXCLUDES 425,928 SHARES HELD BY THE REGISTRANT AS TREASURY SHARES. PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR ITS NOVEMBER 13, 2003 MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PARTpar value, issued and outstanding. This number excludes 1,127,459 shares held by the registrant as treasury shares.

Portions of registrant’s definitive Proxy Statement for its November 18, 2005 meeting of stockholders are incorporated by reference into Part III OF THIS REPORT. of this report.



CONTENTS


- --------------------------------------------------------------------------------------------------- CONTENTS - ---------------------------------------------------------------------------------------------------

Part I

Item 1 . Business3
Item 2 . Properties 17 21
Item 3 . Legal Proceedings 17 21
Item 4 . Submission of Matters to a Vote of Security Holders 19 22

Part II

Item 5 . Market for Registrant'sRegistrant’s Common Equity, and Related Stockholder Matters 19 and Issuer Purchases of Equity Securities23
Item 6 . Selected Financial Data 21 25
Item 7 . Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations 22 26
Item 7A. 7AQuantitative and Qualitative Disclosures About Market and Business Risks 33 38
Item 8 . Consolidated Financial Statements and Supplementary Data 40 47
Item 9 . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 41 48
Item 9A. 9AControls and Procedures 41 48
Item 9BOther Information51

Part III

Item 10. 10Directors and Executive Officers of the Registrant 42 52
Item 11. 11Executive Compensation 42 52
Item 12. 12Security Ownership of Certain Beneficial Owners and Management 42 and Related Stockholder Matters52
Item 13. 13Certain Relationships and Related Transactions 42 52
Item 14. 14Principal Accountant Fees and Services 42 52

Part IV

Item 15. 15Exhibits and Consolidated Financial Statement Schedule and Reports on Form 8-K 42 ... . . . Schedules52
Signatures 44 - --------------------------------------------------------------------------------------------------- S-1
ACTIVA, AERO-CLICK, AERO-FIX, AUTO VPAP, AUTOSCAN, AUTOSET, AUTOSET

Activa, Aerial, Aero-Click, Aero-Fix, ApneaLink, AutoVPAP, AutoScan, AutoSet, AutoSet CS, AUTOSET SPIRIT, AUTOSETAutoSet Spirit, AutoSet T, AUTOSET.COM, AUTOSET-CS.COM, AUTOVIEW, BUBBLE CUSHION, BUBBLE MASK, HUMIDAIRE, HUMIDAIRE 2I,AutoSet.com, AutoSet-CS.com, AutoView, Bubble Cushion, Bubble Mask, Elisée, Eole, Helia, HumidAire, HumidAire 2i, IPAP MAX, IPAP MIN, MEDDTRAXX, MEPAL, MESAMIV, MINNI MAX NCPAP, MIRAGE, PROTEGE MicroMesam, minni Max, MaxNcpap, Mirage, Protégé, MORITZMoritz II BILEVEL, POLY-MESAM, RESCAP, RESALARM, RESCONTROL, RESMED, SLEEPKIT SOLUTIONS,biLEVEL, Poly-MESAM, ResCap, ResAlarm, ResControl, ResMed, SleepKIT Solutions, S6, S7, SCAN,S8, SELFSET, SMARTSTART, SULLIVAN, TICONTROL,SmartStart, Spiro+, Sullivan, Swift, TiControl, TRAXX, TWISTER REMOTE, ULTRA MIRAGE,Twister remote, Ultra Mirage, Vential, VPAP, AND VPAP MAX, VSYNC, ARE OUR TRADEMARKS. AS USED IN THISVS Easyfit, Vsync, are our trademarks.

As used in this 10-K, THE TERMS "WE"the terms “we”, "US"“us”, "OUR" AND "THE COMPANY" REFER TO RESMED INC., A DELAWARE CORPORATION, AND ITS SUBSIDIARIES, ON A CONSOLIDATED BASIS, UNLESS OTHERWISE STATED. “our” and “the Company” refer to ResMed Inc, a Delaware corporation, and its subsidiaries, on a consolidated basis, unless otherwise stated.

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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


ITEM 1BUSINESS

General

We are a leading developer, manufacturer and distributor of medical equipment for treating, diagnosing, and managing sleep-disordered breathing and other respiratory disorders. Sleep-disordered breathing or “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 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. THIS TREATMENT, NASAL CONTINUOUS POSITIVE AIRWAY PRESSURE, OR CPAP, WAS THE FIRST SUCCESSFUL NONINVASIVE TREATMENT FORdeveloped by Professor Colin Sullivan. 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 NASALsystems deliver pressurized air, typically through a nasal mask, to prevent collapse of the upper airway during sleep.

Since the development of CPAP, WE HAVE DEVELOPED A NUMBER OF INNOVATIVE PRODUCTS FORwe have developed a number of innovative products for SDB INCLUDING AIRFLOW 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 1,464 PEOPLE AND SELL OUR PRODUCTS IN OVERand other respiratory disorders including airflow generators, diagnostic products, mask systems, headgear and other accessories. Our growth has been fuelled by geographic expansion, increased awareness of respiratory conditions as a significant health concern among physicians and patients, and our research and product development effort.

We employ 1,927 people and sell our products in over 60 COUNTRIES THROUGH A COMBINATION OF WHOLLY OWNED SUBSIDIARIES AND INDEPENDENT DISTRIBUTORS. OUR WEB SITE ADDRESS IS WWW.RESMED.COM. WE MAKE OUR PERIODIC REPORTS, TOGETHER WITH ANY AMENDMENTS, AVAILABLE ON OUR WEB SITE, FREE OF CHARGE, AS SOON AS REASONABLY PRACTICABLE AFTER WE ELECTRONICALLY FILE OR FURNISH THE REPORTS WITH THE SECURITIES AND EXCHANGE COMMISSION. CORPORATE HISTORY RESMED INC., A DELAWARE CORPORATION, WAS FORMED IN MARCHcountries through a combination of wholly owned subsidiaries and independent distributors.

Our web site address is www.resmed.com. We make our periodic reports, together with any amendments, available on our web site, free of charge, as soon as reasonably practicable after we electronically file or furnish the reports with the Securities and Exchange Commission.

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 JUNEas the ultimate holding company for our Americas, Asia-Pacific, and European operating subsidiaries. On June 1, 1995, WE COMPLETED AN INITIAL PUBLIC OFFERING OF COMMON STOCK AND ON JUNEwe completed an initial public offering of common stock and on June 2, 1995 OUR COMMON STOCK COMMENCED TRADING ON THEour common stock commenced trading on the NASDAQ NATIONAL MARKET. ON SEPTEMBERNational Market. On September 30, 1999 WE TRANSFERRED OUR PRINCIPAL PUBLIC LISTING TO THE NEW YORK STOCK EXCHANGEwe transferred our principal public listing to the New York Stock Exchange (NYSE), TRADING UNDER THE TICKER SYMBOLor “NYSE”, trading under the ticker symbol RMD. ON NOVEMBEROn November 25, 1999, WE ESTABLISHED A SECONDARY LISTING OF OUR SHARES VIA CHESS DEPOSITARY INSTRUMENTS, OR CDIS, ON THE AUSTRALIAN STOCK EXCHANGE (ASX)we established a secondary listing of our common stock via Chess Depositary Instruments, or “CDI’s”, ALSO UNDER THE SYMBOLon the Australian Stock Exchange, or “ASX”, also under the symbol RMD. TEN CDIS ON THETen CDI’s on the ASX REPRESENT ONE SHARE OF OUR COMMON STOCK ON THErepresent one share of our common stock on the NYSE. ON JULYOn July 1, 2002, WE CONVERTED OURwe converted our ASX LISTING STATUS FROMlisting 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.

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Since formation we have acquired a number of operating businesses including:

Date of Acquisition

Dieter W. Priess Medtechnik

February 7, 1996

Premium Medical SARL

June 12, 1996

Innovmedics Pte Ltd

November 1, 1997

EINAR Egnell AB

January 31, 2000

MAP Medizin Technologie GmbH

February 16, 2001

Labhardt AG

November 15, 2001

Servo Magnetics Inc.

May 14, 2002

John Stark and Associates

July 24, 2002

Respro Medical Company Limited

July 2, 2003

Resprecare BV

December 1, 2004

Hoefner Medizintechnik GmbH

February 14, 2005

Saime SA

May 19, 2005

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, called apneas, and to near closures of the upper airway called 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 addition, OSA has recently been recognized as a cause of hypertension and a significant co-morbidity for heart disease, stroke and diabetes.

Scientists estimate that one in five adults have some form of obstructive sleep apnea. In the U.S. alone, this represents approximately 43 million people. 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 with OSA have been diagnosed or treated. Many health care professionals are often unable to diagnose OSA because they are unaware that such non-specific symptoms as excessive daytime sleepiness, snoring, hypertension 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 and pain-killing drugs. 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 strong association has been discovered between OSA and a number of cardiovascular diseases. Recent studies have shown that SDB is present in approximately 80% of

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patients with drug-resistant hypertension, approximately 60% of stroke patients and approximately 50% of patients with congestive heart failure. More recently, studies have shown a connection between SDB and diabetes: recent reports indicate that SDB is independently associated with glucose intolerance and insulin resistance.

Sleep-Disordered Breathing and Obstructive Sleep Apnea

Sleep-disordered breathing 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 and neuromuscular disease. 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 experience an increase in heart rate and an elevation of 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 maybe monitored, along with other vital signs such as heart rate and blood oxygen levels. Simpler tests, using devices such as our Apnealink, or our automatic positive airway pressure devices, monitor airflow during sleep, and use computer programs to analyze airflow patterns. These tests allow sleep clinicians to detect any sleep disturbances such as apneas, hypopneas or subconscious awakenings. We estimate that there are currently around 3,000 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

Before 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, alternative treatments have involved either uvulopalatopharyngoplasty, or UPPP, in which surgery is performed on the upper airway to remove excess tissue and to streamline the shape of the airway, implanting a device to add support to the soft palate, 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 multi-stage upper airway surgical procedures, a greater success rate has been claimed. These combined procedures, performed by highly specialized surgeons, are expensive and involve prolonged and often painful recovery periods.

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. SINCE FORMATION WE HAVE ACQUIRED A NUMBER OF OPERATING BUSINESSES INCLUDING SERVO MAGNETICS INC, LABHARDT AG, MAP MEDIZIN TECHNOLOGIE GMBH, DIETER W. PRIESS MEDTECHNIK, PREMIUM MEDICAL SARL, INNOVMEDICS PTE LTD AND EINAR EGNELL AB ON MAY 14, 2002; NOVEMBER 15, 2001; 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 MEDCARE FLAGA HF (MEDCARE), BASED IN ICELAND. WE NOW MARKET MEDCARE'S POLYSOMNOGRAPHIC PRODUCTS UNDER THE EMBLA AND EMBLETTA LABEL IN SELECTED COUNTRIES. - -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 ADDITION, OSA HAS RECENTLY BEEN RECOGNIZED AS A CAUSE OF HYPERTENSION AND A SIGNIFICANT CO-MORBIDITY FOR HEART DISEASE, STROKE AND DIABETES. FOR EXAMPLE, ONE RECENT RESEARCH STUDY SHOWED THAT 83% OF AN ADULT PATIENT POPULATION WITH DRUG-RESISTANT HYPERTENSION HAD OSA. 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 10% OF THOSE AFFLICTED BY OSA KNOW THE CAUSE OF THEIR EXCESSIVE DAYTIME SLEEPINESS OR OTHER SYMPTOMS. MANY HEALTH CARE PROFESSIONALS ARE OFTEN UNABLE TO DIAGNOSE OSA BECAUSE THEY ARE UNAWARE THAT SUCH NON-SPECIFIC SYMPTOMS AS EXCESSIVE DAYTIME SLEEPINESS, SNORING, HYPERTENSION 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 AND PAIN-KILLING 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 PRESENT IN 45% OF HYPERTENSION PATIENTS (INCLUDING 80% OF PATIENTS WITH DRUG-RESISTANT HYPERTENSION), 60% OF STROKE PATIENTS AND 50% OF PATIENTS WITH CONGESTIVE HEART FAILURE. 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 OBSTRUCTIVE SLEEP APNEA OR OSA, CENTRAL SLEEP APNEA, OR CSA, AND HYPOVENTILATION SYNDROMES THAT OCCUR DURING SLEEP. HYPOVENTILATION SYNDROMES ARE GENERALLY ASSOCIATED WITH OBESITY, CHRONIC OBSTRUCTIVE LUNG DISEASE AND NEUROMUSCULAR DISEASE. OSA IS THE MOST COMMON FORM OF SDB. - -4- 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 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 2,500 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 MULTI-STAGE UPPER AIRWAY SURGICAL PROCEDURES, A GREATER SUCCESS RATE HAS BEEN CLAIMED. THESE COMBINED PROCEDURES, PERFORMED BY HIGHLY SPECIALIZED SURGEONS, ARE EXPENSIVE AND INVOLVE PROLONGED AND OFTEN PAINFUL RECOVERY PERIODS. CPAP, BY CONTRAST, IS A NON-INVASIVE MEANS OF TREATINGby contrast, is a non-invasive means of treating OSA. CPAP WAS FIRST USED AS A TREATMENT FORwas first used as a treatment for OSA INin 1980 BY DR. COLIN SULLIVAN, THE PAST CHAIRMAN OF OUR MEDICAL ADVISORY BOARD.by Dr. Colin Sullivan, the past Chairman of our Medical Advisory Board. CPAP SYSTEMS WERE COMMERCIALIZED FOR TREATMENT OFsystems 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 MANAGINGin the United States in the mid 1980’s. Today, use of CPAP is generally acknowledged as the most effective and least invasive therapy for managing OSA. DURING

During CPAP TREATMENT, A PATIENT SLEEPS WITH A NASAL MASK CONNECTED TO A SMALL PORTABLE AIRFLOW 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. SOMETIMES WHEN A PATIENT LEAKS AIR THROUGH THEIR MOUTH, A FULL-FACE MASK MAY NEED TO BE USED. treatment, a patient sleeps with a nasal interface connected to a small portable airflow generator that delivers room air at a positive pressure. The patient breathes in air from the flow

- 5 -


generator and breathes out through an exhaust port in the interface. Continuous air pressure applied in this manner acts as a pneumatic splint to keep the upper airway open and unobstructed. Interfaces include nasal masks, and nasal pillows. Sometimes, when a patient leaks air through their mouth, a full-face mask may need to be used, rather than a nasal interface.

CPAP IS NOT A CURE 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 OFis not a cure and therefore, must be used on a nightly basis as long as treatment is required. Patient compliance has been a major factor in the efficacy of CPAP TREATMENT. EARLY GENERATIONS OFtreatment. 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 THEunits 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 AIR FLOW GENERATORS, INCLUDINGdevice operating at the prescribed pressure. In more recent years, product innovations to improve patient comfort and compliance have been developed. These include more comfortable patient interface systems; delay timers which gradually raise air pressure allowing the patient to fall asleep more easily; bilevel air 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. 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.

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, metabolic 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 SDB, 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. 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 treat OSA. In 2003, we introduced the Mirage Activa nasal mask, with active cushion technology to automatically seal mask leaks. In 2004, we introduced the Mirage Swift nasal pillows system, a less obtrusive, lightweight, and flexible alternative to nasal masks. We believe that continued product development and innovation are key factors to our ongoing success. Approximately 13% of our employees are devoted to research and development activities. In fiscal year 2005, we invested $30.0 million, or 7% 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 the depth of our presence in other 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.

During fiscal 2005, 2004, and 2003, we donated $0.5 million, $0.5 million and $nil respectively to the ResMed Foundation in the United States, and the ResMed Foundation Limited in Australia, to further enhance research and awareness of SDB. The contributions to the Foundations reflect ResMed’s commitment to medical research into sleep-disordered breathing, particularly the treatment of obstructive sleep apnea.

- -5- BUSINESS STRATEGY WE BELIEVE THAT THE6 -


Expand into New Clinical Applications.    We continually seek to identify new applications of our technology for significant unmet medical needs. Recent studies have established a clinical association between OSA and both stroke and congestive heart failure, and have recognized SDB MARKET WILL CONTINUE TO GROW IN THE FUTURE DUE TO A NUMBER OF FACTORS INCLUDING INCREASING AWARENESS OFas a cause of hypertension or high blood pressure. Research also indicates that SDB is independently associated with glucose intolerance and insulin resistance. We have developed a device 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. 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.

Products

Our portfolio of products for the treatment of OSA IMPROVED UNDERSTANDING OF THE ROLE OFand other forms of SDB TREATMENT IN THE MANAGEMENT OF CARDIAC, NEUROLOGIC, METABOLIC 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 SDB, 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 TREAT OSA. WE BELIEVE THAT CONTINUED PRODUCT DEVELOPMENT AND INNOVATION ARE KEY FACTORS TO OUR ONGOING SUCCESS. APPROXIMATELY 17% OF OUR EMPLOYEES ARE DEVOTED TO RESEARCH AND DEVELOPMENT ACTIVITIES. IN FISCAL YEAR 2003, WE INVESTED $20.5 MILLION, OR 7.5% 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 THE DEPTH OF OUR PRESENCE IN OTHER 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. DURING FISCAL 2002, WE 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 COMMITMENT TO 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. RECENT STUDIES HAVE ESTABLISHED A CLINICAL ASSOCIATION BETWEEN OSA AND BOTH STROKE AND CONGESTIVE HEART FAILURE, AND HAVE RECOGNIZED SDB AS A CAUSE OF HYPERTENSION OR HIGH BLOOD PRESSURE. WE HAVE DEVELOPED 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. CURRENTLY, 1,000 PATIENTS ARE BEING TREATED BY THIS DEVICE IN EUROPE WITH SIGNIFICANT IMPROVEMENTS IN QUALITY OF LIFE AND HEART FUNCTION. 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. 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 AIRFLOW GENERATORS, DIAGNOSTIC PRODUCTS, MASK SYSTEMS, HEADGEAR AND OTHER ACCESSORIES. AIR FLOW GENERATORS WE PRODUCEincludes airflow generators, diagnostic products, mask systems, headgear and other accessories.

Air Flow Generators

We produce CPAP, VPAP AND AUTOSET SYSTEMS FOR THE DIAGNOSIS, TITRATION AND TREATMENT OFand AutoSet systems for the titration and treatment of SDB. THE FLOW GENERATOR SYSTEMS DELIVER POSITIVE AIRWAY PRESSURE THROUGH A SMALL NASAL MASK (OR SOMETIMES A FULL-FACE MASK). OURThe flow generator systems deliver positive airway pressure through a patient interface, either a small nasal mask, nasal pillows system, or 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 AND CAN ALSO BE USED IN THE DIAGNOSIS, TREATMENT AND MANAGEMENT OFunits 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 and can also be used in the diagnosis, treatment and management of OSA. CPAP ANDand VPAP AIR FLOW GENERATORS, TOGETHER WITH OUR DIAGNOSTIC PRODUCTS, ACCOUNTED FOR APPROXIMATELY 54%flow generators, accounted for approximately 49%, 58% AND 57% OF OUR NET REVENUES IN FISCAL YEARS50% and 53% of our net revenues in fiscal years 2005, 2004 and 2003, 2002 AND 2001, RESPECTIVELY. respectively.

- 7 -


With the recent acquisition of Saime, we have increased our presence in the European homecare ventilation market. The VS and Elisée range of products are sophisticated, yet easy to use for physicians, clinicians and patients. We believe these devices complement our VPAP III and Autoset CS2 for patients who need ventilatory assistance.

- ------------------------------------------------------------------------------------- AIR FLOW Description Date of Generators Commercial Introduction - ------------------------------------------------------------------------------------- VPAP:

AIR FLOW

GENERATORS

DESCRIPTION

DATEOF

COMMERCIAL

INTRODUCTION

VPAP Products

VPAP II

Bilevel portable device providing March 1996 different pressure levels for inhalation and exhalation, improved pressure switching and reduced noise output and spontaneous breath triggering COMFORT. . . . . triggering.March 1996

COMFORT

Bilevel device with limited features.March 1996

VPAP II ST . . .

Bilevel portable device with spontaneous and April 1996 spontaneous/timed breath triggering modes of operation.April 1996

VPAP II ST A . .

Bilevel device with alarms.August 1998

VPAP MAX+. . . . MAX

Bilevel ventilatory support system for the November 1998 treatment of adult patients with respiratory insufficiency or respiratory failure.November 1998

Moritz S#. . . . S#*

Bilevel portable device providing different October 2001* pressure levels for inhalation and exhalation with integrated humidifier humidifier.October 2001

Moritz ST# . . . ST#*

Bilevel ST device with spontaneous and October 2001* spontaneous/timed breath triggering modes of operation, and with power failure alarms, system with integrated humidifier.October 2001

VPAP III . . . .

Updated Bilevel Portableportable device encompassing April 2003 improved pressure synchronization, spontaneous breath triggering and reduced noise.April 2003

VPAP III ST. . . ST

Updated Bilevel ST Portableportable device encompassing April 2003 improved pressure synchronization, spontaneous and spontaneous/timed breath triggering modes of operation and reduced noise. AutoSet: April 2003

VPAP III STA

An upgraded Bi-level device with alarm features.August 2004

- 8 -


AIR FLOW

GENERATORS

DESCRIPTION

DATEOF

COMMERCIAL

INTRODUCTION

Saime Products

Helia 2*#

Dual mode ventilator which combines volumetric and barometric ventilation modes.August 1998

Eole 3 XLS*#

Ventilator device providing conventional volumetric ventilation through both controlled and assisted-controlled ventilation with etv functions.December 1999

VS Serena*#

Bi-level ventilator providing all ventilation modes with two pressure levels.June 2001

VS Ultra*#

Dual mode ventilator which combines volumetric and barometric ventilation from leakage to valve type with single or double limb circuit.March 2002

VS Integra*#

Pressure support ventilator which combines pressure modes with leakage or valve ventilators.March 2002

Elisée 350*#

Ventilator for use in Intensive Care Unit combining all conventional ventilation modes, diagnostic and monitoring functions.December 2003

Elisée 150*#

Ventilator device which combines volumetric and barometric ventilation modes with single or double limb circuit.June 2004

Elisée 370*#

Ventilator for use in Intensive Care Unit combining all conventional ventilation modes, diagnostic functions with external monitoring interface for ventilation loops.September 2004

Elisée 250*#

Ventilator for use in Transport and Emergency Situations.April 2005

* Not cleared for marketing in the United States

# Sold outside U.S. only

- 9 -


AIR FLOW

GENERATORS

DESCRIPTION

DATEOF

COMMERCIAL

INTRODUCTION

Automatic Positive Airway Pressure Devices

AutoSet CS#. . . Delivers varying degrees ofCS*#

Automatic ventilatory assistance December 1998device specifically designed to stabilize breathing and reduce Cheyne Stokes respirationnormalize ventilation in congestive heart failure patients. patients with Cheyne Stokes respiration.December 1998

AutoSet T. . . . T

Autotitrating device, which continually adjusts March 1999 CPAP treatment pressure based on patient airway resistance.March 1999

AutoSet Spirit .

Modular, autotitrating device with advanced compliance monitoring and optional integrated humidifier.September 2001 integrated humidifier. Magellan#. . . .

Magellan*#

Autotitrating device using airway resistance measurement.March 2003* measurement. CPAP: 2003

AutoSet Respond

Autotitrating device with basic compliance monitoring and optional integrated humidifier.September 2003

AutoSet CS2*#

Modular, automatic device specifically designed to normalize ventilation in congestive heart failure patients with Cheyne Stokes respiration. The device has an optional integrated humidifier.August 2004

CPAP

Max II nCPAP#. . Continuous Positive Pressure flow Generator April 1997* availablenCPAP*#

CPAP device with or without integrated humidifier. Features low noise and reduced pressure swings swings.April 1997

Minni Max nCPAP# nCPAP*#

CPAP device with integrated and attachable March 2000 humidifier and low noise levels.March 2000

ResMed S6 series

Quiet, compact CPAP device with various comfort features.June 2000 comfort features.

ResMed S7 series

Continuous Positive Pressure flow generator with optional integrated humidifier.July 2002 With

ResMed S8 Series

A small CPAP flow generator system with optional integrated humidifier. - ------------------------------------------------------------------------------------- humidification.June 2005
*MAP product, not approved

* Not cleared 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 OF10 -


Mask Systems and Diagnostic Products

Mask systems are one of the most important elements of SDB TREATMENT SYSTEMS. 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 46%treatment systems. 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, motors and diagnostic products accounted for approximately 51%, 42% AND 43% OF OUR NET REVENUES IN FISCAL YEARS50% and 47% of our net revenues in fiscal years 2005, 2004 and 2003, 2002 AND 2001, RESPECTIVELY. respectively.

- -------------------------------------------------------------------------------- Date of Mask Description Commercial Products Introduction - --------------------------------------------------------------------------------
MASK PRODUCTSDESCRIPTION

DATEOF

COMMERCIAL

INTRODUCTION

Mirage Mask

Proprietary mask design August 1997 with a contoured nasal cushion that adjusts to patient'spatient’s facial contours. Quiet, light and low profile.August 1997

Ultra Mirage Mask. . Mask

Advanced version of the June 2000 Mirage system with reduced noise characteristics and improved forehead bridge.June 2000
Mirage Full Face Mask Series 2Mirage-based full-face October 2001 Series 2 mask system. Provides an effective method of applying ventilatory assist Non-invasiveNoninvasive Positive Pressure Ventilation therapy. Can be used to address mouth-breathingmouth- breathing problems in conventional bilevel or CPAP therapy.October 2001

Papillon Mask# Mask*#

Nasal mask with only four April 2002* major parts, allows simplified handling for patients and distributors.April 2002

Mirage Vista.Mask . . . . . Vista Mask

Small nasal mask without forehead supports.November 2002 .. . . . . . . . . . . . . .
Ultra Mirage Full Face MaskFull-face mask incorporating our latest adjustable forehead supports. - -------------------------------------------------------------------------------- * MAP product, not approvedsupport technology.August 2003

Mirage Activa Mask

Nasal mask system utilizing Active Seal technology to mitigate leak and improve patient comfort.October 2003

Mirage Swift

A light and unobtrusive nasal cannula mask system.August 2004
Silent Papillon Mask*#A low noise nasal mask with simplified assembly.March 2005
Hospital Full Face MaskDisposable full face mask specifically designed for marketing in the United States. + Sold in USA only # Sold outside USA only hospital use.April 2005

Hospital Nasal Mask

Disposable nasal mask specifically designed for hospital use.April 2005
DIAGNOSTIC PRODUCTS WE MARKET SLEEP RECORDERS FOR THE DIAGNOSIS AND TITRATION OF

* Not cleared for marketing in the United States.

# Sold outside USA only

- 11 -


We market sleep recorders for the diagnosis and titration 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 APPROPRIATEin 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. treatment regimen for the patient.

- ---------------------------------------------------------------------------------------------------------------
DIAGNOSTIC PRODUCTSDESCRIPTION

DATEOF

COMMERCIAL

INTRODUCTION

Poly-MESAM Portable

Diagnostic Products Description Date of Commercial Introduction - --------------------------------------------------------------------------------------------------------------- Poly-MESAM Portable+ Diagnostic System+. . . . System*a#

Configurable cardio-respiratory February 1995* .. . . . . . . . . . . . . . . . . . . . . . . . polygraphy system up to 8 channels, . . . . . . . . . . . . . . . . . . . . . . . .includesincludes ECG, thorax and abdomen .. . . . . . . . . . . . . . . . . . . . . . . . belts, PLMS sensor.February 1995

MEPAL Diagnostic+.System . . . . . . . . . . . .PolysomnographyDiagnostic

System *a#

Polysomnography system designed for February 1999* . . . . . . . . . . . . . . . . . . . . . . . .useuse in the sleep laboratory. ResControl Device to permit remote monitoring and SeptemberFebruary 1999 adjustment of ResMed CPAP, VPAP, and AutoSet T air flow generators. An internal pressure transducer enables the clinician to interface with polysomnography to monitor airflow in . . . . . . . . . . . . . . . . . . . . . . . .both titration and diagnostic studies. Embla+

Emblaa

Digital sleep recorder that provides comprehensive sleep diagnosis in a sleep .. . . . . . . . . . . . . . . . . . . . . . . . laboratory.October 1999 Embletta+.

Emblettaa

Pocket-size digital recorder that November 2000 . . . . . . . . . . . . . . . . . . . . . . . .performsperforms ambulatory sleep studies.November 2000

MEPAL mobil+ mobil *a

Diagnostic System . . . . . . . . .Ambulatory

Ambulatory polysomnography system.March 2001* - --------------------------------------------------------------------------------------------------------------- *MAP product, not approved2001

ApneaLink

(MicroMesam)

A portable Sleep Apnea screening device for use by sleep professionals and primary care physicians.April 2004

* Not cleared for marketing in the United States.

# Sold outside USA only

a Not manufactured by Resmed

- 12 -


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 HumidAire, H2i, and H3i, which connect directly with 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 HUMIDAIRE AND H2I, WHICH CONNECT DIRECTLY WITH THE CPAP, VPAP AND AUTOSET 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 COLD PASSOVER HUMIDIFIERS, CARRY BAGS AND BREATHING CIRCUITS.and AutoSet flow generators to humidify and heat the air delivered to the patient. Their use helps prevent the drying of nasal passages that can cause discomfort. Other optional accessories include cold passover humidifiers, 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 ANDalso offers a range of accessories, including the Twister remote, an intelligent remote control for use in the sleep laboratory 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 FORair delivery source and the AeroFix headgear, for the comfortable adjustment of masks for CPAP THERAPY. SINCE THE MAYtherapy. Since the May 2002 ACQUISITION OF SERVO MAGNETICS INC.acquisition of Servo Magnetics Inc., WE HAVE SOLD CUSTOM ELECTRIC MOTORS, PRIMARILY 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. INwe have sold custom electric motors, primarily for use in data storage and aerospace applications. But we do not expect custom electric motor sales to contribute material revenues in the future.

Product Development and Clinical Trials

We have a strong track record in innovation in the sleep market. In 1989, WE INTRODUCED OUR FIRSTwe introduced our first 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, INdevice. 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 INwe 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. INwhich 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.

In 1999, WE INTRODUCED THE AUTOSETwe introduced the AutoSet T FLOW GENERATOR, AN AUTOTITRATING DEVICE THAT ADAPTS TO THE PATIENT'S BREATHING PATTERNS TO EFFECTIVELY PREVENT APNEAS. INflow generator, an autotitrating device that adapts to the patient’s breathing patterns to effectively prevent apneas. In 2001, WE INTRODUCED OUR NEXT GENERATION AUTOTITRATING DEVICE, THE AUTOSET SPIRIT. THE AUTOSET SPIRIT IS AN AUTOTITRATING MODULAR DEVICE WITH OPTIONAL INTEGRATED HUMIDIFIER. CURRENTLY, WE ARE BRINGING TO MARKET THE ACTIVA NASAL MASK USING OUR PATENTED ACTIVE CUSHION TECHNOLOGY, WHICH AUTOMATICALLY SEALS MASK LEAKS. WE ARE ALSO ABOUT TO LAUNCH OUR IMPROVED AUTOSETwe introduced our next generation autotitrating device, the AutoSet Spirit. The AutoSet Spirit is an autotitrating modular device with optional integrated humidifier. In September 2003 we introduced the Activa nasal mask using our patented Active Cushion Technology, which automatically seals mask leaks. In August 2004, we launched an improved AutoSet CS II (OUTSIDE THE2 (outside the U.S. ONLY) TO TREAT CONGESTIVE HEART FAILURE PATIENTS WITH SIGNIFICANT CENTRAL SLEEP APNEA. WE CONTINUALLY SEEK TO IDENTIFY NEW APPLICATIONS OF OUR TECHNOLOGY FOR SIGNIFICANT UNMET MEDICAL NEEDS.only) to treat congestive heart failure patients with significant central sleep apnea and also launched our Mirage Swift mask, a light and unobtrusive nasal cannula mask system.

We continually seek to identify new applications of our technology for significant unmet medical needs. SDB IS ASSOCIATED WITH A NUMBER OF SYMPTOMS BEYOND EXCESSIVE DAYTIME SLEEPINESS AND IRRITABILITY. RECENT STUDIES HAVE ESTABLISHED A CLINICAL ASSOCIATION BETWEENis associated with a number of symptoms beyond excessive daytime sleepiness and irritability. Recent studies have established a clinical association between SDB AND HYPERTENSION, STROKE, AND CONGESTIVE HEART FAILURE. WE SUPPORT CLINICAL TRIALS IN THE UNITED STATES, GERMANY, FRANCE, THE UNITED KINGDOM AND AUSTRALIA TO DEVELOP NEW CLINICAL APPLICATIONS FOR OUR TECHNOLOGY. WE CONSULT WITH PHYSICIANS AT MAJOR SLEEP CENTERS THROUGHOUT THE WORLD TO IDENTIFY TECHNOLOGICAL TRENDS IN THE TREATMENT OFand hypertension, stroke, congestive heart failure, and diabetes. We support clinical trials in the United States, Germany, France, the United Kingdom, Italy, Swtizerland and Australia to develop new clinical applications for our technology.

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 PERFORM NEW PRODUCT DEVELOPMENT. IN FISCAL YEARSSome 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 develop these ideas, where appropriate, into new products.

In fiscal years 2005, 2004, and 2003 2002 AND 2001, WE INVESTEDwe invested $30.0 million, $26.2 million and $20.5 MILLION, $14.9 MILLION AND $11.1 MILLION, RESPECTIVELY, ON RESEARCH AND DEVELOPMENT. million, respectively, on research and development.

Sales and Marketing

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

- -9- SALES AND MARKETING 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 OF13 -


to each national market, based on regional awareness of SDB AS A HEALTH PROBLEM, PHYSICIAN REFERRAL PATTERNS, CONSUMER PREFERENCES AND LOCAL REIMBURSEMENT POLICIES. NORTH AMERICA AND LATIN AMERICA. 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. 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, 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 WITHas a health problem, physician referral patterns, consumer preferences and local reimbursement policies.

North America and Latin America.    Our products are typically purchased by a home health care 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 health care dealer; the insurer and the patient. 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, regional sales directors, and independent manufacturers’ representatives. Our United States field sales organization markets and sells products to 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 PRESCRIBEDand 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 DIRECTORS, OUR VICE PRESIDENT OF SALES AND OUR CHIEF OPERATING OFFICER FOR THE AMERICAS. OUR CANADIAN AND LATIN AMERICAN SALES ARE CONDUCTED THROUGH INDEPENDENT DISTRIBUTORS. SALES IN NORTH AND LATIN AMERICA ACCOUNTED FOR 48%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 the Chief Operating Officer Americas and Vice President of Marketing. Our Canadian and Latin American sales are conducted through independent distributors. Sales in North and Latin America accounted for 51%, 49% AND 52% OF OUR NET REVENUES FOR FISCAL YEARSand 48% of our net revenues for fiscal years 2005, 2004, and 2003, 2002 AND 2001, RESPECTIVELY. EUROPE. WE MARKET OUR PRODUCTS IN MOST MAJOR EUROPEAN COUNTRIES. WE HAVE WHOLLY OWNED SUBSIDIARIES IN GERMANY, FRANCE, UNITED KINGDOM, SPAIN, SWITZERLAND, NETHERLANDS, AUSTRIA, SWEDEN AND FINLAND 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 TOrespectively.

Europe.    We market our products in most major European countries. We have wholly-owned subsidiaries in Austria, Finland, France, Germany, Spain, Sweden, Switzerland, and United Kingdom. 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 FORtherapy. In each country in which we have a subsidiary, a local senior manager is responsible for direct national sales. In many countries in Europe, we sell our products to home health care dealers who then sell the products to the patients. In Germany, we also operate a home health care company, in which we provide products and services directly to patients, and receive reimbursement directly from third party payers.

Our European Chief Operating Officer 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 41%, 43% and 42% of our total net revenues for fiscal years 2005, 2004, and 2003, respectively.

Asia Pacific.    Marketing in Asia Pacific and the rest of the world is the responsibility of our Senior Vice President Sales & Marketing Asia Pacific. We have wholly–owned subsidiaries in Australia, Hong Kong, Japan, Malaysia, New Zealand and Singapore. We use a combination of direct sales force and independent distributors in Australia and New Zealand, and use independent distributors to sell our products elsewhere in Asia Pacific. Sales in Asia Pacific and the rest of the world accounted for 8%, 42% AND 39% OF OUR TOTAL NET REVENUES FOR FISCAL YEARS8% and 10% of our total net revenues for the fiscal years ended June 30, 2005, 2004, and 2003, 2002 AND 2001, 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 10%, 9% AND 9% OF OUR TOTAL NET REVENUES FOR THE FISCAL YEARS ENDED JUNE 30,respectively.

Other Marketing Efforts.    In addition to our, and our distributors’ sales efforts, we work with the following cardiovascular disease associations to raise awareness of the co-morbidity of SDB in

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cardiovascular disease patients (cardiovascular disease includes coronary artery disease, congestive heart failure, hypertension and stroke):

(i) American College of Cardiology.    We work with the American College of Cardiology and its more than 20,000 cardiologist members to increase education and awareness in the cardiology community regarding the morbidity associated with sleep apnea in their patients. We have co-sponsored educational symposia with Guidant Corp at ACC in 2003 2002 AND 2001, RESPECTIVELY. - -10- OTHER MARKETING EFFORTS. IN ADDITION TO OUR, AND OUR DISTRIBUTOR'S SALES EFFORTS, WE WORK WITH THE FOLLOWING CARDIOVASCULAR DISEASE ASSOCIATIONS (CARDIOVASCULAR DISEASE INCLUDES CORONARY ARTERY DISEASE, CONGESTIVE HEART FAILURE, HYPERTENSION, STROKE, AND TRANSIENT ISCHEMIC ATTACKS) TO RAISE AWARENESS OF THE CO-MORBIDITY OFand ACC 2004 on sleep apnea and cardiovascular disease. We have exhibited at ACC national conferences since 2001. Sleep apnea was included in the formal ACC scientific sessions in 2004.

(ii) American Heart Association.    We have worked with the American Heart Association and we have attended the annual Scientific Sessions since 2001. Sleep apnea has been on the official program of the Scientific Sessions since 2002. We work with various regional and local AHA affiliates to increase awareness regarding sleep apnea and cardiovascular disease.

(iii) Heart Failure Society of America.    We have attended the Heart Failure Society of America national conferences since 2002. We have co-sponsored CME-level educational symposia with Guidant at HFSA 2003 and HFSA 2004 on sleep apnea and heart failure. We continue to see a very high level of interest amongst heart failure physicians, due to the significant (approximately 50%) prevalence of sleep apnea in heart failure patients, and the outcome improvements in blood pressure and ejection fraction observed in peer-reviewed studies using CPAP treatment.

Strategic Alliances

Guidant Corporation.    The Guidant Corporation is a world leader in the treatment of cardiac and vascular disease. Guidant and ResMed have entered into an agreement pursuant to which the companies will work together in the areas of sleep-disordered breathing and cardiac rhythm disorders, disease states with a significant patient population overlap. The companies plan to co-market to each other’s physician partners and customers, and to collaborate on research and development projects, clinical studies, as well as physician and patient education.

MedCath Corporation.    MedCath develops, owns, and operates hospitals in partnership with cardiologists and cardiovascular surgeons. Our alliance allows MedCath to offer SDB IN CARDIOVASCULAR DISEASE PATIENTS: (I) NATIONAL STROKE ASSOCIATION. WE HAVE DEVELOPED A STRATEGIC ALLIANCE WITH THE NATIONAL STROKE ASSOCIATION TO INCREASE AWARENESS ABOUT THE HIGH PREVALENCE OFscreening, diagnosis, and treatment in conjunction with services currently offered through the company’s cardiovascular diagnostic centers.

We believe that our affiliations and continued work with these organizations raises the awareness of SDB IN THE STROKE SURVIVOR POPULATION. (II) 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. (III) 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. STRATEGIC ALLIANCES GUIDANT CORPORATION. THE GUIDANT CORPORATION IS A WORLD LEADER IN THE TREATMENT OF CARDIAC AND VASCULAR DISEASE. GUIDANT AND RESMED HAVE ENTERED INTO AN AGREEMENT PURSUANT TO WHICH THE COMPANIES WILL WORK TOGETHER IN THE AREAS OF SLEEP-DISORDERED BREATHING AND CARDIAC RHYTHM DISORDERS, DISEASE STATES WITH A SIGNIFICANT PATIENT POPULATION OVERLAP. THE COMPANIES PLAN TO CO-MARKET TO EACH OTHER'S PHYSICIAN PARTNERS AND CUSTOMERS, AND TO COLLABORATE ON RESEARCH AND DEVELOPMENT PROJECTS, CLINICAL STUDIES, AS WELL AS PHYSICIAN AND PATIENT EDUCATION. MEDCATH CORPORATION. MEDCATH DEVELOPS, OWNS, AND OPERATES HOSPITALS IN PARTNERSHIP WITH CARDIOLOGISTS AND CARDIOVASCULAR SURGEONS. OUR ALLIANCE WILL ALLOW MEDCATH TO OFFER SDB SCREENING, DIAGNOSIS, AND TREATMENT IN CONJUNCTION WITH SERVICES CURRENTLY OFFERED THROUGH THE COMPANY'S CARDIOVASCULAR DIAGNOSTIC CENTERS. MEDCARE. MEDCARE IS A GLOBAL LEADER PROVIDING SLEEP DIAGNOSTIC SOLUTIONS TO SLEEP SERVICE PROVIDERS AND OTHER PROFESSIONALS PRACTICING SLEEP MEDICINE. MEDCARE OFFERS A BROAD RANGE OF SOLUTIONS INCLUDING THE EMBLA /SOMNOLOGICA AND REMBRANDT SLEEP SYSTEMS. MEDCARE PRODUCTS ARE DISTRIBUTED TO OVER 50 COUNTRIES WORLDWIDE. WE DISTRIBUTE MEDCARE PRODUCTS IN SELECTED COUNTRIES AND WE HAVE A CO-MARKETING AGREEMENT WITH MEDCARE FOR THE U.S. AND GERMAN MARKETS. 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 FEET MANUFACTURING AND RESEARCH AND DEVELOPMENT FACILITY. WE ALSO RENT SOME SPACE IN NEARBY BUILDINGS. WE ARE IN THE PROCESS OF BUILDING A NEWas a significant health concern.

Manufacturing

Our principal manufacturing facility is located in Sydney, Australia and comprises a 215,000 SQUARE FEET MANUFACTURING FACILITY IN SYDNEY, DUE TO BE COMPLETED IN THE FIRST HALF OF CALENDAR 2004. 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. - -11- OUR QUALITY MANAGEMENT SYSTEM IS BASED UPON THE REQUIREMENTS OFsquare foot manufacturing 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 few years, the manufacturing processes have been transformed along lean 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)(European Medical Standards), FDA QUALITY SYSTEM REGULATIONS FOR MEDICAL DEVICESQuality System Regulations for Medical Devices (21 CFR PARTpart 820) AND THE MEDICAL DEVICE DIRECTIVEand the

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Medical Device Directive (93/42/EEC). OUR SYDNEY, AUSTRALIA FACILITY IS ACCREDITED TOOur Sydney, Australia facility is accredited to ISO 9001 ANDand EN46001 AND OUR SAN DIEGO, CALIFORNIA FACILITY IS ACCREDITED TOand our San Diego, California facility is accredited to ISO 9002 ANDand EN46002. THESE TWO SITES HAVE THIRD PARTY AUDITS CONDUCTED BY THEThese 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 APPROXIMATELYcertification 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 TOsquare feet. This facility is accredited to ISO 9001 ANDand EN46001 AND PRIMARILY ASSEMBLES AND TESTS FLOW GENERATORS FOR SALE BY OUR SUBSIDIARYand primarily assembles and tests flow generators for sale by our German subsidiary. Appropriate quality controls monitor and measure product assembly and performance.

As part of the acquisition of Saime SA on May 19, 2005, we also acquired a new 7,000 square feet manufacturing facility. This facility is accredited to ISO 13485 and is primarily responsible for the assembly of the Saime brand of mechanical ventilators and associated accessories.

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 Inc., or “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. In Germany, we receive payments directly from these payers. Outside Germany, 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.

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.

Even though we do not file claims or bill governmental programs and other third-party payers directly for reimbursement for our products sold in the United States, 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 health care 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 health care 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.

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In some foreign markets, such as Spain, France and Germany, government reimbursement is currently available for purchase or rental of our products, however, subject 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-year and 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.

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. Customer support, 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., and Fisher & Paykell Healthcare Corporation Limited 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 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, which would harm our revenues and financial condition.

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 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, Medizintechnik fur Arzt und Patient GmbH, SMI and Saime SA, we own or have licensed rights to 192 issued United States patents (including 56 design patents) and 242 issued foreign patents. In addition, there are 182 pending United States patent applications (including 41 design patent applications), 369 pending foreign patent applications, 312 registered foreign designs and 107 pending foreign designs. Some of these patents, patent applications and designs relate to significant aspects and features of our products.

Of our patents, nine United States patents and four foreign patents are due to expire in the next five years, with one foreign patent due to expire in each of the years 2005, 2007, 2009 and 2010 and one United States patent in 2005, two United States patents in 2007, four United States patents in 2008 and two United States patents in 2010. We believe that the expiration of these patents will not have a material adverse impact on our competitive position.

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We rely on a combination of patents, trade secrets, copyrights, trademarks and non-disclosure agreements to protect our proprietary technology and rights.

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.

Government Regulations

Our products are subject to extensive regulation particularly as to safety, efficacy and adherence to FDA Quality System Regulation, 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, before introducing it 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 before 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 and Saime’s facilities are not subject to FDA regulation, because none of their products are 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.

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On August 16, 2005, the US Food and Drug Administration authorized ResMed to market its VPAP Adapt SV device in the United States. The device is indicated for use to provide non-invasive ventilatory support to treat adult patients with OSA and respiratory insufficiency caused by central and/or mixed apneas and periodic breathing. ResMed does not expect to sell material quantities of the VPAP Adapt SV until the third quarter of fiscal year 2006, or later.

Employees

As of June 30, 2005, we had 1,927 employees or full time consultants, of which 728 persons were employed in warehousing and manufacturing, 255 in research and development, 944 in sales, marketing and administration. Of our employees and consultants, 952 were located in Australia, 429 in the United States, 530 in Europe and 16 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, consists of physicians specializing in the field of sleep-disordered breathing and ventilation. Medical Advisory Board 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. Medical Advisory Board members are also available to consult on an as-needed basis with our senior management. In alphabetical order, Medical Advisory Board members include:

Claudio Bassetti, M.D., is a neurologist with expertise in general neurology, stroke and sleep medicine. He is a leader in studying the implications of SDB on stroke and is Head of the Neurology Outpatient Clinics and Vice-Chairman of the Neurology Department at the University Hospital, Zurich. Dr. Bassetti is board member of the European Neurological Society, of the Swiss Societies of Neurology, Neuroscience and Sleep and sits on the editorial boards of the Journal of Sleep Research, Sleep Medicine, and Swiss Archives of Neurology and Psychiatry. Dr. Bassetti has produced over 100 publications.

Michael Coppola,M.D., is a leading pulmonary, critical care, and sleep disorders physician and is President of Springfield Medical Associates, a multi-specialty medical group in Springfield, Massachusetts. He is an attending physician at Baystate Medical Center and Mercy Hospital, and a Fellow of the American College of Chest Physicians. Dr. Coppola is also the Medical Director of Sleep Ave LLC, a sleep-disordered breathing specialty company with sites in Massachusetts, Louisiana and Texas, and Associate Clinical Professor of Medicine at Tufts University School of Medicine.

Terence M. Davidson, M.D., F.A.C.S., 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 the University of California, San Diego. He is also Director of the UCSD Head and Neck Surgery Sleep Clinic in La Jolla, CA.

Anthony N. DeMaria, M.D., 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 on the American Board of Internal Medicine and is board certified by the Subspecialty Board in cardiovascular disease. He is a past President of both the

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American College of Cardiology and the American Society of Echocardiography. Dr. DeMaria is currently Editor-in-Chief of the Journal of the American College of Cardiology and has authored or co-authored over 400 articles for medical journals.

Neil J. Douglas, M.D., D.Sc., F.R.C.P., is Chairman of the MAB and 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 President of the Royal College of Physicians of Edinburgh, past Chairman of the British Sleep Society, and past Secretary of the British Thoracic Society. Dr. Douglas has published over 200 papers on breathing during sleep.

Nicholas Hill, M.D., is Professor of Medicine at Tufts University School of Medicine and Chief, Pulmonary, Critical Care and Sleep Division, Tufts-New England Medical Center in Boston. He is a Fellow and Chair of the Home Care Network as well as a member of the Network Steering Committee for the American College of Chest Physicians. For the American Thoracic Society, Dr. Hill is chair of the Program Committee for the Critical Care Assembly as well as a member of the Planning Committee. Dr. Hill’s main research interests are in the acute and chronic applications of noninvasive positive pressure ventilation (NPPV) for treating lung disease as well as the pathogenesis and therapy of pulmonary hypertension.

Barry J. Make, M.D., 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 diseases. Dr. Make’s research and clinical investigations have resulted in a large number of publications on mechanisms, treatment, and rehabilitation of chronic respiratory disorders. His areas of focus are long-term noninvasive ventilation and chronic obstructive pulmonary diseases including emphysema.

Ralph Pascualy, M.D., is Director of the Swedish Sleep Medicine Institute in Seattle, one of the largest sleep diagnostic and treatment facilities in the United States. He has twenty years of experience in the clinical practice of sleep medicine and clinical research. He has developed innovative programs in the clinical screening for sleep apnea, CPAP compliance programs and others to bring sleep medicine services to other medical subspecialties.

Barbara Phillips, M.D., 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. Dr. Phillips serves as a board member of the National Sleep Foundation, on the Health and Science Policy Committee of the American College of Chest Physicians, and on the Clinical Practice Committee of the American Thoracic Society. She has been a recipient of a Sleep Academic Award from the National Institutes of Health, president of the American Board of Sleep Medicine, and a 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.

Bruce Robinson, M.D., is Head of the Cancer Genetics Laboratory in the Kolling Institute. He is also Head of the Division of Medicine at the Royal North Shore Hospital. Professor Robinson is also Associate Dean (International), Faculty of Medicine, at the University of Sydney and also serves on the Council of the Endocrine Society of Australia.

Jonathan R. L. Schwartz, M.D., is Clinical Professor of Medicine at the University of Oklahoma Health Sciences Center. He also is the medical director of the Integris Sleep Disorders Centers of Oklahoma. He is board certified in sleep disorders medicine, internal medicine, pulmonary disease,

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and critical care medicine. He is a Fellow of the American Academy of Sleep Medicine, the American College of Physicians, and the American College of Chest Physicians.

Helmut Teschler, M.D., is Professor of Medicine and Head of the Department of Respiratory Medicine, High Dependency Unit, and Centre of Sleep Medicine at the 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, M.D., 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, and Sleep Medicine, Beth Israel Deaconess Medical Center, Boston, MA. He is an internationally recognized researcher in sleep-disorders medicine.

B. Tucker Woodson, M.D., F.A.C.S., is Professor of Otolaryngology and Communication Sciences at the Medical College of Wisconsin, a Diplomat of the American Academy of Sleep Medicine, and a Fellow of the American Academy of Otolaryngology—Head and Neck Surgery and the American College of Surgeons. He is the Director of the Medical College of Wisconsin/Froedert Memorial Lutheran Hospital Center for Sleep. Dr. Woodson also sits on multiple committees for the American Academy of Sleep Medicine and American Academy of Otolaryngology.

ITEM 2PROPERTIES

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 Research & Development operations at North Ryde, in Sydney, Australia in a 120,000 square feet facility. We own our principal manufacturing facility consisting of a 215,000 square feet complex at Norwest, also in Sydney, Australia and lease in Canoga Park, California a 35,500 square feet facility for manufacture of electronic motors.

Sales and warehousing facilities are either leased or owned in Abingdon, England; Munich, Germany; Moenchengladbach, Germany; Bremen, Germany; Hochstadt, Germany; Lyon, France; Paris, France; Basel, Switzerland; Trollhaettan, Sweden; Villach, Austria; Helsinki, Finland; Den Haag, Netherlands and Singapore. Before 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.

ITEM 3LEGAL PROCEEDINGS

The Company was engaged in litigation relating to the enforcement and defense of certain of its patents during the fiscal year ended June 30, 2005.

2005 Litigation.    On December 23, 2002 three former contractors of 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 INC. (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 Medizin-Technologie GmbH initiated proceedings in Munich 1 Regional Court (Proceedings No. 7 O 23286/02), petitioning the Court for a declaration of inventorship with respect to MAP German Patent Applications identified as No. 100 31 079 and 101 92 802.5 and European Patent Application No. EP 01 967 819.7. On March 10, 2005 the Court entered judgment in favor of the plaintiffs, finding that they should be identified as co-inventors in place of certain individual defendants. In April 2005, MAP filed an appeal of that decision. We do not expect the outcome of this litigation to have an adverse material effect on us.

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Other Litigation.    In addition to the matters described above, in the normal course of business, we are subject to routine litigation incidental to our business. While the results of this litigation cannot be predicted with certainty, we believe that their final outcome will not have a material adverse effect on our consolidated financial statements taken as a whole.

ITEM 4SUBMISSIONOF MATTERSTOA VOTEOF SECURITY HOLDERS

None.

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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. 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. II


ITEM 5MARKETFOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASESOF EQUITY SECURITIES

Our common stock is traded on 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.

   2005  2004
   High  Low  High  Low
  

Quarter One, ended September 30

  $51.50  $43.90  $43.98  $38.58

Quarter Two, ended December 31

   51.10   43.46   46.49   38.05

Quarter Three, ended March 31

   60.50   49.81   47.95   40.69

Quarter Four, ended June 30

   66.28   56.30   51.56   44.84

As of August 23, 2005, there were 54 holders of record of our common stock. We have not paid any cash dividends on our common stock since our 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

None.

- -12- IN SOME FOREIGN MARKETS, SUCH AS SPAIN, FRANCE AND GERMANY, GOVERNMENT REIMBURSEMENT IS CURRENTLY AVAILABLE FOR PURCHASE OR RENTAL OF OUR PRODUCTS, HOWEVER, SUBJECT 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. 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. CUSTOMER SUPPORT, 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.23 -


ITEM 5MARKETFOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASESOF EQUITY SECURITIES

Purchases of Equity Securities

The following table summarizes purchases by us of our common stock during the year ended June 30, 2005:

Period  

Total
Number

of Shares

  Average
Price Paid
per Share
  Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (1)
  Maximum Number of
Shares that May yet be
Purchased Under the
Plans or Programs(1)
 
Opening Balance at
July 1, 2004
  886,369  $34.34  886,369  3,113,631 

July 2004

  Nil           

August 2004

  241,090  $45.48  241,090  (241,090)

September 2004

  Nil           

October 2004

  Nil           

November 2004

  Nil           

December 2004

  Nil           

January 2005

  Nil           

February 2005

  Nil           

March 2005

  Nil           

April 2005

  Nil           

May 2005

  Nil           

June 2005

  Nil           

Total to June 30, 2005

  1,127,459  $36.72  1,127,459  2,872,541 

(1)On June 6, 2002, the Board of Directors authorized us to repurchase up to 4.0 million shares of our outstanding common stock. There is no expiration date for the repurchase of these shares. For the years ended June 30, 2005 and 2004, we repurchased 241,000 and 471,000 shares at a cost of $11.0 million and $19.0 million respectively. As at June 30, 2005, we have repurchased a total of 1,127,459 shares at a cost of $41.4 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.

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ITEM 6SELECTED 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, 2005. The data set forth below should be read in conjunction with the Consolidated Financial Statements and related Notes included elsewhere in this Report.

Consolidated Statement of Income Data:  Years Ended June 30 
(In thousands, except per share data)  2005  2004  2003  2002  2001 

Net revenues

  $425,505  $339,338  $273,570  $204,076  $155,156 

Cost of sales

   150,645   122,602   100,483   70,827   50,377 
Gross profit   274,860   216,736   173,087   133,249   104,779 
Selling, general and administrative expenses   135,703   104,706   85,313   64,481   49,364 
Research and development expenses   30,014   26,169   20,534   14,910   11,146 
Donations to Research Foundations   500   500   -   2,349   - 
In-process research and development charge   5,268   -   -   350   17,677 
Amortization of acquired intangible assets   870   -   -   -   - 
Restructuring expenses   5,152   -   -   -   550 
Total operating expenses   177,507   131,375   105,847   82,090   78,737 
Income from operations   97,353   85,361   67,240   51,159   26,042 
Other income (expenses):                     
Interest income (expense), net   (808)  (1,683)  (2,549)  (3,224)  (762)
Government grants   -   -   -   -   72 
Other, net   81   990   1,907   108   1,962 

Gain on extinguishment of debt

   -   -   529   6,549   - 
Total other income (expenses)   (727)  (693)  (113)  3,433   1,272 
Income before income taxes   96,626   84,668   67,127   54,592   27,314 

Income taxes

   (31,841)  (27,384)  (21,398)  (17,086)  (15,684)
Net income  $64,785  $57,284  $45,729  $37,506  $11,630 
Basic earnings per share  $1.89  $1.70  $1.38  $1.17  $0.37 
Diluted earnings per share  $1.82  $1.63  $1.33  $1.10  $0.35 
Basic shares outstanding   34,322   33,694   33,054   32,174   31,129 
Diluted shares outstanding   37,471   35,125   34,439   34,080   33,484 

Consolidated Balance Sheet Data:  As of June 30
(In thousands)  2005  2004  2003  2002  2001

Working capital

  $141,659  $222,230  $191,322  $142,809  $144,272

Total assets

   774,146   549,151   459,595   376,191   288,090

Long-term debt, less current maturities

   58,934   113,250   113,250   123,250   150,000

Total stockholders’ equity

   474,065   361,499   286,433   192,930   100,366

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ITEM 7MANAGEMENTS DISCUSSIONAND ANALYSISOF FINANCIAL CONDITIONAND RESULTSOF 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 and rental 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. We have also developed numerous innovations associated with our mask product offerings and they now form a significant part of our product portfolio.

Business Acquisitions

Fiscal year ended June 30, 2005

Saime SA (“Saime”).    On May 19, 2005 we acquired 100% of the outstanding stock of Financiere ACE SAS, the holding company for Saime SA and its affiliates, for net cash consideration of $40.5 million. This was comprised of $51.0 million in consideration, including acquisition costs, less $10.5 million of cash acquired. Additionally, as part of the acquisition we assumed (and immediately repaid) debt of $65.8 million. The acquisition and the immediate repayment of the assumed debt was funded with cash on hand and a five-year secured loan of 50 million Euro, equivalent to $62.7 million, from HSBC Bank Australia Limited.

Saime is a leading developer of ventilation products and distributes its products directly in France and Germany and through a network of distributors in Europe and Asia-Pacific.

The acquisition has been accounted for using purchase accounting and has been included in the company’s operations since the date of acquisition. The company has not yet completed the purchase price allocation as the appraisals associated with the valuation of certain tangible assets are not yet complete. The company does not believe that the appraisals will materially modify the preliminary purchase price allocation. We expect to complete our purchase price allocation in the six months ended December 31, 2005.

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The following table summarizes the estimated fair value of the assets acquired and liabilities assumed from Saime at the date of acquisition based on an independent appraisal and internal studies (in thousands):

  At May 19, 2005 

Cash

 $10,532 

Accounts receivable

  7,829 

Inventory

  7,031 

Other assets

  874 

Property, plant & equipment

  2,112 

Developed / core product technology (useful life of 7 years)

  30,733 

In-Process research and development (expensed immediately)

  5,268 

Customer relationships (useful life of 9 years)

  10,035 

Tradenames (useful life of 7 years)

  1,631 

Goodwill (non-amortizing, non-tax deductible)

  66,338 

Total assets acquired

 $142,383 

Current liabilities, primarily consisting of accounts payable, accrued expenses,

taxes

payable and deferred tax liabilities

  (12,329)

Non current liabilities, primarily consisting of capital leases and deferred tax

liabilities

  (13,271)

Assumed debt repaid upon acquisition

  (65,764)

Net assets acquired

 $51,019 

Since its formation in 1987, Saime has developed a complete range of ventilators for use in the home and hospital markets. Saime distributes its products directly in France and Germany and through a network of distributors in Europe and Asia Pacific. Saime develops, manufactures and markets products from its headquarters near Paris, with a staff of approximately 100.

The company believes that the Saime acquisition resulted in the recognition of goodwill primarily because of its industry position and management strength. In addition, Saime’s products complete our line of homecare ventilation products and will immediately expand our market presence and distribution network in Europe and other regions. The Saime devices will complement our VPAPIII and Autoset CS devices and will allow us to provide the full range of options for patients who need ventilatory assistance.

Hoefner Medizintechnick GmbH (“Hoefner”).     On February 14, 2005 we acquired 100% of the outstanding stock of Hoefner Medizintechnick GmbH (“Hoefner”), DEVILBISS, A DIVISION OF SUNRISE MEDICAL INC.for net cash consideration of $8.2 million. This was comprised of the $10.7 million in total consideration, including acquisition costs, less $2.5 million of cash acquired. Under the purchase agreement, we may also be required to make additional future payments of up to $0.9 million based on the achievement of certain performance milestones following the acquisition through December 31, 2006. Hoefner is a German-based company that distributes medical equipment and associated services for the treatment of sleep and respiratory patients. Hoefner was our Bavarian distributor before the acquisition, and the acquisition is consistent with our strategy for ongoing expansion of our international operations. We have been particularly successful in selling directly in Europe. We believe selling directly improves our understanding of local markets as well as our relationships with physicians and payers. The acquisition also brings us into closer contact with patients and allows us to more directly respond to their needs.

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The acquisition has been accounted for using purchase accounting and has been included within our consolidated financial statements from February 14, 2005. An amount of $8.2 million, representing the excess of the purchase price over the fair value of identifiable net assets acquired of $2.5 million, has been recorded as goodwill.

The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values at the date of acquisition. The fair values were determined by an independent appraisal and internal studies. The following table summarizes the final purchase price allocation of the assets acquired and liabilities assumed from Hoefner at the date of acquisition (in thousands):

   At February 14, 2005 
Cash  $2,450 
Accounts receivable   1,576 
Inventory   3,526 
Other assets   235 
Property, plant & equipment   747 
Customer relationships (useful life of 7 years)   1,828 
Goodwill (non-amortizing, non-tax deductible)   8,202 
Total assets acquired  $18,564 
Current liabilities, primarily consisting of accounts payable, accrued expenses, taxes payable and deferred revenue   (4,333)
Non-current liabilities, primarily consisting of deferred revenue and deferred tax liabilities   (3,573)
Net assets acquired  $10,658 

Resprecare BV.    On December 1, 2004 we acquired substantially all the assets of Resprecare BV, our Dutch distributor, for initial consideration of $5.9 million in cash, including acquisition costs. The acquisition of the exclusive Dutch distributor is consistent with our strategy for ongoing expansion of our international operations. Under the purchase agreement, we potentially were also required to make up to $1.4 million of additional future payments based on the achievement of certain milestones. Of these potential additional payments, $0.6 million was paid in January 2005 as a result of the successful achievement of a performance milestone and a further $0.7 million was accrued at June 30, 2005 as a result of the integration of the Dutch subsidiary of our subsidiary MAP with the newly-acquired Resprecare business. The decision to integrate these operations determined the amount of the final future payment, which will be paid in January 2006.

The acquisition has been accounted for using purchase accounting and accordingly, the results of operations of Resprecare have been included within our consolidated financial statements from December 1, 2004. An amount of $4.4 million, representing the excess of the purchase price over the fair value of identifiable net assets acquired of $2.8 million, has been recorded as goodwill, which will be tax deductible. An independent third party has completed a valuation of identifiable intangible assets associated with the Resprecare acquisition. As a result of this valuation, $1.7 million that was preliminarily allocated to goodwill has been recorded as a customer relationship intangible asset and is being amortized over its estimated useful life of seven years.

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We expect that the acquisitions of Resprecare, Hoefner and Saime will not have a significant impact on the historical relationship of our gross profit, selling, general and administrative expense and research and development expense, expressed as a percentage of our net revenue.

Fiscal year ended June 30, 2004

Respro Medical Company Limited (“Respro”).    On July 2, 2003 we acquired the assets of Respro Medical Company Limited (“Respro”), AND NELLCOR PURITAN BENNETT, A SUBSIDIARY OF TYCO INC.our Hong Kong distributor for total consideration of $184,000 in cash. The acquisition has been accounted for using purchase accounting and accordingly, the results of operations of Respro have been included within our consolidated financial statements from July 2, 2003. An amount of $89,000, representing the excess of the purchase price over the fair value of net identifiable assets acquired of $95,000, has been recorded as goodwill.

Fiscal year ended June 30, 2003

John Stark and Associates.    On July 24, 2002 we acquired the business of John Stark and Associates, our Texas representative, for total consideration of $300,000 in cash. The acquisition has been accounted for using purchase accounting and accordingly, the results of operations of John Stark and Associates were included within our consolidated financial statements from July 24, 2002. An amount of $300,000, representing the excess of the purchase price over the fair value of net identifiable assets acquired of $nil, has been recorded as goodwill.

In-Process Research and Development Charge (IPR&D)

On acquisition of Saime in May 2005, we recognized as an expense a charge of $5.3 million with respect to IPR&D programs under active development by Saime that, at date of acquisition, had not reached technological feasibility and had no alternative future use. The estimated fair value assigned to IPR&D was based on an independent appraisal and was comprised of the following projects (in thousands):

Project  Value of IPR&D

Upgrade of the Elisee Series of ventilators

  $1,379

Next generation of portable ventilators

  $3,889

Total

  $5,268

The value of IPR&D 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 25%, 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 which was based on the risk profile of the acquired assets.

As of the date of acquisition, these projects have estimated costs to complete totaling approximately $1.1 million. The projects were in various stages of development but are expected to reach completion at various dates ranging from 1 to 3 years.

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.

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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 2005, 2004 and 2003. During fiscal 2005, 2004 and 2003, our effective tax rate has fluctuated between approximately 31% and approximately 33%. These fluctuations have resulted from, and future effective tax rates will depend upon, numerous factors, including the amount of research and development expenditures for which a 125% Australian tax deduction is available, the level of non-deductible expenses, and other tax credits or benefits available to us under applicable tax laws.

We account 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.

Fiscal Year Ended June 30, 2005 Compared to Fiscal Year Ended June 30, 2004

Net Revenues.    Net revenue increased for the year ended June 30, 2005 to $425.5 million from $339.3 million for the year ended June 30, 2004, an increase of $86.2 million or 25%. The increase in net revenue was attributable to an increase in unit sales of our flow generators, masks and accessories. Sales also benefited from an appreciation of international currencies against the U.S. dollar (increasing sales by approximately $10.4 million). Net revenue in North and Latin America increased for the year ended June 30, 2005 to $218.1 million from $166.1 million for the year ended June 30, 2004, an increase of $52.0 million or 31%. This growth has been generated by increased public and physician awareness of sleep-disordered breathing together with our continued investment in our sales force and marketing initiatives. Product releases during the year, in particular our Mirage Swift mask, have also contributed strongly to our sales growth.

Net revenue in markets outside the Americas increased for the year ended June 30, 2005 to $207.4 million from $173.2 million for the years ended June 30, 2005 and 2004 respectively, an increase of 20%. International sales growth for the year ended June 30, 2005 reflects organic growth in the overall sleep-disordered breathing market, appreciation of international currencies against the U.S. dollar and the acquisition during the year of Resprecare, Hoefner and Saime. These acquisitions contributed incremental revenue of $11.5 million for the year ended June 30, 2005. Excluding the impact of acquisitions, international sales grew by 13%.

Sales of flow generators for the year ended June 30, 2005 totaled $209.8 million, an increase of 24% compared to the year ended June 30, 2004, including increases of 22% in North and Latin America and 25% elsewhere. Sales of mask systems, motors and other accessories totaled $215.7 million, an increase of 27%, including increases of 38% in North and Latin America and 12% elsewhere, for the year ended June 30, 2005, compared to the year ended June 30, 2004. These increases primarily reflect growth in the overall sleep-disordered breathing market, acquisitions during the year, appreciation of international currencies against the U.S. dollar and new product releases.

Gross Profit.    Gross profit increased for the year ended June 30, 2005 to $274.9 million from $216.7 million for the year ended June 30, 2004, an increase of $58.2 million or 27%. Gross profit as a percentage of net revenue increased for the year ended June 30, 2005 to 65% from 64% for the year ended June 30, 2004. The improvement in gross margin reflects a more favorable product mix due to increased sales of higher margin mask products and new product introductions.

- 30 -


Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased for the year ended June 30, 2005 to $135.7 million from $104.7 million for the year ended June 30, 2004, an increase of $31.0 million or 30%. As a percentage of net revenue, selling, general and administrative expenses for the year ended June 30, 2005 was 32%, marginally higher than 31% in the year ended June 30, 2004. The increase in selling, general and administrative expenses was primarily due to an increase in the number of sales and administrative personnel to support our growth, the acquisitions of Resprecare, Hoefner and Saime, continued infrastructure investment, particularly in our European businesses, and other expenses related to the increase in our sales. The increase in selling, general and administrative expenses was also attributable to appreciation of international currencies against the U.S. dollar, which added approximately $4.0 million to our expenses as reported in U.S. dollars. As a percentage of net revenue, we expect our future selling, general and administrative expense to continue in the historical range of 31% to 33%.

Donations to Foundations.    In the years ended June 30, 2005 and 2004 we donated $0.5 million and $0.5 million, respectively, to the ResMed Foundation in the U.S., and the Resmed Foundation Limited in Australia. The Foundation’s overall mission includes the education of both the public and physicians about the inherent dangers of untreated SDB/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. particularly as it relates to cerebrovascular and cardiovascular disease.

Research and Development Expenses.    Research and development expenses increased for the year ended June 30, 2005 to $30.0 million from $26.2 million for the year ended June 30, 2004, an increase of $3.8 million or 15%. As a percentage of net revenue, research and development expenses were 7% for the year ended June 30, 2005 compared to 8% for the year ended June 30, 2004. The increase in research and development expenses was primarily due to higher employee compensation and increased charges for consulting fees and technical assessments incurred to facilitate development of new products. The increase also reflects an appreciation of the Australian dollar against the U.S. dollar, as the majority of research and development costs are incurred in Australian dollars. The appreciation of international currencies against the U.S. dollar added approximately $1.3 million to our research and development expenses as reported in U.S. dollars. As a percentage of net revenue, we expect our future research and development expense to continue in the range of 5% to 7%.

In-process Research and Development Charge.    Purchased in-process research and development of $5.3 million was expensed upon acquisition of Saime as technological feasibility of the products under development had not been established and no further alternative uses existed. The nature of this charge is explained more fully in note 20 to the consolidated financial statements.

Amortization of Acquired Intangible Assets.    Amortization of acquired intangible assets for the year ended June 30, 2005 totaled $0.9 million ($nil for the year ended June 30, 2004) and related to acquired intangible assets totaling $46.0 million associated with the acquisitions of Saime, Hoefner and Resprecare.

Restructure.    Restructuring expenses incurred for the year ended June 30, 2005 were $5.2 million and consisted of restructure charges associated with our integration of the separate operations of ResMed Germany and MAP into a single operating unit. We have completed the relocation of our ResMed Germany operation, previously located in Moenchengladbach, to Munich and associated integration of the back office functions including customer service, logistics and administration. We will continue to monitor the progress of this restructure and adjust our business strategies and personnel accordingly to achieve maximum efficiencies and cost savings.

Other Income (Expense), Net.    Other expense, net for the year ended June 30, 2005 was $0.7 million, consistent with the year ended June 30, 2004. In fiscal year 2005, other expense, net reflected lower net foreign currency exchange gains, partially offset by lower interest expense due to the reduction in our convertible note debt that occurred in the 2004 fiscal year.

- -13- PATENTS AND PROPRIETARY RIGHTS AND RELATED LITIGATION THROUGH OUR SUBSIDIARIES RESMED LIMITED, MEDIZINTECHNIK FUR ARZT UND PATIENT GMBH AND SMI, WE OWN OR HAVE LICENSED RIGHTS TO 108 ISSUED UNITED STATES PATENTS (INCLUDING 24 DESIGN PATENTS) AND 135 ISSUED FOREIGN PATENTS. IN ADDITION, THERE ARE 139 PENDING UNITED STATES PATENT APPLICATIONS (INCLUDING 23 DESIGN PATENT APPLICATIONS) AND 249 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 OUR CPAP DEVICES, A DELAY TIMER SYSTEM, THE BUBBLE MASK, AND AN AUTOMATED MEANS OF VARYING AIR PRESSURE BASED UPON A PATIENT'S CHANGING NEEDS DURING NIGHTLY USE, SUCH AS THAT EMPLOYED IN OUR AUTOSET DEVICE. OF OUR PATENTS, FOUR 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 YEARS31 -


Income Taxes.    Our effective income tax rate increased to approximately 33% for the year ended June 30, 2005 from approximately 32% for the year ended June 30, 2004. However, adding back the impact of the non-deductible in-process research and development charge of $5.3 million taken in the year ended June 30, 2005 would result in an adjusted effective tax rate of approximately 31%. The lower adjusted effective tax rate was primarily due to our geographical mix of taxable income. In particular, we continue to benefit from the Australian corporate tax rate of 30% and certain Australian R&D tax benefits because we generate a majority of our taxable income in Australia.

Net Income.    As a result of the factors above, our net income for the year ended June 30, 2005 was $64.8 million or $1.82 per diluted share compared to net income of $57.3 million or $1.63 per diluted share for the year ended June 30, 2004. The restructuring expenses, in-process research and development charge and amortization of acquired intangible assets described above constituted a reduction of $0.24 and $0.00 per diluted share on an after-tax basis, respectively, for the years ended June 30, 2005 and 2004.

Fiscal Year Ended June 30, 2004 2005 AND 2007 AND TWO UNITED STATES PATENTS IN 2007 AND ONE UNITED STATES PATENT IN EACH OF THE YEARS 2005 AND 2008. 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. OUR SUBSIDIARY, RESMED LIMITED, IS PURSUING INFRINGEMENT ACTIONS AGAINST A COMPETITOR 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. 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. - -14- 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. EMPLOYEES AS OF JUNECompared to Fiscal Year Ended June 30, 2003

Net Revenues.    Net revenue increased for the year ended June 30, 2004 to $339.3 million from $273.6 million for the year ended June 30, 2003, WE HAD 1,464 EMPLOYEES OR FULL TIME CONSULTANTS, OF WHICH 540 PERSONS WERE EMPLOYED IN WAREHOUSING AND MANUFACTURING, 252 IN RESEARCH AND DEVELOPMENT, 672 IN SALES, MARKETING AND ADMINISTRATION. OF OUR EMPLOYEES AND CONSULTANTS, 705 WERE LOCATED IN AUSTRALIA, 349 IN THE UNITED STATES, 363 IN EUROPE AND 47 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, CONSISTS OF PHYSICIANS SPECIALIZING IN THE FIELD OF SLEEP DISORDERED BREATHING. MEDICAL ADVISORY BOARD 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. MEDICAL ADVISORY BOARD MEMBERS ARE ALSO AVAILABLE TO CONSULT ON AN AS-NEEDED BASIS WITH OUR SENIOR MANAGEMENT. IN ALPHABETICAL ORDER, MEDICAL ADVISORY BOARD MEMBERS INCLUDE: CLAUDIO BASSETTI, MD, IS A NEUROLOGIST WITH EXPERTISE IN SLEEP, SLEEP MEDICINE, STROKE, AND CEREBROVASCULAR DISEASE. HE IS A LEADER IN STUDYING THE IMPLICATIONS OF SDB ON STROKE AND IS HEAD OF THE NEUROLOGY OUTPATIENT CLINICS AND VICE-CHAIRMAN OF THE NEUROLOGY DEPARTMENT AT THE UNIVERSITY HOSPITAL, ZURICH. DR. BASSETTI IS A MEMBER OF THE AMERICAN ACADEMY OF NEUROLOGY, THE AMERICAN SLEEP DISORDERS ASSOCIATION, AND EX-MEMBER OF THE SCIENTIFIC COMMITTEE OF THE EUROPEAN SLEEP RESEARCH SOCIETY. HE IS ALSO A MEMBER OF BOARDS OF THE SWISS SOCIETIES OF NEUROLOGY, NEUROSCIENCE AND SLEEP AND SITS ON THE EDITORIAL BOARDS OF EUROPEAN NEUROLOGY, JOURNAL OF SLEEP RESEARCH, SLEEP MEDICINE, AND SWISS ARCHIVES OF NEUROLOGY AND PSYCHIATRY. DR. BASSETTI HAS PRODUCED OVER 100 PUBLICATIONS. - -15- MICHAEL COPPOLA, MD IS A LEADING PULMONARY CRITICAL CARE AND SLEEP DISORDERS PHYSICIAN AND IS PRESIDENT OF SPRINGFIELD MEDICAL ASSOCIATES, A MULTI-SPECIALTY MEDICAL GROUP IN SPRINGFIELD, MASSACHUSETTS. HE IS AN ATTENDING PHYSICIAN AT BAYSTATE MEDICAL CENTER AND MERCY HOSPITAL IN SPRINGFIELD, MASSACHUSETTS AND A FELLOW OF THE AMERICAN COLLEGE OF CHEST PHYSICIANS. DR. COPPOLA IS ALSO THE MEDICAL DIRECTOR OF SLEEP AVENUE, 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, CALIFORNIA. 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 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, DSC, 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 VICE PRESIDENT OF THE ROYAL COLLEGE OF PHYSICIANS OF EDINBURGH, CHAIRMAN OF THE BRITISH SLEEP FOUNDATION, PAST CHAIRMAN OF THE BRITISH SLEEP SOCIETY, AND PAST SECRETARY OF THE BRITISH THORACIC SOCIETY. DR. DOUGLAS HAS PUBLISHED OVER 200 PAPERS ON BREATHING DURING SLEEP. NICHOLAS HILL, MD, IS PROFESSOR OF MEDICINE AT TUFTS UNIVERSITY SCHOOL OF MEDICINE AND CHIEF, PULMONARY, CRITICAL CARE AND SLEEP DIVISION, TUFTS-NEW ENGLAND MEDICAL CENTER IN BOSTON. HE IS A FELLOW AND CHAIR OF THE HOME CARE NETWORK IN THE AMERICAN COLLEGE OF CHEST PHYSICIANS AND A MEMBER OF THE LEADERSHIP COMMITTEE FOR THE PULMONARY CIRCULATION ASSEMBLY AND IS CHAIR ELECT OF THE PROGRAM COMMITTEE FOR THE CRITICAL CARE ASSEMBLY OF THE AMERICAN THORACIC SOCIETY. HE IS ALSO A MEMBER OF THE PLANNING AND PROGRAM REVIEW COMMITTEES OF THE AMERICAN THORACIC SOCIETY. DR. HILL'S MAIN RESEARCH INTERESTS ARE IN THE ACUTE AND CHRONIC APPLICATIONS OF NONINVASIVE POSITIVE PRESSURE VENTILATION FOR TREATING LUNG DISEASE. 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 DISEASES. DR. MAKE'S RESEARCH AND CLINICAL INVESTIGATIONS HAVE RESULTED IN A LARGE NUMBER OF PUBLICATIONS ON MECHANISMS, TREATMENT, AND REHABILITATION OF CHRONIC RESPIRATORY DISORDERS. 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, KENTUCKY. DR. PHILLIPS SERVES AS A BOARD MEMBER OF THE AMERICAN ACADEMY OF SLEEP MEDICINE AND OF THE NATIONAL SLEEP FOUNDATION. SHE HAS BEEN A RECIPIENT OF A SLEEP ACADEMIC AWARD FROM THE NATIONAL INSTITUTES OF HEALTH, PRESIDENT OF THE AMERICAN BOARD OF SLEEP MEDICINE, AND A 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. - -16- HELMUT TESCHLER, MD, HELMUT TESCHLER, MD, IS ASSOCIATE PROFESSOR OF MEDICINE AND HEAD OF THE DEPARTMENT OF RESPIRATORY MEDICINE, HIGH DEPENDENCY UNIT, AND CENTRE OF SLEEP MEDICINE AT THE 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, AND SLEEP MEDICINE, BETH ISRAEL DEACONESS MEDICAL CENTER, BOSTON, MASSACHUSETTS. HE IS AN INTERNATIONALLY RECOGNIZED RESEARCHER IN SLEEP-DISORDERS MEDICINE. B. TUCKER WOODSON, MD, FACS, IS PROFESSOR OF OTOLARYNGOLOGY AND COMMUNICATION SCIENCES AT THE MEDICAL COLLEGE OF WISCONSIN, A DIPLOMAT OF THE AMERICAN ACADEMY OF SLEEP MEDICINE, AND A FELLOW OF THE AMERICAN ACADEMY OF OTOLARYNGOLOGY - HEAD AND NECK SURGERY AND THE AMERICAN COLLEGE OF SURGEONS. HE IS THE DIRECTOR OF THE MEDICAL COLLEGE OF WISCONSIN/FROEDERT MEMORIAL LUTHERAN HOSPITAL CENTER FOR SLEEP. DR. WOODSON ALSO SITS ON MULTIPLE COMMITTEES FOR THE AMERICAN ACADEMY OF SLEEP MEDICINE AND AMERICAN ACADEMY OF OTOLARYNGOLOGY. ITEM 2 PROPERTIES OUR PRINCIPAL EXECUTIVE OFFICES ANDan increase of $65.7 million or 24%.

The increase in net revenue was attributable to an increase in unit sales of our flow generators, masks and accessories. Sales also benefited from an appreciation of international currencies against the 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 AT NORTH RYDE, IN SYDNEY, AUSTRALIA IN A 120,000 SQUARE FOOT FACILITY AND SOME SMALLER NEARBY BUILDINGS AND IN CANOGA PARK, CALIFORNIA IN A 35,500 SQUARE FOOT FACILITY. SALES AND WAREHOUSING FACILITIES ARE LEASED IN ABINGDON, ENGLAND; MOENCHENGLADBACH, GERMANY; LYON, FRANCE; BASEL, SWITZERLAND; TROLLHAETTAN, SWEDEN; HELSINKI, FINLAND 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. IN APRIL 2002, WE PURCHASED A 30-ACRE SITE IN SYDNEY, AUSTRALIA ON WHICH WE ARE DEVELOPING A NEW MANUFACTURING FACILITY DUE FOR COMPLETION IN FISCAL 2004. CONSTRUCTION OF THE NEW MANUFACTURING PLANT COMMENCED IN JANUARYdollar (increasing sales by approximately $18.6 million). Net revenue in North and Latin America increased to $166.1 million from $130.7 million for the years ended June 30, 2004 and 2003 AND IS CURRENTLY EXPECTED TO BE COMPLETED IN THE FIRST HALF OF CALENDAR 2004. ITEM 3 LEGAL PROCEEDINGS THE COMPANY WAS ENGAGED IN LITIGATION RELATING TO THE ENFORCEMENT AND DEFENSE OF CERTAIN OF ITS PATENTS DURING THE FISCAL YEAR. - -17- 1995 LITIGATION WITH RESPIRONICS. IN JANUARY 1995, OUR SUBSIDIARY, RESMED LIMITED, FILED A COMPLAINT IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA SEEKING MONETARY DAMAGES FROM AND INJUNCTIVE RELIEF AGAINST RESPIRONICS, INC. FOR ALLEGED INFRINGEMENT OF THREE OF ITS PATENTS. IN FEBRUARY 1995, RESPIRONICS FILED A COMPLAINT IN THErespectively. This growth primarily reflects increased public and physician awareness of sleep-disordered breathing. Net revenue in international markets increased to $173.2 million from $142.8 million for the years ended June 30, 2004 and 2003 respectively. International sales growth for the year ended June 30, 2004 reflects organic growth in the overall sleep-disordered breathing market and appreciation of international currencies against the U.S. DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA, IN PITTSBURGH, AGAINST RESMED LIMITED SEEKING A DECLARATORY JUDGMENT THAT RESPIRONICS, INC. DOES NOT INFRINGE CLAIMS OF THESE PATENTS AND THAT RESMED LIMITED'S PATENTS ARE INVALID AND UNENFORCEABLE. THE RESPIRONICS COMPLAINT ALSO MADE THE UNIVERSITY OF SYDNEY A PARTY AS THE UNIVERSITY OF SYDNEY IS THE ASSIGNEE OF ONE OF THE PATENTS IN SUIT; RESMED LIMITED IS THE EXCLUSIVE LICENSEE OF THAT PATENT. THE TWO ACTIONS WERE COMBINED AND ARE PROCEEDING IN THE WESTERN DISTRICT OF PENNSYLVANIA. IN JUNE 1996, RESMED LIMITED FILED AN ADDITIONAL COMPLAINT AGAINST RESPIRONICS FOR INFRINGEMENT OF A FOURTH RESMED PATENT, AND THAT COMPLAINT WAS CONSOLIDATED WITH THE EARLIER ACTION. THE COURT HAS GRANTED THREE PARTIAL SUMMARY JUDGMENT MOTIONS, FINDING THAT RESPIRONICS DOES NOT INFRINGE THREE OF THE FOUR PATENTS AT ISSUE. IN DECEMBER 1999, IN RESPONSE TO THE COURT'S RULING ON RESPIRONICS, INC.'S 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 OF THE THIRD PARTIAL SUMMARY JUDGMENT. ON SEPTEMBER 9, 2003, THE COURT VACATED THE SUMMARY JUDGMENTS. RESMED AND RESPIRONICS HAVE AGREED TO SETTLE THIS ACTION. RESMED AND RESPIRONICS WILL DISMISS ALL CLAIMS IN THE ACTION WITH PREJUDICE. 2002 LITIGATION WITH FISHER & PAYKEL HEALTHCARE. ON AUGUST 26, 2002, RESMED INC., RESMED CORP. AND RESMED LIMITED FILED A LAWSUIT IN U.S. DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA, IN SAN DIEGO AGAINST FISHER & PAYKEL HEALTHCARE INC AND FISHER & PAYKEL HEALTHCARE LIMITED ("FISHER & PAYKEL HEALTHCARE"). RESMED'S AMENDED COMPLAINT SOUGHT A JUDGMENT THAT SELECTED FISHER & PAYKEL HEALTHCARE MASK PRODUCTS INFRINGE PATENTS HELD BY RESMED. THE COMPLAINT FURTHER CHARGED THE DEFENDANTS WITH THE COPYING OF RESMED PROPRIETARY MASK TECHNOLOGY AND ALLEGES VIOLATIONS OF THE LANHAM ACT, TRADEMARK AND TRADE DRESS INFRINGEMENT AND COMMON LAW VIOLATIONS RELATING TO THE APPEARANCE OF RESMED MASK PRODUCTS. ON MAY 6, 2003, RESMED AND FISHER & PAYKEL HEALTHCARE AGREED TO SETTLE THIS PATENT INFRINGEMENT LAWSUIT. IN ACCORDANCE WITH THE SETTLEMENT, FISHER & PAYKEL INTRODUCED A NEW DESIGN OF ITS MASK IN THE UNITED STATES BY AUGUST 1, 2003 AND RESMED WILL NOT ASSERT INTELLECTUAL PROPERTY CLAIMS AGAINST THE NEW MASK. IN ADDITION, FISHER & PAYKEL MAY CONTINUE TO SELL ITS EXISTING MASKS OUTSIDE THE UNITED STATES UNTIL OCTOBER 1, 2003, UNDER LICENSE FROM RESMED, UNTIL IT INTRODUCES THE NEW VERSION THERE. RESMED HAS DISMISSED THE LAWSUIT WITH PREJUDICE. 2002 LITIGATION WITH RESPIRONICS. ON OCTOBER 11, 2002, RESMED INC, RESMED CORP, AND RESMED LIMITED FILED A LAWSUIT IN U.S. DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA, IN SAN DIEGO AGAINST RESPIRONICS, INC. RESMED'S SUIT SEEKS A JUDGMENT THAT CERTAIN OF RESPIRONICS' MASK PRODUCTS (CONTOUR DELUXE, COMFORT CLASSIC, COMFORT SELECT, AND IMAGE3 MASKS) INFRINGE PATENTS HELD BY RESMED. THE COMPLAINT FURTHER CHARGES RESPIRONICS WITH COPYING RESMED'S PROPRIETARY MASK TECHNOLOGY, AND ALLEGES VIOLATION OF THE LANHAM ACT, TRADEMARK AND TRADE DRESS INFRINGEMENT, AND COMMON LAW VIOLATIONS RELATING TO THE APPEARANCE OF RESMED'S MASK PRODUCTS. RESMED SEEKS AN INJUNCTION AND DAMAGES. ON MARCH 4, 2003, THE COURT DENIED RESPIRONICS' MOTION TO TRANSFER THE CASE TO THE U.S. DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. ON OCTOBER 16, 2002 RESPIRONICS, INC. FILED A LAWSUIT IN U.S. DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA, IN PITTSBURGH, AGAINST RESMED LIMITED SEEKING A DECLARATORY JUDGMENT THAT RESPIRONICS, INC. DOES NOT INFRINGE THE PATENTS THAT ARE THE SUBJECT OF RESMED'S OCTOBER 11, 2002 COMPLAINT FILED IN SAN DIEGO, THAT SUCH PATENTS ARE INVALID AND UNENFORCEABLE AND THAT RESPIRONICS HAS NOT COMMITTED ANY OTHER TRADEMARK, TRADE DRESS OR COMMON LAW VIOLATIONS. ON JULY 29, 2003, THE COURT ORDERED THE CASE TRANSFERRED TO THE US DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA. - -18- RESMED AND RESPIRONICS HAVE AGREED TO SETTLE BOTH LAWSUITS INVOLVED IN THE 2002 LITIGATION. RESMED AND RESPIRONICS WILL FILE A STIPULATION TO DISMISS ALL CLAIMS IN THE ACTIONS WITH PREJUDICE. OTHER LITIGATION. IN ADDITION TO THE MATTERS DESCRIBED ABOVE, IN THE NORMAL COURSE OF BUSINESS, WE ARE SUBJECT TO ROUTINE LITIGATION INCIDENTAL TO OUR BUSINESS. WHILE THE RESULTS OF THIS LITIGATION CANNOT BE PREDICTED WITH CERTAINTY, WE BELIEVE THAT THEIR FINAL OUTCOME WILL NOT HAVE A MATERIAL ADVERSE EFFECT ON OUR CONSOLIDATED FINANCIAL STATEMENTS TAKEN AS A WHOLE. 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. - ------------------------------------------------------------------ 2003 2002 High Low High Low - ------------------------------------------------------------------ Quarter One, ended September 30 $33.63 $24.89 $60.95 $45.90 Quarter Two, ended December 31. 34.13 27.63 61.75 50.47 Quarter Three, ended March 31 . 33.87 29.67 53.15 36.36 Quarter Four,dollar.

Sales for the previous year ended June 30 . . 41.95 32.00 40.34 24.70 - ------------------------------------------------------------------

AS OF SEPTEMBER 5, 2003, THERE WERE 76 HOLDERS OF RECORD OF OUR COMMON STOCK. WE HAVE NOT PAID ANY CASH DIVIDENDS ON OUR COMMON STOCK SINCE OUR 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 AND 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. - -19- DURING FISCAL 2003 AND 2002, WE REPURCHASED $10.0 MILLION AND $56.8 MILLION FACE VALUE OF OUR CONVERTIBLE SUBORDINATED NOTES RESPECTIVELY. THE TOTAL PURCHASE PRICE OF THE NOTES WAS $9.4 MILLION AND $49.1 MILLION, INCLUDING $0.2 MILLION AND $0.6 MILLION IN ACCRUED INTEREST. WE RECOGNIZED A GAIN OF $0.3 MILLION AND $4.0 MILLION, NET OF TAX OF $0.2 MILLION AND $2.5 MILLION, ON THESE TRANSACTIONS. AT JUNE 30, 2003 WE HAD CONVERTIBLE SUBORDINATED NOTES OUTSTANDING OF $113.25 MILLION. 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. WE MAY REDEEM SOME OR ALL OF THE NOTES AT ANY TIME BEFORE JUNE 20,included non-recurring SARS-related sales to China of approximately $5.0 million. Excluding the impact of these sales, international sales grew by 26%. Excluding both the impacts of the appreciation of international currencies against the U.S. dollar and SARS-related sales, international sales grew by 12%.

Sales of flow generators for the year ended June 30, 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 20, 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. - -20- 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. THESE SHARES WERE SUBSEQUENTLY REGISTERED FOR RESALE UNDER THE SECURITIES ACT (REGISTRATION NO. 335-100825), EFFECTIVE MARCH 26, 2003; AND CONSEQUENTLY THE SHARES MAY BE RESOLD IN ACCORDANCE WITH THE PROSPECTUS THAT WAS PART OF THE REGISTRATION STATEMENT BY THE SELLING STOCKHOLDER NAMED IN THE PROSPECTUS OR IN A SUPPLEMENT TO THE PROSPECTUS. OTHER SALES OF THE SHARES 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. 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 periodincreased by 18% compared to the year ended June 30, 2003. The data set forth below should be read in conjunction with the Consolidated Financial Statements and related Notes included elsewhere in this Report. - ---------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME DATA: Years Ended June 30 - ---------------------------------------------- ---------------------------------------------------------------- (In thousands, except per share data) 2003 2002 2001 2000 1999 --------------------- --------- --------- --------- -------- Net revenues . . . . . . . . . . . . . . . . . $ 273,570 $204,076 $155,156 $115,615 $88,627 Cost of sales. . . . . . . . . . . . . . . . . 100,483 70,827 50,377 36,991 29,416 - ---------------------------------------------- --------------------- --------- --------- --------- -------- Gross profit . . . . . . . . . . . . . . . . . 173,087 133,249 104,779 78,624 59,211 - ---------------------------------------------- --------------------- --------- --------- --------- -------- Selling, general and administrative expenses . 85,313 64,481 49,364 36,987 27,414 Research and development expenses. . . . . . . 20,534 14,910 11,146 8,499 6,542 In-process research and development write off. - 350 17,677 - - Donations to Research Foundations. . . . . . . - 2,349 - - - Provision for restructure. . . . . . . . . . . - - 550 - - - ---------------------------------------------- --------------------- --------- --------- --------- -------- Total operating expenses . . . . . . . . . . . 105,847 82,090 78,737 45,486 33,956 - ---------------------------------------------- --------------------- --------- --------- --------- -------- Income from operations . . . . . . . . . . . . 67,240 51,159 26,042 33,138 25,255 - ---------------------------------------------- --------------------- --------- --------- --------- -------- Other income (expenses): Interest income (expense), net . . . . . . . . (2,549) (3,224) (762) 801 779 Government grants. . . . . . . . . . . . . . . - - 72 279 833 Other, net . . . . . . . . . . . . . . . . . . 1,907 108 1,962 (52) (2,290) Gain on extinguishment of debt . . . . . . . . 529 6,549 - - - - ---------------------------------------------- --------------------- --------- --------- --------- -------- Total other income (expenses). . . . . . . . . (113) 3,433 1,272 1,028 (678) - ---------------------------------------------- --------------------- --------- --------- --------- -------- Income before income taxes . . . . . . . . . . 67,127 54,592 27,314 34,166 24,577 - ---------------------------------------------- --------------------- --------- --------- --------- -------- Income taxes . . . . . . . . . . . . . . . . . 21,398 17,086 15,684 11,940 8,475 - ---------------------------------------------- --------------------- --------- --------- --------- -------- Net income . . . . . . . . . . . . . . . . . . $ 45,729 $ 37,506 $ 11,630 $ 22,226 $16,102 - ---------------------------------------------- --------------------- --------- --------- --------- -------- Basic earnings per share . . . . . . . . . . . $ 1.38 $ 1.17 $ 0.37 $ 0.74 $ 0.55 Diluted earnings per share . . . . . . . . . . $ 1.33 $ 1.10 $ 0.35 $ 0.69 $ 0.52 Basic shares outstanding . . . . . . . . . . . 33,054 32,174 31,129 30,153 29,416 Diluted shares outstanding . . . . . . . . . . 34,439 34,080 33,484 32,303 31,068 - ---------------------------------------------- --------------------- --------- --------- --------- --------
- -21
- ----------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET DATA: As of June 30 - ----------------------------------------------------------------------------------------------- (In thousands) 2003 2002 2001 2000 1999 - ----------------------------------------------------------------------------------------------- Working capital. . . . . . . . . . . . . $ 191,322 $142,809 $144,272 $ 47,550 $32,529 Total assets . . . . . . . . . . . . . . 459,595 376,191 288,090 115,594 89,889 Long-term debt, less current maturities. 113,250 123,250 150,000 - - Total stockholders' equity . . . . . . . 286,433 192,930 100,366 93,972 71,647 - -----------------------------------------------------------------------------------------------
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 AND RENTAL 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. BUSINESS ACQUISITIONS 1. FISCAL YEAR ENDED JUNE 30, 2003, JOHN STARK AND ASSOCIATES. ON JULY 24, 2002 WE ACQUIRED THE BUSINESS OF JOHN STARK AND ASSOCIATES, OUR TEXAS REPRESENTATIVE, FOR TOTAL CONSIDERATION OF $0.3 MILLION IN CASH. THE ACQUISITION HAS BEEN ACCOUNTED FOR AS A PURCHASE AND ACCORDINGLY, THE RESULTS OF OPERATIONS OF JOHN STARK AND ASSOCIATES WERE INCLUDED WITHIN OUR CONSOLIDATED FINANCIAL STATEMENTS FROM JULY 24, 2002. AN AMOUNT OF $0.3 MILLION, REPRESENTING THE EXCESS OF THE PURCHASE PRICE OVER THE FAIR VALUE OF NET IDENTIFIABLE ASSETS ACQUIRED OF $NIL, HAS BEEN RECORDED AS GOODWILL. 2. FISCAL YEAR ENDED JUNEincluding increases of 20% in North and Latin America and 16% elsewhere. Sales of mask systems, motors and other accessories increased by 31%, including increases of 33% in North and Latin America and 29% elsewhere, for the year ended June 30, 2002 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. AN AMOUNT OF $4.2 MILLION, REPRESENTING 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. - -22- 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. AN AMOUNT OF $30.7 MILLION, REPRESENTING 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 $0.4 MILLION 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. PURCHASED RESEARCH AND DEVELOPMENT PROJECTS RELATED TO ELECTRICAL MOTOR SYSTEMS USED IN OUR 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 WERE EXPECTED TO BE COMPLETED AND COMMERCIALLY AVAILABLE BY 2004. THESE PROJECTS HAVE ESTIMATED COSTS TO COMPLETE TOTALLING APPROXIMATELY $0.5 MILLION. 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. 3. FISCAL YEAR ENDED JUNE2004 compared to the year ended June 30, 2001 MAP MEDIZIN-TECHNOLOGIE GMBH (MAP). ON FEBRUARY 16, 2001 OUR WHOLLY-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 OUR CONSOLIDATED FINANCIAL STATEMENTS FROM FEBRUARY 16, 2001. AN AMOUNT OF $47.1 MILLION, REPRESENTING THE EXCESS OF THE PURCHASE PRICE OVER THE FAIR VALUE OF THE NET IDENTIFIABLE ASSETS ACQUIRED, HAS BEEN RECORDED AS GOODWILL. 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. 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. - -23- ALL PURCHASED RESEARCH AND DEVELOPMENT PROJECTS RELATED TO MEDICAL EQUIPMENT FOR THE TREATMENT OF SLEEP DISORDERED BREATHING, PRIMARILY FOR 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 WERE EXPECTED TO BE COMPLETED AND COMMERCIALLY AVAILABLE IN 2002 AND VERSIONS OF THE AUTOTITRATING DEVICES BETWEEN 2003 AND 2005. THESE PROJECTS HAD ESTIMATED COSTS TO COMPLETE TOTALLING APPROXIMATELY $2.0 MILLION. 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. DURING THE DECEMBER 2001, WE PAID AN AMOUNT OF $1.4 MILLION AS FINAL CONSIDERATION ASSOCIATED WITH THE PURCHASE OF MAP. THE AMOUNT HAS BEEN RECORDED AS GOODWILL. IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. ON ACQUISITION OF MAP IN FEBRUARY 2001, WE RECOGNIZED AS AN EXPENSE A CHARGE OF $17.7 MILLION WITH RESPECT TO FIVE IN-PROCESS RESEARCH AND DEVELOPMENT PROGRAMS UNDER ACTIVE DEVELOPMENT BY MAP AT DATE OF ACQUISITION. THE FIVE PROJECTS WERE: (I) A SINGLE-WALLED NASAL CUSHION MASK SYSTEM (II) NEW HEADGEAR SYSTEM (III) STANDALONE ACTIVE HUMIDIFIER (IV) AN AUTOTITRATION CPAP DEVICE FOR TREATMENT OF OSA (V) A NEW OSA DIAGNOSTIC DEVICE THE STATUS OF EACH PROJECT AS AT JUNE2003. These increases primarily reflect growth in the overall sleep-disordered breathing market and appreciation of international currencies against the U.S. dollar.

Gross Profit.    Gross profit increased for the year ended June 30, 2004 to $216.7 million from $173.1 million for the year ended June 30, 2003, IS AS NOTED BELOW: (I) SINGLE-WALLED NASAL CUSHION - THE NASAL CUSHION UNDER DEVELOPMENT BY MAP ON ACQUISITION WAS DUE FOR RELEASE IN OCTOBER 2001. DELAYS IN THE DESIGN AND MANUFACTURING PROCESS DELAYED THE RELEASE FOR SEVEN MONTHS, UNTIL APRIL 2002. THE DELAY IN RELEASE OF THE PRODUCT WAS NOT SIGNIFICANT OVER ITS EXPECTED LIFE CYCLE, AND HAS MADE NO SIGNIFICANT IMPACT ON THE NET RETURN ASSUMPTIONS USED IN THE INITIAL IN-PROCESS RESEARCH AND DEVELOPMENT MODEL. SINCE RELEASE, THE PRODUCT (NOW REFERRED TO AS THE PAPILLON) HAS MET OR EXCEEDED SALES FORECASTS. (II) NEW HEADGEAR - THE NEW HEADGEAR PRODUCT LINE WAS WITHHELD TO COINCIDE WITH THE RELEASE OF THE PAPILLON MASK SYSTEM IN APRIL 2002 AND SO WAS ALSO SEVEN MONTHS BEHIND SCHEDULE IN PROJECTED RELEASE DATES. SINCE RELEASE, THE NEW HEADGEAR SYSTEM HAS EXCEEDED ORIGINAL SALES PROJECTIONS AND CONTINUES TO MEET OR EXCEED INITIAL EXPECTATIONS. (III) STANDALONE ACTIVE HUMIDIFIER - DUE TO OTHER PRIORITIES AND TO THE INTRODUCTION OF INTEGRATED HUMIDIFICATION FLOW GENERATOR DEVICES BY A NUMBER OF COMPETITORS DURING FISCAL 2002, WE HAVE DELAYED THE STANDALONE HUMIDIFIER PROJECT. - -24- GIVEN THE RELATIVELY SMALL REVENUE FORECAST OF THE PRODUCT LINE IN THE IPR&D MODEL, THE FINANCIAL IMPACT OF THIS PROJECT IS NOT MATERIAL TO OUR BUSINESS OR THE NET RETURN OF THE MAP ACQUISITION. (IV) AUTOTITRATION CPAP DEVICE - THE MAIN PRODUCT DEVELOPMENT EFFORT OF MAP SINCE ACQUISITION HAS BEEN THE COMPLETION OF THE AUTOTITRATION CPAP FLOW GENERATOR SPECIFIED IN THE INITIAL IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. THIS PROJECT EXPERIENCED SOME DELAYS DUE TO THE COMPLEXITY OF THE SOFTWARE ALGORITHM DEVELOPMENT PROCESS AND ASSOCIATED ELECTRONICS. MAP RELEASED THE PRODUCT IN NOVEMBER 2002; SINCE RELEASE, SALES OF THE PRODUCT (NOW REFERRED TO AS MAGELLAN) HAVE BEEN WITHIN EXPECTATIONS. (V) OSA DIAGNOSTIC DEVICE - MAP'S NEW DIAGNOSTIC DEVICE REMAINS ON TARGET FOR INITIAL MARKET RELEASE IN CALENDAR 2003, ALTHOUGH THE FORECASTED RELEASE DATE OF MARCH 2003 WAS NOT ACHIEVED. WE REMAIN CONFIDENT IN THE CAPACITY OF THE DIAGNOSTIC ALGORITHM TO SIGNIFICANTLY ENHANCE THE DIAGNOSTIC PROCESS, AND REMAIN CONFIDENT IN THE POTENTIAL OF THE PRODUCT TO SIGNIFICANTLY IMPACT THE TREATMENT AND DIAGNOSIS OF OBSTRUCTIVE SLEEP APNEA IN THE GERMAN MARKET. AS AT JUNEan increase of $43.6 million or 25%. Gross profit as a percentage of net revenue increased for the year ended June 30, 2004 to 64% from 63% for the year ended June 30, 2003. The small improvement in gross margin reflects a more favorable product mix due to increased sales of higher margin products, partially offset by the impact of higher manufacturing costs resulting from a stronger Australian dollar against the U.S. dollar, as the majority of manufacturing labor and overhead costs are incurred in Australia.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased for the year ended June 30, 2004 to $104.7 million from $85.3 million for the year ended June 30, 2003, THREE OF THE FIVE PROGRAMS HAVE BEEN COMPLETED WITH THE RELEASE OF THE PAPILLON MASK SYSTEM, UPGRADED HEADGEAR AND THE MAGELLAN AUTOMATED FLOW GENERATOR DEVICE. ALL THREE PRODUCTS ARE GENERATING SALES REVENUE CONSISTENT WITH OUR ORIGINAL EXPECTATIONS AND ASSUMPTIONS USED IN CALCULATING THE IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. WE EXPECT TO RELEASE PRODUCTS WITH RESPECT TO BOTH REMAINING IN-PROCESS RESEARCH AND DEVELOPMENT PROGRAMS OVER THE NEXT TWELVE-MONTH PERIOD, WHICH IS GENERALLY CONSISTENT WITH OUR ORIGINAL EXPECTATIONS. GIVEN THE SUCCESSFUL COMPLETION OF THE ABOVE RESEARCH PROGRAMS AND PERFORMANCE OF THE ASSOCIATED PRODUCT LINES, WE REMAIN CONFIDENT IN THE ASSUMPTIONS USED TO DETERMINE THE IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE AND, AS A RESULT, THE NET RETURN OF THE MAP ACQUISITION. 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 2003 AND 2002; AND WAS 34% IN FISCAL 2001. DURING FISCAL 2003, 2002 AND 2001, OUR EFFECTIVE TAX RATE HAS FLUCTUATED BETWEEN APPROXIMATELYan increase of $19.4 million or 23%. As a percentage of net revenue, selling, general and administrative expenses for the year ended June 30, 2004 was 31% AND APPROXIMATELY 57%. 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. WE ACCOUNT 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. , consistent with the year

- -25- FISCAL YEAR ENDED JUNE32 -


ended June 30, 2003. The increase in selling, general and administrative expenses was primarily due to an increase in the number of sales and administrative personnel and other expenses related to the increase in our sales. The increase in selling, general and administrative expenses was also attributable to appreciation of international currencies against the U.S. dollar which added approximately $8.1 million to our expenses as reported in U.S. dollars.

Donations to Foundation.    In the year ended June 30, 2004 we donated $0.5 million to the ResMed Foundation in the U.S., and the Resmed Foundation Limited in Australia. The Foundation’s overall mission includes the education of both the public and physicians about the inherent dangers of untreated SDB/OSA, particularly as it relates to cerebrovascular and cardiovascular disease.

Research and Development Expenses.    Research and development expenses increased for the year ended June 30, 2004 to $26.2 million from $20.5 million for the year ended June 30, 2003, COMPARED TO FISCAL YEAR ENDED JUNEan increase of $5.7 million or 28%. As a percentage of net revenue, research and development expenses were 7.7% for the year ended June 30, 2002 NET REVENUES. NET REVENUE INCREASED FOR THE YEAR ENDED JUNE2004 compared to 7.5% for the year ended June 30, 2003. 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. The increase also reflects an appreciation of the Australian dollar against the U.S. dollar, as the majority of research and development costs are incurred in Australian dollars.

The appreciation of international currencies against the U.S. dollar added approximately $3.8 million to our research and development expenses as reported in U.S. dollars.

Other Income (Expense), Net.    Other expense, net increased for the year ended June 30, 2004 to net expense of $0.7 million from net expense of $0.1 million for the year ended June 30, 2003. The increase in other expense was attributable to no gains on extinguishment of debt this year compared to $0.5 million for the year ended June 30, 2003, TO $273.6 MILLION FROM $204.1 MILLION FOR THE YEAR ENDED JUNEand lower net foreign currency exchange gains, partially offset by lower interest expense due to the reduction in convertible note debt.

Income Taxes.    Our effective income tax rate increased to 32.3% for the year ended June 30, 2002, AN INCREASE OF $69.5 MILLION OR 34%. THE INCREASE IN NET REVENUE WAS ATTRIBUTABLE TO AN INCREASE IN UNIT SALES OF OUR FLOW GENERATORS AND ACCESSORIES. SALES ALSO BENEFITED FROM AN APPRECIATION OF INTERNATIONAL CURRENCIES AGAINST THE US DOLLAR (INCREASING SALES BY APPROXIMATELY $16.8 MILLION) AND INCLUSION OF SALES OF $6.5 MILLION FROM SERVO MAGNETICS INC. (SMI), THE SUBSIDIARY WE ACQUIRED IN MAY 2002. NET REVENUE IN NORTH AND LATIN AMERICA INCREASED TO $130.7 MILLION FROM $100.9 MILLION FOR THE YEARS ENDED JUNE 30, 2003 AND 2002 RESPECTIVELY. THIS GROWTH PRIMARILY REFLECTS INCREASED PUBLIC AND PHYSICIAN AWARENESS OF SLEEP-DISORDERED BREATHING. NET REVENUE IN INTERNATIONAL MARKETS INCREASED TO $142.8 MILLION FROM $103.1 MILLION FOR THE YEARS ENDED JUNE 30, 2003 AND 2002 RESPECTIVELY. INTERNATIONAL SALES GROWTH FOR THE YEAR ENDED JUNE 30, 2003 REFLECTS ORGANIC GROWTH IN THE OVERALL SLEEP DISORDERED BREATHING MARKET, APPRECIATION OF INTERNATIONAL CURRENCIES AGAINST THE U.S. DOLLAR AND SARS-RELATED SALES TO CHINA OF APPROXIMATELY $5.0 MILLION. SALES OF FLOW GENERATORS FOR THE YEAR ENDED JUNE 30, 2003 INCREASED BY 29% COMPARED TO THE YEAR ENDED JUNE 30, 2002 INCLUDING INCREASES OF 23% IN NORTH AND LATIN AMERICA AND 33% ELSEWHERE. SALES OF MASK SYSTEMS, MOTORS AND OTHER ACCESSORIES INCREASED BY 40% INCLUDING INCREASES OF 35% IN NORTH AND LATIN AMERICA AND 47% ELSEWHERE, FOR THE YEAR ENDED JUNE 30, 2003 COMPARED TO THE YEAR ENDED JUNE 30, 2002. THESE INCREASES PRIMARILY REFLECT GROWTH IN THE OVERALL SLEEP-DISORDERED BREATHING MARKET, APPRECIATION OF INTERNATIONAL CURRENCIES AGAINST THE U.S. DOLLAR AND OUR ACQUISITION OF SMI. GROSS PROFIT. GROSS PROFIT INCREASED FOR THE YEAR ENDED JUNE 30, 2003 TO $173.1 MILLION FROM $133.2 MILLION FOR THE YEAR ENDED JUNE 30, 2002, AN INCREASE OF $39.9 MILLION OR 30%. GROSS PROFIT AS A PERCENTAGE OF NET REVENUE DECREASED FOR THE YEAR ENDED JUNE 30, 2003 TO 63% FROM 65% FOR THE YEAR ENDED JUNE 30, 2002, REFLECTING THE IMPACT OF HIGHER MANUFACTURING COSTS RESULTING FROM A STRONGER AUSTRALIAN DOLLAR AGAINST THE US DOLLAR, AS THE MAJORITY OF MANUFACTURING LABOR AND OVERHEAD COSTS ARE INCURRED IN AUSTRALIA AND, TO A LESSER EXTENT, THE INCLUSION OF SMI'S MOTOR SALES WHICH ACHIEVE LOWER MARGINS COMPARED TO OUR OVERALL GROSS MARGIN. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES INCREASED FOR THE YEAR ENDED JUNE 30, 2003 TO $85.3 MILLION FROM $64.5 MILLION FOR THE YEAR ENDED JUNE 30, 2002, AN INCREASE OF $20.8 MILLION OR 32%. AS A PERCENTAGE OF NET REVENUE, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES FOR THE YEAR ENDED JUNE 30, 2003 DECREASED TO 31% COMPARED TO 32% FOR THE YEAR ENDED JUNE 30, 2002. THE INCREASE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES WAS PRIMARILY DUE TO AN INCREASE IN THE NUMBER OF SALES AND ADMINISTRATIVE PERSONNEL AND OTHER EXPENSES RELATED TO THE INCREASE IN OUR SALES. THE INCREASE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES WAS ALSO ATTRIBUTABLE TO APPRECIATION OF INTERNATIONAL CURRENCIES AGAINST THE US DOLLAR (ADDING APPROXIMATELY $6.0 MILLION), THE INCLUSION OF $2.6 MILLION FROM SMI'S OPERATIONS, AND $2.2 MILLION IN LITIGATION COSTS ASSOCIATED WITH OUTSTANDING PATENT INFRINGEMENT LAWSUITS AGAINST COMPETITORS. RESEARCH AND DEVELOPMENT EXPENSES. RESEARCH AND DEVELOPMENT EXPENSES INCREASED FOR THE YEAR ENDED JUNE 30, 2003 TO $20.5 MILLION FROM $14.9 MILLION FOR THE YEAR ENDED JUNE 30, 2002, AN INCREASE OF $5.6 MILLION OR 38%. AS A PERCENTAGE OF NET REVENUE, RESEARCH AND DEVELOPMENT EXPENSES WERE 7.5% FOR THE YEAR ENDED JUNE 30, 2003 COMPARED TO 7.3% FOR THE YEAR ENDED JUNE 30, 2002. 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. THE INCREASE ALSO REFLECTS AN APPRECIATION OF THE AUSTRALIAN DOLLAR AGAINST THE US DOLLAR, AS THE MAJORITY OF RESEARCH AND DEVELOPMENT COSTS ARE INCURRED IN AUSTRALIAN DOLLARS. IN CONSTANT CURRENCY TERMS, RESEARCH AND DEVELOPMENT EXPENSES FOR THE YEAR ENDED JUNE 30, 2003 INCREASED BY $3.1 MILLION, OR 17%, COMPARED TO THE YEAR ENDED JUNE 30, 2002. - -26- OTHER INCOME (EXPENSE), NET. OTHER INCOME (EXPENSE), NET DECREASED FOR THE YEAR ENDED JUNE 30, 2003 TO NET EXPENSE OF $0.1 MILLION FROM NET INCOME OF $3.4 MILLION FOR THE YEAR ENDED JUNE 30, 2002. THE DECREASE IN OTHER INCOME WAS ATTRIBUTABLE TO LOWER GAINS ON EXTINGUISHMENT OF DEBT PARTIALLY OFFSET BY INCREASED NET FOREIGN CURRENCY EXCHANGE GAINS, AND LOWER INTEREST EXPENSE DUE TO THE REDUCTION IN CONVERTIBLE NOTE DEBT. INCOME TAXES. OUR EFFECTIVE INCOME TAX RATE INCREASED TO2004 from 31.9% FOR THE YEAR ENDED JUNE 30, 2003 FROM 31.3% FOR THE YEAR ENDED JUNE 30, 2002. THE MARGINALLY HIGHER TAX RATE WAS PRIMARILY DUE TO THE GEOGRAPHICAL MIX OF TAXABLE INCOME. WE CONTINUE TO BENEFIT FROM THE AUSTRALIAN CORPORATE TAX RATE OF 30%, BECAUSE WE GENERATE A MAJORITY OF OUR TAXABLE INCOME IN AUSTRALIA. FISCAL YEAR ENDED JUNE 30 2002, COMPARED TO FISCAL YEAR ENDED JUNE 30 2001 NET REVENUES. NET REVENUE INCREASED FOR THE YEAR ENDED JUNE 30, 2002 TO $204.1 MILLION FROM $155.2 MILLION FOR THE YEAR ENDED JUNE 30,2001, 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 THE INCLUSION OF INCREMENTAL SALES OF $17.2 MILLION FROM MAP MEDIZIN-TECHNOLOGIE GMBH "MAP", THE SUBSIDIARY WE ACQUIRED IN FEBRUARY 2001. NET REVENUE IN NORTH AND LATIN AMERICA INCREASED TO $100.9 MILLION FROM $79.9 MILLION FOR THE YEARS ENDED JUNE 30, 2002 AND 2001 RESPECTIVELY. THIS GROWTH REFLECTS INCREASED PUBLIC AND PHYSICIAN AWARENESS OF SLEEP-DISORDERED BREATHING. NET REVENUE IN OTHER INTERNATIONAL MARKETS INCREASED TO $103.1 MILLION FROM $75.2 MILLION FOR THE YEARS ENDED JUNE 30, 2002 AND 2001 RESPECTIVELY. INTERNATIONAL SALES GROWTH FOR THE YEAR ENDED JUNE 30, 2002 REFLECTS ORGANIC GROWTH IN THE OVERALL SLEEP-DISORDERED BREATHING MARKET AND A FULL YEAR OF SALES FROM OUR SUBSIDIARY, MAP. SALES OF FLOW GENERATORS FOR THE YEAR ENDED JUNE 30, 2002 INCREASED BY 35% COMPARED TO THE YEAR ENDED JUNE 30, 2001 INCLUDING INCREASES OF 22% IN NORTH AND LATIN AMERICA AND 47% ELSEWHERE. SALES OF MASK SYSTEMS, MOTORS AND OTHER ACCESSORIES INCREASED BY 28% INCLUDING INCREASES OF 30% IN NORTH AND LATIN AMERICA AND 24% ELSEWHERE, FOR THE YEAR ENDED JUNE 30, 2002 COMPARED TO THE YEAR ENDED JUNE 30, 2002. THESE INCREASES REFLECT GROWTH IN THE OVERALL SLEEP-DISORDERED BREATHING MARKET AND OUR ACQUISITION OF MAP. GROSS PROFIT. GROSS PROFIT INCREASED FOR THE YEAR ENDED JUNE 30, 2002 TO $133.2 MILLION FROM $104.8 MILLION FOR THE YEAR ENDED JUNE 30, 2001, AN INCREASE OF $28.5 MILLION OR 27%. GROSS PROFIT AS A PERCENTAGE OF NET REVENUE DECLINED FOR THE YEAR ENDED JUNE 30, 2002 TO 65% FROM 68% FOR THE YEAR ENDED JUNE 30, 2001. THE DECLINE IN GROSS MARGINS REFLECTS A CHANGE IN GEOGRAPHICAL SALES MIX, OTHER THAN 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 FOR THE YEAR ENDED JUNE 30, 2002 TO $64.5 MILLION FROM $49.4 MILLION FOR THE YEAR ENDED JUNE 30, 2001, AN INCREASE OF $15.1 MILLION OR 31%. AS A PERCENTAGE OF NET REVENUE, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES FOR THE YEAR ENDED JUNE 30, 2002 WAS 32%, CONSISTENT WITH THE YEAR ENDED JUNE 30, 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. - -27- PROVISION FOR RESTRUCTURE. IN THE YEAR ENDED JUNE 30, 2001, SUBSEQUENT TO THE PURCHASE OF MAP, WE RESTRUCTURED MAP'S UNPROFITABLE FRENCH ACTIVITIES AND TOOK A CHARGE OF $0.6 MILLION ASSOCIATED WITH THEIR CLOSURE. WE DID NOT INCUR ANY RESTRUCTURE CHARGES FOR THE YEAR ENDED JUNE 30, 2002. IN-PROCESS RESEARCH AND DEVELOPMENT WRITE-OFF. IN THE YEAR ENDED JUNE 30, 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 THE YEAR ENDED JUNE 30, 2001, PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT OF $17.7 MILLION WAS EXPENSED UPON ACQUISITION OF MAP. DONATIONS TO FOUNDATIONS. IN THE YEAR ENDED JUNE 30, 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 CEREBROVASCULAR AND CARDIOVASCULAR DISEASE. RESEARCH AND DEVELOPMENT EXPENSES. RESEARCH AND DEVELOPMENT EXPENSES INCREASED IN FISCAL 2002 TO $14.9 MILLION FROM $11.1 MILLION FOR THE YEAR ENDED JUNE 30, 2001, AN INCREASE OF $3.8 MILLION OR 34%. AS A PERCENTAGE OF NET REVENUE, RESEARCH AND DEVELOPMENT EXPENSES INCREASED TO 7.3% FOR THE YEAR ENDED JUNE 30, 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 FOR THE YEAR ENDED JUNE 30, 2002, TO A NET INCOME OF $3.4 MILLION FROM NET INCOME OF $1.3 MILLION FOR THE YEAR ENDED JUNE 30, 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. OUR EFFECTIVE INCOME TAX RATE DECLINED TO APPROXIMATELY 31.3% FOR THE YEAR ENDED JUNE 30, 2002, FROM APPROXIMATELY 57.4% FOR THE YEAR ENDED JUNE 30, 2001. THE LOWER TAX RATE IS A COROLLARY OF THE HIGH EFFECTIVE TAX RATE IN FISCAL 2001. THE HIGH EFFECTIVE TAX RATE FOR THE YEAR ENDED JUNE 30, 2001 WAS PRIMARILY DUE TO NON-DEDUCTIBLE EXPENSES OF $17.7 MILLION FOR AN IN-PROCESS RESEARCH AND DEVELOPMENT WRITE-DOWN AND $0.6 MILLION IN RESTRUCTURING CHARGES. TO A LESSER EXTENT, THE LOWER EFFECTIVE TAX RATE ALSO REFLECTS THE LOWERING OF THE CORPORATE INCOME TAX RATE IN AUSTRALIA FROM 34% TO 30% EFFECTIVE JULY 1, 2001. WE ALSO BENEFIT FROM A 125% TAX DEDUCTION ON RESEARCH AND DEVELOPMENT EXPENDITURES IN AUSTRALIA, WHICH FURTHER REDUCES THE EFFECTIVE TAX RATE ON AUSTRALIAN SOURCED INCOME. LIQUIDITY AND CAPITAL RESOURCES AS OF JUNE 30, 2003 AND JUNE 30, 2002, WE HAD CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES AVAILABLE-FOR-SALE OF APPROXIMATELY $121.0 MILLION AND $92.8 MILLION, RESPECTIVELY. WORKING CAPITAL APPROXIMATED $191.3 MILLION AND $142.8 MILLION AT JUNE 30, 2003 AND JUNE 30, 2002 RESPECTIVELY. - -28- INVENTORIES AT JUNE 30, 2003 INCREASED BY $8.2 MILLION OR 20% TO $49.4 MILLION COMPARED TO JUNE 30, 2002 INVENTORIES OF $41.2 MILLION. THE PERCENTAGE INCREASE IN INVENTORIES WAS LESS THAN THE 34% INCREMENTAL INCREASE IN REVENUES IN THE YEAR ENDED JUNE 30, 2003 COMPARED TO THE YEAR ENDED JUNE 30, 2002. THE IMPROVEMENT REFLECTS BETTER INVENTORY MANAGEMENT PRACTICES AND VERY STRONG FOURTH QUARTER SALES. ACCOUNTS RECEIVABLE AT JUNE 30, 2003 WERE $56.7 MILLION, AN INCREASE OF $10.5 MILLION OR 23% OVER THE JUNE 30, 2002 ACCOUNTS RECEIVABLE BALANCE OF $46.2 MILLION. THIS INCREASE WAS LOWER THAN THE 34% INCREMENTAL INCREASE IN REVENUES FOR THE YEAR ENDED JUNE 30, 2003 COMPARED TO THE YEAR ENDED JUNE 30, 2002, REFLECTING IMPROVED COLLECTIONS. ACCOUNTS RECEIVABLE DAYS OUTSTANDING IMPROVED TO 62 DAYS FOR THE QUARTER ENDED JUNE 30, 2003, COMPARED TO 72 DAYS FOR THE QUARTER ENDED JUNE 30, 2002. THE IMPROVEMENT REFLECTED, IN PART, SARS-RELATED SALES TO CHINA OF $5.0 MILLION IN THE QUARTER ENDED JUNE 30, 2003, WHICH WERE COLLECTED PRIOR TO JUNEfor the year ended June 30, 2003. DURING THE YEAR ENDED JUNEThe marginally higher tax rate was primarily due to the geographical mix of taxable income. We continue to benefit from the Australian corporate tax rate of 30%, because we generate a majority of our taxable income in Australia.

Liquidity and Capital Resources

As of June 30, 2003, WE GENERATED CASH OF $59.3 MILLION FROM OPERATIONS, PRIMARILY AS A RESULT OF INCREASED PROFIT AND IMPROVED WORKING CAPITAL MANAGEMENT, PARTICULARLY IN RESPECT OF INVENTORIES AND ACCOUNTS PAYABLE. DURING THE YEAR ENDED JUNE2005 and June 30, 2002 APPROXIMATELY $35.6 MILLION OF CASH WAS GENERATED BY OPERATIONS. CAPITAL EXPENDITURES FOR THE YEARS ENDED JUNE2004, we had cash and cash equivalents and marketable securities available-for-sale of $142.2 million and $140.9 million, respectively. Working capital was $141.7 million and $222.2 million at June 30, 2003 AND 2002 AGGREGATED $25.6 MILLION AND $28.2 MILLION RESPECTIVELY. THE MAJORITY OF THE EXPENDITURES FOR THE YEAR ENDED JUNE2005 and June 30, 2003 RELATED TO THE CONSTRUCTION OF OUR NEW MANUFACTURING FACILITY, ACQUISITION OF COMPUTER HARDWARE AND SOFTWARE INCLUDING A DISASTER RECOVERY SYSTEM, AND PURCHASE OF PRODUCTION TOOLING AND EQUIPMENT. THE CAPITAL EXPENDITURES IN THE YEAR ENDED JUNE2004 respectively. The reduction in working capital predominantly reflects the classification of our outstanding convertible subordinated notes due June 20, 2006 from a non- current liability as at June 30, 2002 PRIMARILY REFLECTED THE PURCHASE OF LAND IN SYDNEY DESCRIBED BELOW AND A COMPUTER SYSTEM UPGRADE. AS A RESULT OF THESE CAPITAL EXPENDITURES, OUR BALANCE SHEET REFLECTS NET PROPERTY, PLANT AND EQUIPMENT OF APPROXIMATELY $104.7 MILLION AT JUNE2004, to a current liability as at June 30, 2003 COMPARED TO $79.3 MILLION AT JUNE2005.

Inventories at June 30, 2002. DURING THE YEAR ENDED JUNE2005 increased by $33.3 million or 60% to $89.1 million compared to June 30, 2003 WE REPURCHASED $10.0 MILLION FACE VALUE OF OUR OUTSTANDING CONVERTIBLE SUBORDINATED NOTES. THE TOTAL PURCHASE PRICE OF THE NOTES WAS $9.4 MILLION, INCLUDING $0.2 MILLION IN ACCRUED INTEREST. WE RECOGNIZED A GAIN OF $0.3 MILLION, NET OF TAX OF $0.2 MILLION, ON THESE TRANSACTIONS. AT JUNE2004 inventories of $55.8 million. Excluding the incremental inventories from acquisitions, our inventories increased by $22.0 million or 39%. This percentage increase in inventories was higher than the increase of 25% in revenues in the year ended June 30, 2003, WE HAD CONVERTIBLE SUBORDINATED NOTES OUTSTANDING OF $113.2 MILLION. DURING THE YEAR ENDED JUNE2005 compared to the year ended June 30, 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. 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 OUR CURRENT OR FUTURE CONTRACTUAL OBLIGATIONS, IF ANY, THAT MAY DIRECTLY OR INDIRECTLY APPLY TO SUCH TRANSACTIONS. 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. 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. 2004. The higher inventory growth reflects management’s decision to increase inventory levels, particularly in raw materials, to accommodate our increasing production volumes. In addition to this, raw material inventories have increased to support production of our recently launched S8 flow generator. Accounts receivable at June 30, 2005 were $104.0 million, an increase of $36.8

- -29- 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 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 PAID IN OCTOBER 2002 AND $5.7 MILLION PAID IN APRIL 2003. WE EXPECT THE FIRST BUILDING, A MANUFACTURING FACILITY, TO BE OPERATIONAL ON THIS SITE IN THE FIRST HALF OF CALENDAR33 -


million or 55% over the June 30, 2004 accounts receivable balance of $67.2 million. Excluding the incremental increase from acquisitions, our accounts receivables have increased by $27.3 million or 41%. This increase was higher than the 25% incremental increase in revenues for the year ended June 30, 2005 compared to the year ended June 30, 2004. NEW RESEARCH AND DEVELOPMENT AND OFFICE FACILITIES ARE EXPECTED TO BE COMPLETED IN 2005. WE ESTIMATE THAT THE BUILDING COSTS WILL BE APPROXIMATELY $40.0 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. ON MAY 14, 2002 WE ACQUIRED ALL OF THE COMMON STOCK OF SERVO MAGNETICS INCORPORATED ("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 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. ON JUNE 6, 2002, THE BOARD OF DIRECTORS AUTHORIZED US TO REPURCHASE UP TO 4.0 MILLION SHARES OF OUR OUTSTANDING COMMON STOCK. FOR THE YEARS ENDED JUNEThe deterioration in ageing largely reflects higher than normal receivable balances relative to sales in Germany as delays in processing of invoices have also resulted in timing of collections being delayed. Accounts receivable days outstanding increased to 71 days for the year ended June 30, 2003 AND 2002, WE REPURCHASED 125,000 AND 290,000 SHARES AT A COST OF $3.5 MILLION AND $7.9 MILLION RESPECTIVELY. 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 JUNE2005, compared to 64 days for the year ended June 30, 2003 ARE AS FOLLOWS:
- --------------------------------------------------------------------------------------------------------------- Payments Due by Period - --------------------------------------------------------------------------------------------------------------- In $000's Total Less than 1 year 1-3 years 4-5 years After 5 years Long-Term Debt . . . . . . . . . . . . $ 113,250 - 113,250 - - Operating Leases . . . . . . . . . . . 14,440 5,134 6,388 2,196 722 Capital Leases . . . . . . . . . . . . - - - - - Unconditional Purchase Obligations (1) 29,967 29,967 - - - - --------------------------------------------------------------------------------------------------------------- Total Contractual Cash Obligations . . 157,657 $35,101 119,638 2,196 722 - ---------------------------------------------------------------------------------------------------------------
(1)2004. Our allowance for doubtful accounts as a percentage of total accounts receivable at June 30, 2005 and 2004 was 3.0% and 4.5%, respectively. The figure includes unconditional purchase obligationscredit quality of $30.0our customers remains consistent with our past experience.

During the year ended June 30, 2005, we generated cash of $71.1 million relatingfrom operations. This was lower than the cash generated from operations for the year ended June 30, 2004 of $76.5 million and primarily reflects the increase in inventory and receivables attributable to the factors described above.

Capital expenditures for the years ended June 30, 2005 and 2004 aggregated $39.7 million and $57.2 million respectively. For the year ended June 30, 2005, $23.5 million of the expenditure related to the construction of our new manufacturing facility. The capital expenditures in the year ended June 30, 2005 primarily reflected the construction of our new manufacturing, research and warehouse facilitydevelopment building, office facilities, computer hardware and software, rental and loan equipment and purchase of production tooling equipment and machinery. As a result of these capital expenditures, our balance sheet reflects net property, plant and equipment of approximately $174.2 million at NorwestJune 30, 2005 compared to $147.3 million at June 30, 2004.

We are currently building our new research and development and office facilities at our existing site in Sydney, Australia. Australia and expect this to be completed by the second half of calendar 2006. We estimate that the additional building costs for the new research and development and office facilities will be approximately $49.0 million. We expect to fund the project through a combination of cash on hand and cash generated from operations.

On May 16, 2005 we obtained a five-year loan of 50 million Euro, equivalent to $62.7 million, from HSBC Bank Australia Limited, to fund the acquisition of Saime SA.

On July 7, 2005, we purchased a 9.78-acre parcel of land in San Diego for $21.0 million. The new location at Kearney Mesa, San Diego will allow us to develop a new corporate headquarters. We expect to commence building during calendar year 2006 and begin moving into the facility in calendar 2007. As part of the funding of the purchase we drew down $10.0 million from our existing $15.0 million revolving line of credit with Union Bank of California.

Details of contractual obligations at June 30, 2005 are as follows:

      Payments Due by Period
In $000’s  Total  2006  2007  2008  2009  2010  Thereafter
Long-Term Debt  $173,694  $115,366  $4,534  $8,161  $12,392  $33,241  $-
Operating Leases   15,021   5,563   3,323   2,135   1,650   1,005   1,345
Capital Leases   675   69   69   69   69   69   330
Unconditional Purchase Obligations   49,047   45,674   3,373   -   -   -   -
Total Contractual Cash Obligations  $238,437  $166,672  $11,299  $10,365  $14,111  $34,315  $1,675

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Details of other commercial commitments at June 30, 20032005 are as follows:
- ---------------------------------------------------------------------------------------------------------------- In $000's Total Amounts Amount of Commitment Expiration Per Period Committed Less than 1 year 1-3 years 4-5 years Over 5 years - ---------------------------------------------------------------------------------------------------------------- Lines of Credit. . . . . . . . $ 118 118 - - - Standby Letters of Credit. . . - - - - - Guarantees*. . . . . . . . . . 2,378 - 793 - 1,585 Standby Repurchase Obligations - - - - - Other Commercial Commitments . - - - - - - ---------------------------------------------------------------------------------------------------------------- Total Commercial Commitments . $2,496 118 793 - 1,585 - ----------------------------------------------------------------------------------------------------------------
*THE ABOVE GUARANTEES RELATE TO GUARANTEES REQUIRED BY STATUTORY AUTHORITIES AS

In $000’s  Total
Amounts
Committed
  Amount of Commitment Expiration Per Period
    2006  2007  2008  2009  2010  Thereafter
Standby Letters of Credit   32   32   -   -   -   -   -
Guarantees*   1,190   -   439   -   211   -   540
Total Commercial Commitments  $1,222  $32  $439  $-  $211  $-  $540

*The above 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.

We expect to satisfy all of our short-term liquidity requirements through a combination of cash on hand, cash generated from operations and a $5.0 million undrawn revolving line of credit with Union Bank of California. Beyond this, we are currently reviewing our funding needs and existing facilities to provide flexibility for future business needs and facilitate the refinancing of our convertible notes should they not convert to common stock before maturity on June 20, 2006.

During the year ended June 30, 2005, we did not repurchase any convertible subordinated notes. Our convertible subordinated notes are due to mature on June 20, 2006.

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 our current or future contractual obligations, if any, that may directly or indirectly apply to such transactions.

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 would be adversely affected by changes in foreign currency exchange rates. We manage this risk through foreign currency option contracts.

Critical Accounting Principles and Estimates

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, goodwill, impaired assets, intangible assets, income taxes, deferred tax valuation allowances and contingencies.

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.

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

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results in bad debt expense. We determine the adequacy of this allowance by continually evaluating individual customer receivables, considering a 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 goodwill, intangibles and other long-lived assets. 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 us. 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 our 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.

(6)    Revenue Recognition.    Revenue on product sales is recorded at the time of shipment, at which time title transfers to the customer. Revenue on product sales which require customer acceptance is not recorded until acceptance is received. Royalty revenue from license agreements is recorded when earned. Service revenue received in advance from service contracts is initially deferred and recognized ratably over the life of the service contract. Revenue received in advance from rental unit contracts is initially deferred and recognized ratably over the life of the rental contract. Revenue from sale of marketing and distribution rights is initially deferred and recognized ratably as revenue over the life of the contract. Freight charges billed to customers are included in revenue. All freight-related expenses are charged to cost of sales.

We do not offer a right of return or other recourse with respect to the sale of our products or similarly offer variable sale prices for subsequent events or activities. However, as part of our sales processes

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we may provide upfront discounts for large orders, one time special pricing to support new product introductions, sales rebates for centralized purchasing entities or price-breaks for regular order volumes. The costs of all such programs are recorded as an adjustment to revenue. In our domestic sales activities we use a number of Manufacturer Representatives to sell our products. These representatives are paid a direct commission on sales and act as an integral component of our domestic sales force. We do not sell our products to these representatives, and do not recognize revenue on such shipments. Our products are predominantly therapy-based equipment and require no installation. As such, we have no significant installation obligations.

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board, (“FASB”), issued SFAS 123(R), “Share-Based Payment”, which is a revision of SFAS 123. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure will no longer be an alternative. This statement also eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25. The statement, which was delayed, is effective at the beginning of the fiscal year beginning after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. The accounting provision SFAS 123(R) is effective beginning in our interim period ending September 30, 2005.

SFAS 123(R) permits public companies to adopt its requirements using one of two methods: (1) A PRE-REQUISITE TO DEVELOPING OUR SITE AT NORWEST AND REQUIREMENTS UNDER CONTRACTUAL OBLIGATIONS WITH INSURANCE COMPANIES TRANSACTING WITH OUR GERMAN SUBSIDIARIES. “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees before the effective date of SFAS 123(R) that remain unvested on the effective date; or (2) A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. We expect to adopt the modified prospective method.

As permitted by SFAS 123, we currently account for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options, which are granted with exercise prices equal to the fair market value of our common stock on the date of grant. We are currently reviewing the impact of the adoption of SFAS 123(R) however we expect the adoption of SFAS 123(R) will have a significant impact on our results of operations.

In December 2004, the Financial Accounting Standards Board, (“FASB”), issued SFAS 153, “Exchanges of Non-monetary Assets, an Amendment of APB Opinion No. 29,’ Accounting for Non-monetary Transactions’.” The amendments are based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. SFAS 153 is effective for fiscal periods beginning after June 15, 2005, however earlier application is permitted for non-monetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this statement will be applied prospectively. We do not believe the adoption of this statement will have a material impact on our financial condition or results of operations.

In November 2004, the Financial Accounting Standards Board (“FASB”), issued SFAS 151, “Inventory Costs”, which sought to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. SFAS 151 also requires that the allocation of fixed

- -30- 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 WOULD 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, CASH GENERATED FROM OPERATIONS AND A $15.0 MILLION UNDRAWN REVOLVING LINE OF CREDIT WITH UNION BANK OF CALIFORNIA. CRITICAL ACCOUNTING PRINCIPLES AND ESTIMATES 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, GOODWILL, IMPAIRED ASSETS, INTANGIBLE ASSETS, INCOME TAXES AND CONTINGENCIES. 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. 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 A 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 US. 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.37 - -31- (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 OUR 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. (6) REVENUE RECOGNITION. REVENUE ON PRODUCT SALES IS RECORDED AT THE TIME OF SHIPMENT, AT WHICH TIME TITLE TRANSFERS TO THE CUSTOMER. REVENUE ON PRODUCT SALES WHICH REQUIRE CUSTOMER ACCEPTANCE IS NOT RECORDED UNTIL ACCEPTANCE IS RECEIVED. ROYALTY REVENUE FROM LICENSE AGREEMENTS IS RECORDED WHEN EARNED. SERVICE REVENUE RECEIVED IN ADVANCE FROM SERVICE CONTRACTS IS INITIALLY DEFERRED AND RECOGNIZED RATABLY OVER THE LIFE OF THE SERVICE CONTRACT. REVENUE RECEIVED IN ADVANCE FROM RENTAL UNIT CONTRACTS IS INITIALLY DEFERRED AND RECOGNIZED RATABLY OVER THE LIFE OF THE RENTAL CONTRACT. REVENUE FROM SALE OF MARKETING AND DISTRIBUTION RIGHTS IS INITIALLY DEFERRED AND RECOGNIZED RATABLY AS REVENUE OVER THE LIFE OF THE CONTRACT. FREIGHT CHARGES BILLED TO CUSTOMERS ARE INCLUDED IN REVENUE. ALL FREIGHT-RELATED EXPENSES ARE CHARGED TO COST OF SALES. WE DO NOT OFFER A RIGHT OF RETURN OR OTHER RECOURSE WITH RESPECT TO THE SALE OF OUR PRODUCTS OR SIMILARLY OFFER VARIABLE SALE PRICES FOR SUBSEQUENT EVENTS OR ACTIVITIES. HOWEVER, AS PART OF OUR SALES PROCESSES WE MAY PROVIDE UPFRONT DISCOUNTS FOR LARGE ORDERS, ONE TIME SPECIAL PRICING TO SUPPORT NEW PRODUCT INTRODUCTIONS, SALES REBATES FOR CENTRALIZED PURCHASING ENTITIES OR PRICE-BREAKS FOR REGULAR ORDER VOLUMES. THE COSTS OF ALL SUCH PROGRAMS ARE RECORDED AS AN ADJUSTMENT TO REVENUE. IN OUR DOMESTIC SALES ACTIVITIES WE USE A NUMBER OF MANUFACTURER REPRESENTATIVES TO SELL OUR PRODUCTS. THESE REPRESENTATIVES ARE PAID A DIRECT COMMISSION ON SALES AND ACT AS AN INTEGRAL COMPONENT OF OUR DOMESTIC SALES FORCE. WE DO NOT SELL OUR PRODUCTS TO THESE REPRESENTATIVES, AND DO NOT RECOGNIZE REVENUE ON SUCH SHIPMENTS. OUR PRODUCTS ARE PREDOMINANTLY THERAPY BASED EQUIPMENT AND REQUIRE NO INSTALLATION. AS SUCH, WE HAVE NO SIGNIFICANT INSTALLATION OBLIGATIONS. - -32- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS IN MAY 2003, THE FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB") ISSUED STATEMENT OF FINANCIAL ACCOUNTING STANDARD ("SFAS") 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY.


production overheads to the costs of conversion be based on the normal operating capacity of the production facilities. SFAS 150 REQUIRES THAT CERTAIN FINANCIAL INSTRUMENTS, WHICH UNDER PREVIOUS GUIDANCE WERE ACCOUNTED FOR AS EQUITY, MUST NOW BE ACCOUNTED FOR AS LIABILITIES. THE FINANCIAL INSTRUMENTS AFFECTED INCLUDE MANDATORY REDEEMABLE STOCK, CERTAIN FINANCIAL INSTRUMENTS THAT REQUIRE OR MAY REQUIRE THE ISSUER TO BUY BACK SOME OF ITS SHARES IN EXCHANGE FOR CASH OR OTHER ASSETS AND CERTAIN OBLIGATIONS THAT CAN BE SETTLED WITH SHARES OF STOCK. SFAS 150 IS EFFECTIVE FOR ALL FINANCIAL INSTRUMENTS ENTERED INTO OR MODIFIED AFTER MAY 31, 2003, AND OTHERWISE IS EFFECTIVE AT THE BEGINNING OF THE FIRST INTERIM PERIOD BEGINNING AFTER JUNE151 is effective for fiscal years beginning after June 15, 2003. THE COMPANY INTENDS TO ADOPT SFAS NO. 150 EFFECTIVE JULY 1, 2003 AND DOES NOT BELIEVE THAT THE ADOPTION WILL HAVE A MATERIAL IMPACT ON ITS CONSOLIDATED FINANCIAL POSITION OR RESULTS OF OPERATION. IN APRIL 2003, THE FASB ISSUED SFAS 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, WHICH AMENDS AND CLARIFIES FINANCIAL ACCOUNTING AND REPORTING FOR DERIVATIVE INSTRUMENTS, INCLUDING CERTAIN DERIVATIVE INSTRUMENTS EMBEDDED IN OTHER CONTRACTS AND FOR HEDGING ACTIVITIES UNDER2005. We do not believe the adoption of this statement will have a material impact on our financial condition or results of operations.

ITEM 7AQUANTITATIVEAND QUALITATIVE DISCLOSURESABOUT MARKETAND BUSINESS RISKS

Foreign Currency Market Risk

Our functional currency is the U.S. dollar, although the financial statements of our non-U.S. subsidiaries are maintained in their respective local currencies. 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. We have determined our hedge program to be a non-effective hedge as defined under SFAS 133. SFAS 149 IS EFFECTIVE FOR CONTRACTS ENTERED INTO OR MODIFIED AFTER JUNEThe foreign currency derivatives portfolio is recorded in the consolidated balance sheets at fair value and included in other assets or other liabilities. All movements in the fair value of the foreign currency derivatives are recorded within other income, net on our consolidated statements of income.

- 38 -


The table below provides information (in U.S. dollars) on our foreign-currency-denominated financial assets by legal entity functional currency as of June 30, 2003. THE COMPANY IS CURRENTLY EVALUATING THE IMPACT OF THIS STATEMENT. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET AND BUSINESS RISKS FOREIGN CURRENCY MARKET RISK OUR FUNCTIONAL CURRENCY IS THE2005 (in thousands):

  Foreign Currency Financial Assets 
  Australian
Dollar
(AUD)
  

US
Dollar

(USD)

  

Euro

(EUR)

  Great
Britain
Pound
(GBP)
  Singapore
Dollar
(SGD)
  

New
Zealand

Dollar
(NZD)

  

Swedish

Krona
(SEK)

 Swiss
Franc
(CHF)
  Japanese
Yen
(JPY)
 

AUD

                                   
Functional Currency Entities:                                   
Assets $-  $86,592  $86,799  $2,925  $975  $1,600  $730 $705  $- 
Liability  -   (19,738)  (61,160)  (6,132)  (52)  (22)  -  -   (497)
Net Total  -   66,854   25,639   (3,207)  923   1,578   730  705   (497)
USD                                   
Functional Currency Entities:                                   
Assets  23,846   -   4,676   -   -   -   -  -   - 
Liability $-   -   -   -   -   -   -  -   - 
Net Total  23,846   -   4,676   -   -   -   -  -   - 
EURO                                   
Functional Currency Entities:                                   
Assets  4,675   3,950   -   -   -   -   -  266   - 
Liability  (59)  (295)  -   -   -   -   -  (511)  - 
Net Total  4,616   3,655   -   -   -   -   -  (245)  - 
GBP                                   
Functional Currency Entities:                                   
Assets  -   2,775   1,694   -   -   -   -  -   - 
Liability  -   -   -   -   -   -   -  -   - 
Net Total  -   2,775   1,694   -   -   -   -  -   - 
CHF                                   
Functional Currency Entities:                                   
Assets  763   4   69   9   -   -   -  -   - 
Liability  -   (4)  (16)  (19)  -   -   -  -   - 
Net Total $763  $-  $53  $(10) $-  $-  $- $-  $- 

- 39 -


The table below provides information about our foreign currency derivative financial instruments and presents the information in U.S. DOLLAR, ALTHOUGH WE TRANSACT BUSINESS IN VARIOUS FOREIGN CURRENCIES, INCLUDING 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, 2005. 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.

(In thousands except exchange
rates)
      Fair Value
Assets /
(Liabilities)
      As of June 30
 FY 2006 FY 2007 Total  2005 2004

Foreign Exchange Call Options

           

(Receive AUD$/Pay U.S.$)

           

Option amount

 $66,000 $36,000 $102,000  $2,240 $1,816

Average contractual exchange rate

 AUD $1 = USD 0.747 AUD $1 = USD 0.788 AUD $1 = USD 0.761     

(Receive AUD$/Pay Euro)

           

Option amount

 $21,762 $21,762 $43,524  $758 $180

Average contractual exchange rate

 AUD $1 = Euro 0. 62 AUD $1 = Euro 0.66 AUD $1 = Euro 0.64     

Interest Rate Risk

We are exposed to risk associated with changes in interest rates affecting the return on our cash and cash equivalents and debt. At June 30, 2005 we had total long-term debt, including the current portion of those obligations, of $174.4 million. Of this debt, $113.9 million is at fixed interest rates and $60.5 million is subject to variable interest rates.

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. THE TABLE BELOW PROVIDES INFORMATION (IN US DOLLARS) ON OUR FOREIGN-CURRENCY-DENOMINATED FINANCIAL ASSETS BY LEGAL ENTITY FUNCTIONAL CURRENCY AS OF JUNEhypothetical 10% change in interest rates during the twelve months ended June 30, 2003 (IN THOUSANDS):
- ---------------------------------------------------------------------------------------------------------- Foreign Currency Financial Assets - ---------------------------------------------------------------------------------------------------------- Australian US dollar Euro Great Singapore NZ dollar Swedish Swiss Franc dollar (AUD) (USD) Britain dollar Krona Pound - ---------------------------------------------------------------------------------------------------------- AUD Functional Currency Entities: Assets . . $- 29,609 9,849 1,782 1,547 961 648 128 Liability. $- (6,620) (69) (5,173) (926) (5) (20) - Net Total. $- 22,989 9,780 (3,391) 621 956 628 128 USD Functional Currency Entities: Assets . . $23,711 - - - - - - - Liability. $- - - - - - - - Net Total. $23,711 - - - - - - - Euro : Functional Currency Entities: Assets . . $ 9,726 69 - - - - - 1,251 Liability. $- (227) - - - - - - - ---------------------------------------------------------------------------------------------------------- Net Total. $ 9,726 (158) - - - - - 1,251 - ----------------------------------------------------------------------------------------------------------
THE TABLE BELOW PROVIDES INFORMATION ABOUT OUR FOREIGN CURRENCY DERIVATIVE FINANCIAL INSTRUMENTS AND PRESENTS THE INFORMATION IN2005, would not have a material impact on pretax income. We have no interest rate hedging agreements.

Forward-Looking Statements

This report on Form 10-K contains or may contain certain forward-looking statements and information that are based on our management’s beliefs, as well as on 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 our products, such as the cardiovascular and stroke markets. These forward-looking statements are made under the safe harbor provisions of the 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, 2003. 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. Private Securities Litigation Reform Act of 1995. You should not unduly rely on these forward-looking statements. Forward-looking statements reflect the views of our management at the time the 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 under the caption “Risk Factors” 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

- -33-
- ------------------------------------------------------------------------------------------------------------------- Fair Value Assets/ (Liabilities) - ------------------------------------------------------------------------------------------------------------------- (In thousands except exchange rates) FY 2004 FY 2005 Total As of June 30 2003 2002 - ------------------------------------------------------------------------------------------------------------------- Foreign Exchange Call Options (Receive AUD$/Pay U.S.$) Option amount. . . . . . . . . . . $66,000 $24,000 $90,000 $2,026 $2,341 Average contractual exchange rate. AUD $1 = USD 0.662 AUD $1=USD 0.647 AUD $1 = USD 0.658 (Receive AUD$/Pay Euro) Option amount. . . . . . . . . . . $20,538 $13,928 $34,466 $552 $423 Average contractual exchange rate. AUD $1 = Euro 0.590 AUD $1 = Euro 0.580 AUD $1 = Euro 0.586 - -------------------------------------------------------------------------------------------------------------------
INTEREST RATE RISK WE ARE EXPOSED TO RISK ASSOCIATED WITH CHANGES IN INTEREST RATES AFFECTING THE RETURN ON OUR INVESTMENTS. AT JUNE 30, 2003, 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, 2003, WOULD HAVE RESULTED IN APPROXIMATELY $0.8 MILLION CHANGE IN PRETAX INCOME. IN ADDITION, THE VALUE OF OUR MARKETABLE SECURITIES WOULD CHANGE BY APPROXIMATELY $0.7 MILLION FOLLOWING A HYPOTHETICAL 100 BASIS POINT CHANGE IN INTEREST RATES. WE DO NOT USE DERIVATIVE FINANCIAL INSTRUMENTS IN OUR INVESTMENT PORTFOLIO. 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 OUR 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.40 - -34- 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 SLEEP-DISORDERED BREATHING 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. 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 OBSTRUCTIVE SLEEP APNEA 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. THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO MARKET EFFECTIVELY TO HOME HEALTH CARE DEALERS AND SLEEP CLINICS TO ENSURE THAT OUR PRODUCTS ARE PROPERLY MARKETED AND SOLD BY THESE THIRD PARTIES. WE HAVE LIMITED RESOURCES TO MARKET TO THE MORE THAN 2,500


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 sleep-disordered breathing 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, manufacture and market innovative new 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 make our products 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.

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 obstructive sleep apnea 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. The success of our business depends on our ability to market effectively to home health care dealers and sleep clinics to ensure that our products are properly marketed and sold by these third parties.

We have limited resources to market to approximately 3,000 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. WE HAVE EXPANDED OUR MARKETING ACTIVITIES TO TARGET THE POPULATION WITH A PREDISPOSITION TO SLEEP- DISORDERED BREATHING AS WELL AS PRIMARY CARE PHYSICIANS AND VARIOUS MEDICAL SPECIALISTS. WE CANNOT ASSURE YOU THAT THESE MARKETING EFFORTS WILL BE SUCCESSFUL IN INCREASING AWARENESS OF OUR PRODUCTS. - -35- ANY INABILITY TO EFFECTIVELY MARKET OUR PRODUCTS OUTSIDE THEsleep clinics and the more than 6,000 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.

We have expanded our marketing activities to target the population with a predisposition to sleep- disordered breathing as well as primary care physicians and various medical specialists. We cannot assure you that these marketing efforts will be successful in increasing awareness or sales of our products.

Any inability to effectively market our products outside the U.S. COULD IMPACT OUR PROFITABILITY. APPROXIMATELY HALF OUR REVENUES ARE GENERATED OUTSIDE THEcould impact our profitability.    Approximately half our revenues are generated outside the U.S., IN APPROXIMATELYin approximately 60 DIFFERENT COUNTRIES. MANY OF THESE COUNTRIES HAVE UNIQUE REGULATORY, MEDICAL, AND BUSINESS ENVIRONMENTS. IF WE ARE UNABLE TO MARKET OUR PRODUCTS EFFECTIVELY OUTSIDE THEdifferent countries. Many of these countries have unique regulatory, medical, and business environments. If we are unable to effectively market our products outside the U.S., OUR OVERALL FINANCIAL PERFORMANCE COULD DECLINE. 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 ON 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 ACQUISITIONS WITH OUR OPERATIONS, OUR BUSINESS COULD SUFFER. THE INTEGRATION OF OUR ACQUIRED OPERATIONS REQUIRES SIGNIFICANT EFFORTS FROM OUR COMPANY AND THE ACQUIRED ENTITY, FOR SEVERAL YEARS AFTER EACH ACQUISITION. ALTHOUGH WE ACQUIRED OURour overall financial performance could decline.

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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 on 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 acquisitions with our operations, our business could suffer.     During the fiscal year ended June 30, 2005 we acquired Saime SA, Hoefner and Resprecare. We are currently in the process of integrating our operations with these recent acquisitions. The integration will require significant efforts from each company. We may find it difficult to integrate the operations as personnel may leave, licensees, distributors or suppliers may terminate their arrangements, or demand amended terms to these arrangements. Additionally, our management may have their attention diverted while trying to integrate these 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, we may not realize the anticipated benefits of these acquisitions

If we fail to properly implement restructure plans, our business could suffer.    We recently merged the operations of ResMed Germany and MAP SUBSIDIARY IN FEBRUARY 2001, OUR LABHARDT SUBSIDIARY IN NOVEMBER 2001, AND OUR SERVO MAGNETICS SUBSIDIARY IN MAY 2002, WE CONTINUE TO ADJUST OUR BUSINESS STRATEGIES, EQUIPMENT, AND PERSONNEL TO ACHIEVE MAXIMUM EFFICIENCIES AND SUCCESS. IF WE ARE NOT ABLE TO SUCCESSFULLY INTEGRATE THE OPERATIONS OF OUR ACQUIRED ENTITIES, WE MAY NOT FULLY REALIZE THE ANTICIPATED BENEFITS OF THE ACQUISITIONS. WE MANUFACTURE SUBSTANTIALLY ALL OF OUR PRODUCTS OUTSIDE THEinto a single operating unit as part of our German restructure plan. We have relocated our ResMed Germany operations to Munich, and are integrating the back office functions, including customer service, logistics and administration. We will continue to monitor the progress of this restructure and adjust our business strategies and personnel accordingly to achieve maximum efficiencies, cost savings and success. If we are not able to successfully integrate the operations we may not fully realize the anticipated benefits of the restructure.

Changes in assumptions used in the purchase accounting of our recent acquisitions may impact our future operating results.    The acquisitions have been accounted for using purchase accounting and accordingly have been included in the company’s operations since the date of acquisition. We allocate the purchase price according to the fair value of assets and liabilities assumed, intangible assets and in process research and development as at the date of acquisition. The excess of the purchase price over the fair values of acquired net assets is recorded as goodwill. We utilize independent appraisals with our own internal studies and management assumptions to estimate the fair values. If our estimates change due to inaccurate assumptions or other circumstances our future financial results maybe impacted. This may result in goodwill becoming impaired and changes to the amount of amortization charges of certain identifiable intangible assets.

We manufacture substantially all of our products outside the U.S. 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 52%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 49%, 51%, AND 48% OF OUR NET REVENUES IN FISCAL YEARSand 52% of our net revenues in fiscal years 2005, 2004 and 2003, 2002 AND 2001, RESPECTIVELY. WE EXPECT THAT SALES WITHIN THESE AREAS WILL ACCOUNT FOR APPROXIMATELYrespectively. 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 ANDof 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 U.S. operations, including:

fluctuations in currency exchange rates;

tariffs and other trade barriers;

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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 U.S. 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 payers 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 the product, that the reimbursement amount will be adequate or, that the reimbursement amount even if initially 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 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 payers directly for reimbursement for our products. However, we are still subject to laws and regulations relating to governmental reimbursement programs, particularly Medicaid and Medicare.

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 health care 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 and other governments 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 health care 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 do bill third party payers. Any violation of these laws and regulations could result in civil and criminal penalties, including fines.

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In addition to reimbursement for our products, our customers depend in part on reimbursement by government and private health insurers for other products. During fiscal year 2004, the US Government proposed reductions in reimbursement rates for some of these other products. Such proposed reductions, if they occur, may have a material impact on our customers. Any material impact on our customers may indirectly affect our sales to those customers, or the collectibility of receivables we have from those customers.

Complying with Food and Drug Administration 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 our business activities. Failure to comply with these regulations could result in, among other things, recalls of our products, substantial fines and criminal charges against us or against our employees. A SIGNIFICANT PORTION OF OUR MANUFACTURING COSTS ARE DENOMINATED IN LOCAL CURRENCIES AND NOT INrecall or other regulatory action could increase our costs, damage our reputation, and materially affect operating results.

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 and profits 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 before 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. 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 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.

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 various suppliers, including some who are single-source suppliers for us. 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.

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A SIGNIFICANT PORTION OF OUR BUSINESS AND THATreduction or halt in supply while a replacement supplier reconfigures its components, or while we reconfigure our devices 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

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.

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.

We are subject to potential 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 SIGNIFICANT PORTION OF OUR MANUFACTURING COSTS WILL CONTINUE TO BE DENOMINATED IN AUSTRALIAN DOLLARS. successful product liability

- -36- 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 PAYERS ARE INCREASINGLY CHALLENGING THE PRICES CHARGED FOR MEDICAL PRODUCTS AND SERVICES. THEREFORE, EVEN IF45 -


claim brought against us in excess of our insurance coverage, if any, may require us to pay substantial amounts, which could harm our business.

We are subject to tax audits by various tax authorities in many jurisdictions.    From time to time we may be audited by the tax authorities and are still subject to an ongoing German tax audit. Any final assessment resulting from this audit could result in material changes to our past or future taxable income, tax payable or deferred tax assets, and could require us to pay penalties and interest that could materially adversely affect our financial results.

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;

the effect of foreign currency transaction gains or losses; and

other activities of our competitors.

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 and profitability will decline.    Our 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.

Delaware law, provisions in our charter and our shareholder rights plan could make it difficult for another company to acquire us.    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 security holders. 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 PRODUCT IS APPROVED FOR MARKETING, WE CANNOT ASSURE YOU THAT REIMBURSEMENT WILL BE ALLOWED FOR THE 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 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 PAYERS DIRECTLY FOR REIMBURSEMENT FOR OUR PRODUCTS. HOWEVER, WE ARE STILL SUBJECT TO LAWS AND REGULATIONS RELATING TO GOVERNMENTAL REIMBURSEMENT PROGRAMS, PARTICULARLY MEDICAID AND MEDICARE. 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 FORJunior 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

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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 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 AND OTHER GOVERNMENTS 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 DO BILL THIRD PARTY PAYERS. ANY VIOLATION OF THESE LAWS AND REGULATIONS COULD RESULT IN CIVIL AND CRIMINAL PENALTIES, INCLUDING FINES. COMPLYING WITH FOOD AND DRUG ADMINISTRATION 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 OUR BUSINESS ACTIVITIES. FAILURE TO COMPLY WITH THESE 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. - -37- WE CANNOT ASSURE YOU THAT ANY NEW PRODUCTS WE DEVELOP WILL RECEIVE REQUIRED REGULATORY APPROVALS FROMsubstantial portion of our assets are located outside the United States. Additionally, two of our eight directors and two of our six executive 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. 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. 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 VARIOUS SUPPLIERS, INCLUDING SOME IN WHICH WE USE 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 DEVICES 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 -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. - -38- 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. WE ARE SUBJECT TO POTENTIAL 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 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; -THE EFFECT OF FOREIGN CURRENCY TRANSACTION GAINS OR LOSSES; AND -OTHER ACTIVITIES OF OUR COMPETITORS. - -39- 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. OUR 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. DELAWARE LAW, PROVISIONS IN OUR CHARTER AND OUR SHAREHOLDER RIGHTS PLAN COULD MAKE IT DIFFICULT FOR ANOTHER COMPANY TO ACQUIRE US. 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 SECURITY HOLDERS. 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 OFcourts relating to any liabilities under 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 SEVEN 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 OFsecurities 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. 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. ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA securities laws against these assets or these persons in Australian courts.

ITEM 8CONSOLIDATED FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA

a)Index to Consolidated Financial Statements

Report of Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Registered Public Accounting Firm

F1

Consolidated Balance Sheets as of June 30, 20032005 and 2002 . . . . . . . . . . . . . . . . . . . . 2004

F2

Consolidated Statements of Income for the years ended June 30, 2003, 20022005, 2004 and 2001 . . . . . . . 2003

F3

Consolidated Statements of Stockholders'Stockholders’ Equity for the years ended June 30, 2003, 20022005, 2004 and 2001 2003

F4

Consolidated Statements of Cash Flows for the years ended June 30, 2003, 20022005, 2004 and 2001 . . . . . 2003

F5

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . for the years ended June 30, 2005 and 2004

F6

Schedule II - Valuation and Qualifying Accounts and Reserves . . . . . . . . . . . . . . . . . .

b)Supplementary Data

Quarterly Financial Information (unaudited)—The quarterly results for the years ended June 30, 2005 and 2004 are summarized below (in thousands, except per share amounts):

2005  First
Quarter
  Second
Quarter
  Third
Quarter
  Fourth
Quarter
  Fiscal
Year

Net revenues

  $87,733  $103,893  $108,454  $125,425  $425,505

Gross profit

   56,411   68,378   70,295   79,776   274,860

Net income

   13,926   17,404   17,877   15,578   64,785
  

Basic earnings per share

  $0.41  $0.51  $0.52  $0.45  $1.89

Diluted earnings per share

  $0.39  $0.49  $0.50  $0.43  $1.82

2004  First
Quarter
  Second
Quarter
  Third
Quarter
  Fourth
Quarter
  Fiscal
Year

Net revenues

  $72,878  $  82,292  $  91,277  $  92,891  $339,338

Gross profit

   47,158   52,424   57,550   59,604   216,736

Net income

   12,249   14,151   15,029   15,855   57,284
  

Basic earnings per share

  $0.36  $0.42  $0.45  $0.47  $1.70

Diluted earnings per share

  $0.35  $0.40  $0.43  $0.45  $1.63

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.

- 47 -


ITEM 9CHANGESINAND DISAGREEMENTSWITH ACCOUNTANTSON ACCOUNTINGAND FINANCIAL DISCLOSURE
B) SUPPLEMENTARY DATA

None.

ITEM 9ACONTROLSAND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2005. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

MANAGEMENTS REPORTON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that:

(i)Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii)Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii)Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

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

- -40- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)48 - THE QUARTERLY RESULTS FOR THE YEARS ENDED JUNE


Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2005. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of ResMed, Inc.’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.

Based on our assessment and those criteria, management has concluded that the Company did maintain effective internal control over financial reporting as of June 30, 2005.

KPMG LLP, independent registered public accounting firm, who audited and reported on the consolidated financial statements of ResMed, Inc. included in this report, has issued an attestation report on management’s assessment of internal control over financial reporting.

Scope of Management’s Report

Management’s assessment of the effectiveness of internal control over financial reporting excludes the evaluation of the internal controls over financial reporting of Saime, Hoefner and Resprecare, which were acquired purchase business combinations on May 19, 2005, February 8, 2005 and December 14, 2004, respectively. Purchase combinations excluded from fiscal 2005 scope represents approximately 20% of the total assets and approximately 3% of the net sales, respectively, of our consolidated financial statements as of June 30, 2005 and the year ended June 30, 2005.

- 49 -


RESMED INC. AND SUBSIDIARIES

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

ResMed Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that ResMed Inc. maintained effective internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). ResMed Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

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

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

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

- 50 -


RESMED INC AND SUBSIDIARIES

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

In our opinion, management’s assessment that ResMed Inc. maintained effective internal control over financial reporting as of June 30, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, ResMed Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

ResMed Inc. acquired Saime, Hoefner and Resprecare during 2005, and management excluded from its assessment of the effectiveness of ResMed Inc.’s internal control over financial reporting as of June 30, 2005, Saime, Hoefner and Resprecare’s internal control over financial reporting associated with total assets of 20% and total revenues of 3% included in the consolidated financial statements of ResMed Inc. and subsidiaries as of and for the year ended June 30, 2005. Our audit of internal control over financial reporting of ResMed Inc. also excluded an evaluation of the internal control over financial reporting of Saime, Hoefner and Resprecare.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of ResMed Inc. and subsidiaries as of June 30, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended June 30, 2005, and our report dated September 10, 2005 expressed an unqualified opinion on those consolidated financial statements.

/s/    KPMG LLP


San Diego, California

September 10, 2005

ITEM 9BOTHER INFORMATION

None.

- 51 -



PART III


ITEM 10DIRECTORSAND EXECUTIVE OFFICERSOFTHE REGISTRANT

Incorporated by reference to our definitive Proxy Statement for our November 18, 2005, meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2005.

ITEM 11EXECUTIVE COMPENSATION

Incorporated by reference to our definitive Proxy Statement for our November 18, 2005, meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2005.

ITEM 12SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERSAND MANAGEMENTAND RELATED STOCKHOLDER MATTERS

Incorporated by reference to our definitive Proxy Statement for our November 18, 2005, meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2005.

ITEM 13CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS

No material transactions.

ITEM 14PRINCIPALACCOUNTANT FEESAND SERVICES

Incorporated by reference to our definitive Proxy Statement for our November 18, 2005, meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2005.


PART IV


ITEM 15EXHIBITSAND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

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
3.1Certificate of Incorporation of Registrant, as amended(1)
3.2By-laws of Registrant(1)
4.1Form of certificate evidencing shares of Common Stock(1)
4.2Rights agreement dated as of April 23, 1997(2)

- 52 -


4.3Indenture dated as of June 20, 2001, between ResMed Inc and American Stock Transfer & Trust Company(5)
4.4Registration 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(5)
4.5Registration Rights Agreement dated as of May 14, 2002 between ResMed Inc, and Mr Leslie Hoffman(6)
10.11995 Stock Option Plan(1)
10.21997 Equity Participation Plan(3)
10.3Licensing Agreement between the University of Sydney and ResMed Limited dated May 17, 1991, as amended(1)
10.5Loan Agreement between the Australian Trade Commission and ResMed Limited dated May 3, 1994(1)
10.6Lease for 10121 Carroll Canyon Road, San Diego CA 92131-1109, USA(4)
10.7Sale and Leaseback Agreements for 97 Waterloo Rd, North Ryde, Australia(5)
10.8Employment Agreement dated as of May 14, 2002, between Servo Magnetics Acquisition Inc., and Mr Leslie Hoffman(6)
10.9Agreement for the purchase of Lot 6001, Norwest Boulevarde, Norwest Business Park, Baulkham Hills, Australia(6)
10.102003 Employee Stock Purchase Plan(7)
10.11Loan Agreement between ResMed Limited and HSBC Bank Australia Limited
10.12Saime Purchase Agreement
21.1Subsidiaries of the Registrant
23.1Independent Registered Public Accounting Firm’s Consent and Report on Schedule
31.1Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

(2)Incorporated by reference to the Registrant’s Registration Statement on Form 8-A12G filed on April 25, 1997.

(3)Incorporated by reference to the Registrant’s 1997 Proxy Statement.

(4)Incorporated by reference to the Registrant’s Report on Form 10-K dated June 30, 1998.

(5)Incorporated by reference to the Registrant’s Report on Form 10-K for the year ended June 30, 2001.

(6)Incorporated by reference to the Registrant’s Report on Form 10-K for the year ended June 30, 2002.

(7)Incorporated by reference to the Registrant’s 2003 Proxy Statement.

- 53 -


RESMED INC. AND SUBSIDIARIES

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2005, and 2004, 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, 2005. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ResMed Inc. and subsidiaries as of June 30, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements, taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of ResMed Inc.’s internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 10, 2005, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP


San Diego, California

September 10, 2005

F1


RESMED INC AND SUBSIDIARIES

Consolidated Balance Sheets

June 30, 2005 and 2004

(In thousands, except share and per share data)

   June 30,
2005
  June 30,
2004
 
   


Assets

         

Current assets:

         

Cash and cash equivalents

  $142,185  $128,907 

Marketable securities available for sale (note 4)

   -   12,021 

Accounts receivable, net of allowance for doubtful accounts of $3,199 and $3,197 at June 30, 2005 and 2004, respectively

   103,951   67,242 

Inventories, net (note 5)

   89,107   55,797 

Deferred income taxes (note 14)

   15,230   12,033 

Prepaid expenses and other current assets

   9,737   6,821 
   


Total current assets

   360,210   282,821 

Property, plant and equipment, net of accumulated depreciation of $88,970 and $60,330 at June 30, 2005 and 2004, respectively (note 7)

   174,168   147,268 

Goodwill (note 8)

   181,106   106,075 

Other intangibles (note 8)

   49,371   4,814 

Other assets

   9,291   8,173 
   


Total non-current assets

   413,936   266,330 
   


Total assets

  $774,146  $549,151 
   


Liabilities and Stockholders’ Equity

         

Current liabilities:

         

Accounts payable

  $34,416  $18,574 

Accrued expenses (note 9)

   34,414   22,591 

Deferred Revenue

   12,327   8,759 

Income taxes payable

   21,959   8,470 

Current portion of deferred profit on sale-leaseback

   -   2,197 

Current portion of long-term debt (note 10)

   115,435   - 
   


Total current liabilities

   218,551   60,591 

Non-current liabilities:

         

Deferred income taxes (note 14)

   11,695   4,992 

Deferred revenue

   10,901   8,819 

Long-term debt (note 10)

   58,934   113,250 
   


Total non-current liabilities

   81,530   127,061 
   


Total liabilities

   300,081   187,652 
   


Commitments and contingencies (notes 17, 18 and 19)

   -   - 

Stockholders’ equity: (note 12)

         

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 35,000,540 at June 30, 2005 and 33,858,272 at June 30, 2004

   140   135 

(excluding 1,127,459 and 886,369 shares held as Treasury Stock respectively)

         

Additional paid-in capital

   180,005   132,875 

Retained earnings

   282,441   217,656 

Treasury stock, at cost

   (41,405)  (30,440)

Accumulated other comprehensive income (note 6)

   52,884   41,273 
   


Total stockholders’ equity

   474,065   361,499 
   


Total liabilities and stockholders’ equity

  $774,146  $549,151 
   


See accompanying notes to consolidated financial statements.

F2


RESMED INC AND SUBSIDIARIES

Consolidated Statements of Income

Years Ended June 30, 2005, 2004 and 2003

(In thousands, except per share data)

   June 30,
2005
  June 30,
2004
  June 30,
2003
 
   


Net revenues

  $425,505  $339,338  $273,570 

Cost of sales

   150,645   122,602   100,483 
   


Gross profit

   274,860   216,736   173,087 
   


Operating expenses:

             

Selling, general and administrative

   135,703   104,706   85,313 

Research and development

   30,014   26,169   20,534 

Donations to Research Foundations

   500   500   - 

In-process research and development charge (note 20)

   5,268   -   - 

Amortization of acquired intangible assets

   870   -   - 

Restructuring expenses (note 11)

   5,152   -   - 
   


Total operating expenses

   177,507   131,375   105,847 
   


Income from operations

   97,353   85,361   67,240 
   


Other income (expenses):

             

Gain on extinguishment of debt

   -   -   529 

Interest income (expense), net

   (808)  (1,683)  (2,549)

Other, net (note 13)

   81   990   1,907 
   


Total other income (expenses), net

   (727)  (693)  (113)
   


Income before income taxes

   96,626   84,668   67,127 

Income taxes (note 14)

   31,841   27,384   21,398 
   


Net income

  $64,785  $57,284  $45,729 
   


Basic earnings per share

  $1.89  $1.70  $1.38 

Diluted earnings per share (note 2-j)

  $1.82  $1.63  $1.33 

Basic shares outstanding

   34,322   33,694   33,054 

Diluted shares outstanding

   37,471   35,125   34,439 

See accompanying notes to consolidated financial statements.

F3


RESMED INC AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Years ended June 30, 2005, 2004 and 2003

(In thousands)

   Common Stock  Additional
Paid-in
Capital
  Treasury Stock  Retained
Earnings
  Accumulated
Other
Comprehensive
Income (loss)
     Comprehensive
Income
 
   Shares  Amount    Shares  Amount     Total  

Balance, June 30, 2002

  33,108   132   94,153  (290)  (7,873)  114,643   (8,125)  192,930     

Common stock issued on exercise of options (note 12)

  678   2   9,029                  9,031     

Treasury stock purchases

             (125)  (3,542)          (3,542)    

Tax benefit from exercise of options

          4,250                  4,250     

Comprehensive income:

                                   

Net income

                     45,729       45,729   45,729 

Other comprehensive income

                                   

Foreign currency translation adjustments

                         38,131   38,131   38,131 

Unrealized losses on marketable securities

                         (96)  (96)  (96)
                                 


Comprehensive income/(loss)

                                $83,764 
                                 


                                    

Balance, June 30, 2003

  33,786   134   107,432  (415)  (11,415)  160,372   29,910   286,433     

Common stock issued on exercise of options (note 12)

  958   3   20,338                  20,341     

Treasury stock purchases

      (2)     (471)  (19,025)          (19,027)    

Tax benefit from exercise of options

          5,105                  5,105     

Comprehensive income (note 6):

                                   

Net income

                     57,284       57,284   57,284 

Other comprehensive income

                                   

Foreign currency translation adjustments

                         11,366   11,366   11,366 

Unrealized losses on marketable securities

                         (3)  (3)  (3)
                                 


Comprehensive income/(loss)

                                $68,647 
                                 


                                    

Balance, June 30, 2004

  34,744  $135  $132,875  (886) ($30,440) $217,656  $41,273  $361,499     

Common stock issued on exercise of options (note 12)

  1,317   5   36,770                  36,775     

Common stock issued on employee share purchase plan (note 12)

  67   1   2,650                  2,651     

Treasury stock purchases

      (1)     (241)  (10,965)          (10,966)    

Tax benefit from exercise of options

          7,710                  7,710     

Comprehensive income (note 6):

                                   

Net income

                     64,785       64,785   64,785 

Other comprehensive income

                                   

Foreign currency translation adjustments

                         11,617   11,617   11,617 

Unrealized losses on marketable securities

                         (6)  (6)  (6)
                                 


Comprehensive income/(loss)

                                $76,396 
                                 


                                    

Balance, June 30, 2005

  36,128  $140  $180,005  (1,127) ($41,405) $282,441  $52,884  $474,065     

See accompanying notes to consolidated financial statements.

F4


RESMED INC AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended June 30, 2005, 2004 and 2003

(In thousands)

   June 30,
2005
  June 30,
2004
  June 30,
2003
 
   


Cash flows from operating activities:

             

Net income

  $64,785  $57,284  $45,729 

Adjustments to reconcile net income to net cash provided by operating activities:

             

Depreciation and amortization

   28,292   17,867   12,583 

Provision for service warranties

   501   213   332 

Deferred income taxes

   (7,997)  1,259   2,002 

Foreign currency options revaluation

   293   982   (2,117)

Amortization of deferred borrowing costs

   834   804   834 

Tax benefit from stock options exercised

   7,710   5,105   4,250 

Gain on extinguishment of debt

   -   -   (529)

Release of profit on sale of building

   (2,371)  (2,440)  (2,012)

Purchased in-process research and development write off

   5,268   -   - 

Changes in operating assets and liabilities, net of effect of acquisitions:

             

Accounts receivable, net

   (27,996)  (13,129)  (6,102)

Inventories, net

   (22,562)  (6,722)  (2,988)

Prepaid expenses and other current assets

   558   15   (2,333)

Accounts payable, accrued expenses and other liabilities

   23,764   15,303   9,635 
   


Net cash provided by operating activities

   71,079   76,541   59,284 
   


Cash flows from investing activities:

             

Purchases of property, plant and equipment

   (39,691)  (57,246)  (25,635)

Purchases of marketable securities - available for sale

   (401,546)  (78,890)  (13,544)

Proceeds from sale of marketable securities - available for sale

   413,576   73,376   26,845 

Patent registration costs

   (2,819)  (2,358)  (1,560)

Business acquisitions, net of cash acquired of $12,982 ($Nil in 2004 and 2003)

   (54,425)  (184)  (300)

Purchases of non-trading investments

   (1,873)  (1,535)  (1,625)

Proceeds from sale of non-trading investments

   -   -   3,936 
   


Net cash used in investing activities

   (86,778)  (66,837)  (11,883)
   


Cash flows from financing activities:

             

Proceeds from issuance of common stock, net

   39,426   20,341   9,031 

Repayment of assumed borrowings from acquisitions

   (65,764)  -   - 

Proceeds from borrowings, net of borrowing costs

   62,500   -   - 

Redemption of borrowings, convertible note

   -   -   (9,217)

Purchases of treasury stock

   (10,966)  (19,027)  (3,542)

Installment payment for property purchase

   -   -   (12,609)
   


Net cash provided by (used in) financing activities

   25,196   1,314   (16,337)
   


Effect of exchange rate changes on cash

   3,781   3,398   10,567 
   


Net increase in cash and cash equivalents

   13,278   14,416   41,631 

Cash and cash equivalents at beginning of the year

   128,907   114,491   72,860 
   


Cash and cash equivalents at end of the year

  $142,185  $128,907  $114,491 
   


Supplemental disclosure of cash flow information:

             

Income taxes paid, net of refunds

  $24,747  $15,141  $21,308 

Interest paid

   4,530   4,530   4,530 
   


Fair value of assets acquired in acquisitions

   89,188   95   - 

Liabilities assumed

   (99,270)  -   - 

Goodwill on acquisition

   78,949   89   300 

Acquisition costs accrued

   (1,460)  -   - 
   


Cash paid for acquisition, including acquisition costs

  $67,407  $184  $300 
   


See accompanying notes to consolidated financial statements.

F5


RESMED INC.AND 2002 ARE SUMMARIZED BELOW (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SUBSIDIARIES

Notes to Consolidated Financial Statements

(1)Organization and Basis of Presentation

ResMed Inc (the “Company”) is a Delaware Corporation formed in March 1994 as a holding company for the ResMed Group. Through our subsidiaries, we design, manufacture and market devices for the evaluation and treatment of sleep-disordered breathing, primarily obstructive sleep apnea. Our manufacturing operations are located in Australia, Germany, France, and the United States of America. Major distribution and sales sites are located in the United States of America, Germany, France, United Kingdom, Switzerland, Australia and Sweden.

(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 inter-company transactions and balances have been eliminated in 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 generally recorded upon shipment, at which time title transfers to the customer. Revenue on product sales which require customer acceptance is not recorded until acceptance is received. Royalty revenue from license agreements is recorded when earned. Service revenue received in advance from service contracts is initially deferred and recognized ratably over the life of the service contract. Revenue received in advance from rental unit contracts is initially deferred and recognized ratably over the life of the rental contract. Revenue from sale of marketing or distribution rights is initially deferred and recognized ratably as revenue over the life of the contract. Freight charges billed to customers are included in revenue. All freight-related expenses are charged to cost of sales.

We do not offer a right of return or other recourse with respect to the sale of our products, other than returns for product defects or other warranty claims, nor do we offer variable sale prices for subsequent events or activities. However, as part of our sales processes we may provide upfront discounts for large orders, one time special pricing to support new product introductions, sales rebates for centralized purchasing entities or price-breaks for regular order volumes. The costs of all such programs are recorded as an adjustment to revenue. In our U.S. sales activities we use a number of manufacturer representatives to sell our products. These representatives are paid a direct commission on sales and act as an integral component of our U.S. sales force. We do not sell our products to these representatives and do not recognize revenue on such shipments. Our products are predominantly therapy-based equipment and require no installation. As such, we have no significant installation obligations.

(c)Cash and Cash Equivalents

Cash equivalents include certificates of deposit, commercial paper, and other highly liquid investments and 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, determined principally by the first-in, first-out method, or net realizable value. We review and provide for any product obsolescence in our manufacturing and distribution operations with assessments of individual products and components (based on estimated future usage and sales) being performed throughout the year.

F6


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(2)Summary of Significant Accounting Policies, Continued

(e)Property, Plant and Equipment

Property, plant and equipment, including rental 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 except for buildings, which are depreciated over an estimated useful life of 40 years. Straight–line and accelerated methods of depreciation are used for tax purposes. Maintenance and repairs are charged to expense as incurred.

(f)Intangible Assets

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.

Other intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from seven to nine years. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No impairment of intangible assets have been identified during any of the periods presented.

(g)Goodwill

We conducted our annual review for goodwill impairment as at June 30, 2005. In conducting our review of goodwill impairment, we identified reporting units, being components of our operating segment, as each of the entities acquired and giving rise to the goodwill. The fair value for each reporting unit was determined based on estimated discounted cash flows. Our goodwill impairment review involved a two-step process as follows:

Step 1-Compare the fair value for each reporting unit to its carrying value, including goodwill. For each reporting unit where the carrying value, including goodwill, exceeds the reporting unit’s fair value, move on to step 2. If a reporting unit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary.

Step 2-Allocate the fair value of the reporting unit to its identifiable tangible and non-goodwill intangible assets and liabilities. This will derive an implied fair value for the goodwill. Then, compare the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of its goodwill, an impairment loss must be recognized for the excess.

The results of the review indicated that no impaired goodwill exists.

(h)Foreign Currency

The consolidated financial statements of our 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 period end exchange rates, and revenue and expense transactions are translated at average exchange rates for the period. Cumulative translation adjustments are recognized as part of comprehensive income, as described in Note 6, and are included in accumulated other comprehensive income 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

(2)Summary of Significant Accounting Policies, Continued

(i)Research and Development

Research and development costs are expensed in the period incurred.

(j)Earnings Per Share

Basic earnings per share is computed by dividing the net income available to common shareholders by the weighted average number of shares of common stock outstanding. For purposes of calculating diluted earnings per share, net income is adjusted for the after-tax amount of interest associated with convertible debt, and the denominator includes both the weighted average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options and convertible notes.

The weighted average shares used to calculate basic earnings per share were 34,322,000, 33,694,000, and 33,054,000 for the years ended June 30, 2005, 2004 and 2003, 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 and the assumed conversion of our convertible notes. Stock options had the effect of increasing the number of shares used in the calculation (by application of the treasury stock method) by 1,280,000, 1,431,000 and 1,385,000 for the years ended June 30, 2005, 2004 and 2003, respectively. The conversion of our convertible notes had the effect of increasing the number of shares used in the calculation by 1,869,000, NIL and NIL for the years ended June 30, 2005, 2004 and 2003, respectively.

Stock options of 284,000, 751,000 and 1,408,000 for the years ended June 30, 2005, 2004 and 2003 respectively, were not included in the computation of diluted earnings per share as the effect of exercising these options would have been anti-dilutive.

Basic and diluted earnings per share for the periods ended 30 June 2005, 2004 and 2003 are calculated as follows (in thousands except per share data):

   2005  2004  2003

Numerator:

            

Net income

  $64,785  $57,284  $45,729

Adjustment for interest and deferred borrowing costs,

net of income tax effect(1)

   3,285   -   -

Net income, used in calculating diluted earnings per share

  $68,070  $57,284  $45,729

Denominator:

            

Basic weighted-average common shares outstanding

   34,322   33,694   33,054
  

Effect of dilutive securities:

            

Stock options

   1,280   1,431   1,385

Convertible subordinated notes

   1,869   -   -

Diluted potential common shares

   3,149   1,431   1,385
  

Diluted weighted average shares

   37,471   35,125   34,439

Basic earnings per share

  $1.89  $1.70  $1.38

Diluted earnings per share(1)

  $1.82  $1.63  $1.33

- -------------------------------------------------------------------------------------- 2003 First Second Third Fourth Fiscal Quarter Quarter Quarter Year Year - -------------------------------------------------------------------------------------- Net revenues $58,586 $65,293 $68,996 $80,695 $273,570 Gross profit 37,697 41,839 43,187 50,364 173,087 Net income 9,571 10,384 12,250 13,524 45,729 Basic earnings per share $ 0.29 $ 0.31 $ 0.37 $ 0.41 $ 1.38
(1)Diluted earnings per share $ 0.28 $ 0.30 $ 0.35 $ 0.39 $ 1.33 - -------------------------------------------------------------------------------------- 2002 First Second Third Fourth Fiscal . . . . . . . . . . . . . . Quarter Quarter Quarter Year 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 (loss) 8,538 8,779 10,379 9,810 37,506 Basic earnings (loss) per share $ 0.27 $ 0.27 $ 0.32 $ 0.30 $ 1.17 Diluted earnings (loss) per share $ 0.25 $ 0.26 $ 0.31 $ 0.29 $ 1.10 - -------------------------------------------------------------------------------------- has been calculated after adjusting the numerator (net income) by $3,285,000, $NIL and $NIL for the years ended June 30, 2005, 2004 and 2003, respectively for the effect of assumed conversion of our convertible notes, and the related reduction in interest expense, net of tax.
NB. PER SHARE AMOUNTS FOR EACH QUARTER ARE COMPUTED INDEPENDENTLY,

F8


RESMED INC.AND DUE TO THE COMPUTATION FORMULA, THE SUM OF THE FOUR QUARTERS MAY NOT EQUAL THE YEAR. ITEM 9 CHANGES IN SUBSIDIARIES

Notes to Consolidated Financial Statements

(2)Summary of Significant Accounting Policies, Continued

(k)Financial Instruments

The carrying value of financial instruments, such as cash and cash equivalents, marketable securities available-for-sale, accounts receivable and accounts payable approximate their fair value because of their short-term nature. The estimated fair value of the Company’s convertible subordinated notes, which are included within long-term debt, at June 30, 2005 approximates $129.2 million compared with the carrying value of $113.3 million. Foreign currency option contracts are marked to market and therefore reflect their fair value. We do 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.

(l)Foreign Exchange Risk Management

We enter into various types of foreign exchange contracts in managing our foreign exchange risk, including derivative financial instruments encompassing forward exchange contracts and foreign currency options.

The purpose of our foreign currency hedging activities is to protect us from adverse exchange rate fluctuations with respect to net cash movements resulting from the sales of products to foreign customers and Australian manufacturing activities. We enter 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.

Our foreign currency derivatives portfolio represents a cash flow hedge program against the net cash flow of our international manufacturing operations. We have determined our hedge program to be a non-effective hedge as defined under SFAS 133. The foreign currency derivatives portfolio is recorded in the consolidated balance sheets at fair value and included in other assets or other liabilities.

All movements in the fair value of the foreign currency derivatives are recorded within other income, net on our consolidated statements of income.

We are exposed to credit-related losses in the event of non-performance by counter parties to financial instruments. The credit exposure of foreign exchange options at June 30, 2005 and June 30, 2004 was $3.0 million and $2.0 million, respectively, which represents the positive fair value of options held by us.

We held foreign currency option contracts with notional amounts totaling $145.5 million and $140.6 million at June 30, 2005 and 2004, respectively, to hedge foreign currency items. These contracts mature at various dates before July 2007.

(m)Income Taxes

We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities 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.

F9


RESMED INC.AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING SUBSIDIARIES

Notes to Consolidated Financial Statements

(2)Summary of Significant Accounting Policies, Continued

(n)Marketable Securities

Management determines the appropriate classification of our 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 we do 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.

At June 30, 2005 and 2004, the 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 our investment policy.

(o)Warranty

Estimated future warranty costs related to certain products are charged to operations in the period in which the related revenue is recognized. The liability for warranty costs are included in accrued expenses in our condensed consolidated balance sheet.

Changes in the liability for product warranty for the year ended June 30, 2005 are as follows (in thousands):

  

Balance as at June 30, 2004

  $1,557 

Warranty accruals for the year ended June 30, 2005

   1,656 

Warranty costs incurred for the year ended June 30, 2005

   (1,155)

Warranty accrual from acquisition

   745 

Foreign currency translation adjustments

   109 

Balance as at June 30, 2005

  $2,912 

(p)Impairment of Long-Lived Assets

We periodically evaluate 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.

(q)Cost-Method Investments

The aggregate carrying amount of our cost-method investments at June 30, 2005 and June 30, 2004 was $5.3 million and $5.3 million respectively. At June 30 2005 we reviewed the carrying value of these investments. In fiscal 2005 and 2004, we recognized $0.1 million and $Nil respectively of impairment losses related to our cost method investments, which include investments in privately held service companies, research companies and publicly traded companies. After recognition of the impaired loss we have determined that the fair value of the investments exceeded the carrying values and no unrealized losses existed.

F10


RESMED INC.AND FINANCIAL DISCLOSURE NONE. ITEM 9A CONTROLS AND PROCEDURES WE MAINTAIN DISCLOSURE CONTROLS AND PROCEDURES THAT ARE DESIGNED TO ENSURE THAT INFORMATION REQUIRED TO BE DISCLOSED IN OUR EXCHANGE ACT REPORTS IS RECORDED, PROCESSED, SUMMARIZED AND REPORTED WITHIN THE TIME PERIODS SPECIFIED IN THE SECURITIES AND EXCHANGE COMMISSION'S RULES AND FORMS AND THAT SUCH INFORMATION IS ACCUMULATED AND COMMUNICATED TO OUR MANAGEMENT, INCLUDING OUR CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER, AS APPROPRIATE, TO ALLOW FOR TIMELY DECISIONS REGARDING REQUIRED DISCLOSURE. IN DESIGNING AND EVALUATING THE DISCLOSURE CONTROLS AND PROCEDURES, MANAGEMENT RECOGNIZES THAT ANY CONTROLS AND PROCEDURES, NO MATTER HOW WELL DESIGNED AND OPERATED, CAN PROVIDE ONLY REASONABLE ASSURANCE OF ACHIEVING THE DESIRED CONTROL OBJECTIVES, AND MANAGEMENT IS REQUIRED TO APPLY ITS JUDGMENT IN EVALUATING THE COST-BENEFIT RELATIONSHIP OF POSSIBLE CONTROLS AND PROCEDURES. AS REQUIRED BY SEC RULE 13A-15(B) SUBSIDIARIES

Notes to Consolidated Financial Statements

(2)Summary of Significant Accounting Policies, Continued

(r)Stock-based Employee Compensation

We have granted stock options to personnel, including officers and directors, under both our 1995 Option Plan and our 1997 Equity Participation Plan. These options have expiration dates of ten years from the date of grant and vest over three or four years. We granted these options with the exercise price equal to the market value as determined at the date of grant.

We apply APB Opinion No. 25 in accounting for our equity plans and as all stock options are issued at market price on the date of issue, no compensation cost has been recognized for the grant of stock options. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS 123, Accounting for Stock-Based Compensation, to stock-based employee compensation:

  
   Years Ended June 30
In thousands, except per share data  2005  2004  2003

Net income, as reported

  $64,785  $57,284  $45,729

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

   10,323   9,394   14,102

Pro forma net income

  $54,462  $47,890  $31,627
  

Earnings per share:

            

Basic - as reported

  $1.89  $1.70  $1.38

Basic - pro forma

  $1.59  $1.42  $0.96
  

Diluted - as reported

  $1.82  $1.63  $1.33

Diluted - pro forma

  $1.53  $1.36  $0.92

Compensation costs for the options granted for years ended June 30, 2005, 2004 and 2003 was $13,340,000 (net of tax $9,792,000), WE CARRIED OUT AN EVALUATION, UNDER THE SUPERVISION AND WITH THE PARTICIPATION OF OUR MANAGEMENT, INCLUDING OUR CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER, OF THE EFFECTIVENESS OF THE DESIGN AND OPERATION OF OUR DISCLOSURE CONTROLS AND PROCEDURES AS OF JUNE$12,695,000 (net of tax $9,394,000), and $21,696,000 (net of tax $14,102,000), respectively.

Compensation costs for the ESPP purchase rights for June 30, 2003. BASED ON THE FOREGOING, OUR CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER CONCLUDED THAT OUR DISCLOSURE CONTROLS AND PROCEDURES WERE EFFECTIVE AT THE REASONABLE ASSURANCE LEVEL. THERE HAS BEEN NO CHANGE IN OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING DURING OUR MOST RECENT FISCAL QUARTER THAT HAS MATERIALLY AFFECTED, OR IS REASONABLY LIKELY TO MATERIALLY AFFECT, OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING. - -41- - -------------------------------------------------------------------------------- PART III - -------------------------------------------------------------------------------- ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT INCORPORATED BY REFERENCE TO OUR DEFINITIVE PROXY STATEMENT FOR OUR NOVEMBER 13,2005, 2004 and 2003 MEETING OF STOCKHOLDERS, WHICH WILL BE FILED WITH THE SECURITIES was $763,000 (net of tax $531,000), $nil and $nil, respectively.

F11


RESMED INC.AND EXCHANGE COMMISSION WITHIN 120 DAYS AFTER JUNE SUBSIDIARIES

Notes to Consolidated Financial Statements

(2)Summary of Significant Accounting Policies, Continued

(r)Stock-based Employee Compensation, Continued

The fair value of stock options granted under our stock option plans and purchase rights granted under our ESPP is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

   Years ended June 30
   2005  2004  2003

Stock Options:

         

Weighted average risk-free interest rate

  4.0%  2.9%  2.8%

Dividend yield

  -     -

Expected option life in years

  3.5-4.6  3.3-4.2  2.8-4.0

Volatility

  31%  43%  63%

ESPP Purchase rights:

         

Weighted average risk-free interest rate

  2.3%  -  -

Dividend yield

  -  -  -

Expected option life in years

  6 months  -  -

Volatility

  31%  -  -

The weighted average fair value of options granted in 2005, 2004 and 2003 was $16.98, $14.89 and $12.22, respectively.

(3)New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board, (“FASB”), issued SFAS 123(R), “Share-Based Payment”, which is a revision of SFAS 123. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure will no longer be an alternative. This statement also eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25. The statement, which was delayed, is effective at the beginning of the fiscal year beginning after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. The accounting provision SFAS 123(R) is effective beginning in our interim period ending September 30, 2003. ITEM 11 EXECUTIVE COMPENSATION INCORPORATED BY REFERENCE TO OUR DEFINITIVE PROXY STATEMENT FOR OUR NOVEMBER 13, 2003, MEETING OF STOCKHOLDERS, WHICH WILL BE FILED WITH THE SECURITIES 2005.

SFAS 123(R) permits public companies to adopt its requirements using one of two methods: (1) A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees before the effective date of SFAS 123(R) that remain unvested on the effective date; or (2) A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. We expect to adopt the modified prospective method.

As permitted by SFAS 123, we currently account for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options, which are granted with exercise prices equal to the fair market value of our common stock on the date of grant. We are currently reviewing the impact of the adoption of SFAS 123(R) however we expect the adoption of SFAS 123(R) will have a significant impact on our results of operations.

F12


RESMED INC.AND EXCHANGE COMMISSION WITHIN 120 DAYS AFTER JUNE SUBSIDIARIES

Notes to Consolidated Financial Statements

(3)New Accounting Pronouncements, Continued

In December 2004, the Financial Accounting Standards Board, (“FASB”), issued SFAS 153, “ Exchanges of Non-monetary Assets, an Amendment of APB Opinion No. 29, ’Accounting for Non-monetary Transactions’.” The amendments are based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. SFAS 153 is effective for fiscal periods beginning after June 15, 2005, however earlier application is permitted for non-monetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this statement will be applied prospectively. We do not believe the adoption of this statement will have a material impact on our financial condition or results of operations.

In November 2004, the Financial Accounting Standards Board (“FASB”), issued SFAS 151, “Inventory Costs”, which sought to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. SFAS 151 also requires that the allocation of fixed production overheads to the costs of conversion be based on the normal operating capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. We do not believe the adoption of this statement will have a material impact on our financial condition or results of operations.

(4)Marketable Securities

The estimated fair value of marketable securities available for sale as of June 30, 2003. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT INCORPORATED BY REFERENCE TO OUR DEFINITIVE PROXY STATEMENT FOR OUR NOVEMBER 13, 2003, MEETING OF STOCKHOLDERS, WHICH WILL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WITHIN 120 DAYS AFTER JUNE2005 and 2004, was $NIL and $12.0 million respectively.

As at June 30, 2003. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS NO MATERIAL TRANSACTIONS. ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES INCORPORATED BY REFERENCE TO OUR DEFINITIVE PROXY STATEMENT FOR OUR NOVEMBER 13, 2003, MEETING OF STOCKHOLDERS, WHICH WILL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WITHIN 120 DAYS AFTER JUNE2005 and 2004, contractual maturities of marketable securities-available-for-sale were (in thousands):

   2005  2004

Due less than one year

  $-  $11,025

Due one to less than three years

   -   -

Due more than three years

   -   996

Total

  $-  $12,021

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

(5)Inventories

Inventories, net were comprised of the following as of June 30, 2003. PART IV ITEM 15 EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULE, 2005 and 2004 (in thousands):

   2005  2004

Raw materials

  $29,857  $15,277

Work in progress

   1,820   2,254

Finished goods

   57,430   38,266
   $89,107  $55,797

F13


RESMED INC.AND REPORTS ON FORM 8-K A. THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT: 1. CONSOLIDATED FINANCIAL STATEMENTS SUBSIDIARIES

Notes to Consolidated Financial Statements

(6)Comprehensive Income

The components of comprehensive income, net of tax, were as follows (in thousands):

   2005  2004 

Net income

  $64,785  $57,284 

Foreign currency translation gains/(losses)

   11,617   11,366 

Unrealized gains/(losses) on marketable securities

   (6)  (3)

Comprehensive income

  $76,396  $68,647 

The Company does not provide for U.S. income taxes on foreign currency translation adjustments since it does not provide for such taxes on undistributed earnings of foreign subsidiaries.

(7)Property, Plant and Equipment

Property, plant and equipment is comprised of the following as of June 30, 2005 and 2004 (in thousands):

   2005  2004 

Machinery and equipment

  $42,623  $33,605 

Computer equipment

   44,011   33,542 

Furniture and fixtures

   18,174   13,613 

Vehicles

   2,266   2,015 

Clinical, demonstration and rental equipment

   29,211   21,763 

Leasehold improvements

   4,940   1,346 

Land

   35,492   32,990 

Buildings

   77,101   68,249 

Construction in Progress

   9,320   475 
    263,138   207,598 

Accumulated depreciation and amortization

   (88,970)  (60,330)
   $174,168  $147,268 

(8)Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the year ended June 30, 2005, were as follows:

(In thousands)  2005 

Balance at June 30, 2004

  $106,075 

Foreign currency translation adjustments

   (3,918)

Goodwill on acquisition of Hoefner

   8,202 

Goodwill on acquisition of the assets of Resprecare

   4,409 

Goodwill on acquisition of Saime

   66,338 

Balance at June 30, 2005

  $181,106 

F14


RESMED INC.AND SCHEDULE THE CONSOLIDATED FINANCIAL STATEMENTS SUBSIDIARIES

Notes to Consolidated Financial Statements

(8)Goodwill and Other Intangible Assets, Continued

Patents and other intangibles is comprised of the following as of June 30, 2005 and June 30, 2004:

(In thousands)  June 30, 2005  June 30, 2004 

Developed/Core Product Technology

  $29,620  $- 

Accumulated amortization

   (487)  - 

Developed/Core Product Technology, net of accumulated amortization

   29,133   - 

Trade names

   1,572   - 

Accumulated amortization

   (26)  - 

Trade names, net of accumulated amortization

   1,546   - 

Customer relationships

   12,936   - 

Accumulated amortization

   (345)  - 

Customer relationships, net of accumulated amortization

   12,591   - 

Patents

   13,200   9,775 

Accumulated amortization

   (7,099)  (4,961)

Patents, net of accumulated amortization

   6,101   4,814 

Patents and other intangibles, net of accumulated amortization

  $49,371  $4,814 

Intangible assets consist of patents, customer relationships, trade names, developed/core product technology and are amortized over the estimated useful life of the assets, generally between five and nine years. There are no expected residual values related to these intangible assets.

Amortization expense related to identifiable intangible assets was $2.7 million. Estimated annual amortization expense for the years ending June 30, 2006 through June 30, 2010, including the effect of the Resprecare, Hoefner and Saime acquisitions is shown below (in thousands):

Fiscal Year  Amortization expense

2006

  $8,021

2007

   7,760

2008

   7,354

2009

   6,924

2010

   6,359

F15


RESMED INC.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 (1) - -42- 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 (7) 3.1 CERTIFICATE OF INCORPORATION OF REGISTRANT, AS AMENDED (2) 3.2 BY-LAWS OF REGISTRANT (2) 4.1 FORM OF CERTIFICATE EVIDENCING SHARES OF COMMON STOCK (2) 4.2 RIGHTS AGREEMENT DATED AS OF APRIL 23, 1997 (3) 4.3 INDENTURE DATED AS OF JUNE SUBSIDIARIES

Notes to Consolidated Financial Statements

(9)Accrued expenses

Accrued expenses at June 30, 2005 and 2004 consist of the following (in thousands):

   2005  2004

Service warranties

  $2,912  $1,557

Consulting and professional fees

   3,207   1,275

Value added taxes and other taxes due

   4,139   1,877

Employee related costs

   16,793   14,349

Accrued interest

   358   126

Marketing and promotional programs

   1,887   1,157

Restructuring

   474   -

Customer advance

   1,042   -

Other

   3,602   2,250
   $34,414  $22,591

(10)Long-term debt

Long-term debt at June 30, 2005 and 2004 consists of the following (in thousands):

   June 30, 2005  June 30, 2004

Convertible subordinated notes

  $113,250  $-

Long-term loan

   2,116   -

Capital lease

   69   -

Current portion of long-term debt

  $115,435  $-

Convertible subordinated notes

  $-  $113,250

Long-term loan

   58,328   -

Capital lease

   606   -

Non-current portion of long-term debt

  $58,934  $113,250

Convertible Subordinated notes

On June 20, 2001 BETWEEN RESMED INC AND AMERICAN STOCK TRANSFER & TRUST COMPANY (6) 4.4 REGISTRATION RIGHTS AGREEMENT DATED AS OF JUNEwe issued $150.0 million of 4% convertible subordinated notes that are due to mature on June 20, 2006. On July 3, 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 (6) 4.5 REGISTRATION RIGHTS AGREEMENT DATED AS OF MAY 14, 2002 BETWEEN RESMED INC., AND MR LESLIE HOFFMAN (7) 10.1 1995 STOCK OPTION PLAN (2) 10.2 1997 EQUITY PARTICIPATION PLAN (4) 10.3 LICENSING AGREEMENT BETWEEN THE UNIVERSITY OF SYDNEY AND RESMED LIMITED DATED MAY 17, 1991, AS AMENDED (2) 10.4 CONSULTING AGREEMENT BETWEEN COLIN SULLIVAN AND RESMED LIMITED EFFECTIVE FROM 1 JANUARY 1998 (5) 10.5 LOAN AGREEMENT BETWEEN THE AUSTRALIAN TRADE COMMISSION AND RESMED LIMITED DATED MAY 3, 1994 (2) 10.6 LEASE FOR 10121 CARROLL CANYON ROAD, SAN DIEGO CA 92131-1109, USA (5) 10.7 SALE AND LEASEBACK AGREEMENTS FOR 97 WATERLOO RD, NORTH RYDE, AUSTRALIA (6) 10.8 EMPLOYMENT AGREEMENT DATED AS OF MAY 14, 2002, BETWEEN SERVO MAGNETICS ACQUISITION INC., AND MR LESLIE HOFFMAN (7) 10.9 AGREEMENT FOR THE PURCHASE OF LOT 6001, NORWEST BOULEVARDE, NORWEST BUSINESS PARK, BAULKHAM HILLS, AUSTRALIA (7) 11.1 COMPUTATION OF EARNINGS PER COMMON SHARE 21.1 SUBSIDIARIES OF THE REGISTRANT 23.1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT (1) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REPORT ON FORM 8-K DATED MARCH 2, 2001. (2) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-1 (NO. 33-91094) DECLARED EFFECTIVE ON JUNE 1, 1995. (3) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM 8-A12G FILED ON APRIL 25, 1997. (4) INCORPORATED BY REFERENCE TO THE REGISTRANT'S 1997 PROXY STATEMENT. (5) INCORPORATED BY REFERENCE TO THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNEwe received an additional $30.0 million in over allotments. This increased the total amount of convertible subordinated notes issued to $180.0 million.

During the years ended June 30, 1998. (6) INCORPORATED BY REFERENCE TO THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 2001. (7) INCORPORATED BY REFERENCE TO THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 2002. B. REPORTS ON FORM 8-K NONE. - -43- 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 JUNE2005 and 2004, we did not repurchase any of our convertible subordinated notes.

During the year ended June 30, 2003, AND 2002, 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, 2003. 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, 2003 AND 2002, AND THE RESULTS OF THEIR OPERATIONS AND THEIR CASH FLOWS FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED JUNE 30, 2003, IN CONFORMITY WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. AS DISCUSSED IN NOTE 7 TO THE CONSOLIDATED FINANCIAL STATEMENTS, THE COMPANY HAS ADOPTED THE PROVISIONS OF SFAS NO. 42 "ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS" AND CHANGED ITS METHOD OF ACCOUNTING FOR GOODWILL IN 2002 ACCORDINGLY. /S/ KPMG LLP - ----------------------- SAN DIEGO, CALIFORNIA AUGUST 8, 2003 F1
RESMED INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2003 AND 2002 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)we repurchased $10.0 million face value of our convertible subordinated notes. The total purchase price of the notes was $9.4 million, including $0.2 million in accrued interest. We recognized a gain of $0.3 million, net of tax of $0.2 million, on these transactions.

During the year ended June 30, June 30, ---------- ---------- 2003 2002 ASSETS Current assets: Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 114,491 $ 72,860 Marketable securities available for sale (note 4). . . . . . . . . . . . . . . . . . 6,533 19,979 Accounts receivable, net of allowance for doubtful accounts of $2,474 and $1,938 at June 30, 2003 and 2002, respectively . . . . . . . . . . . . . . . . . . . . . . . . 56,694 46,199 Inventories, net (note 5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,386 41,173 Deferred income taxes (note 12). . . . . . . . . . . . . . . . . . . . . . . . . . . 8,301 9,289 Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . . 6,500 4,213 ---------- ---------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241,905 193,713 ---------- ---------- Property, plant and equipment, net of accumulated depreciation of $45,379 and $31,084 at June 30, 2003 and 2002 respectively (note 6). . . . . . . . . . . . . 104,687 79,279 Patents, net of accumulated amortization of $3,437 and $1,862 at June 30, 2003 and 2002, respectively. . . . . . . . . . . . . . . . . . . . . . . 3,745 2,653 Goodwill (note 7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,160 92,536 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,098 8,010 ---------- ---------- Total non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217,690 182,478 ---------- ---------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 459,595 $ 376,191 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,368 $ 11,605 Accrued expenses (note 8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,140 15,273 Deferred Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,355 3,636 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,408 6,905 Payable for property purchase. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 11,552 Current portion of deferred profit on sale-leaseback . . . . . . . . . . . . . . . . 2,312 1,933 ---------- ---------- Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,583 50,904 Non-current liabilities: Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,210 5,402 Convertible subordinated notes (note 9). . . . . . . . . . . . . . . . . . . . . . . 113,250 123,250 Deferred profit on sale-leaseback. . . . . . . . . . . . . . . . . . . . . . . . . . 2,119 3,705 ---------- ---------- Total non-current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,579 132,357 ---------- ---------- Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,162 183,261 ---------- ---------- Commitments and contingencies (notes 15 and 18). . . . . . . . . . . . . . . . . . . - - Stockholders' equity: (note 10) 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 33,370,885 at June 30, 2003 and 32,818,160 at June 30, 2002 . 134 132 (excluding 415,365 and 290,047 shares held as Treasury Stock respectively) Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,432 94,153 Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,372 114,643 Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,415) (7,873) Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . 29,910 (8,125) ---------- ---------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286,433 192,930 ---------- ---------- Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . $ 459,595 $ 376,191 ========= =========

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F2
RESMED INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 2003, 2002 AND 2001 (IN THOUSANDS, EXCEPT PER SHARE DATA) June 30, June 30, June 30, 2003 2002 2001 Net revenues. . . . . . . . . . . . . . . . . . . . . . $273,570 $204,076 $155,156 Cost of sales . . . . . . . . . . . . . . . . . . . . . 100,483 70,827 50,377 - --------------------------------------------------------------------------------------- Gross profit. . . . . . . . . . . . . . . . . . . . . . 173,087 133,249 104,779 - --------------------------------------------------------------------------------------- Operating expenses: Selling, general and administrative . . . . . . . . . . 85,313 64,481 49,364 Research and development. . . . . . . . . . . . . . . . 20,534 14,910 11,146 In-process research and development write off (note 19) - 350 17,677 Donations to Research Foundations . . . . . . . . . . . - 2,349 - Provision for restructure . . . . . . . . . . . . . . . - - 550 - --------------------------------------------------------------------------------------- Total operating expenses. . . . . . . . . . . . . . . . 105,847 82,090 78,737 - --------------------------------------------------------------------------------------- Income from operations. . . . . . . . . . . . . . . . . 67,240 51,159 26,042 - --------------------------------------------------------------------------------------- Other income (expenses): Gain on extinguishment of debt. . . . . . . . . . . . . 529 6,549 - Interest income (expense), net. . . . . . . . . . . . . (2,549) (3,224) (762) Government grants . . . . . . . . . . . . . . . . . . . - - 72 Other, net (note 11). . . . . . . . . . . . . . . . . . 1,907 108 1,962 - --------------------------------------------------------------------------------------- Total other income (expenses), net. . . . . . . . . . . (113) 3,433 1,272 - --------------------------------------------------------------------------------------- Income before income taxes. . . . . . . . . . . . . . . 67,127 54,592 27,314 Income taxes (note 12). . . . . . . . . . . . . . . . . 21,398 17,086 15,684 - --------------------------------------------------------------------------------------- Net income. . . . . . . . . . . . . . . . . . . . . . . $ 45,729 $ 37,506 $ 11,630 ======================================================================================= Basic earnings per share. . . . . . . . . . . . . . . . $ 1.38 $ 1.17 $ 0.37 Diluted earnings per share. . . . . . . . . . . . . . . $ 1.33 $ 1.10 $ 0.35 Basic shares outstanding. . . . . . . . . . . . . . . . 33,054 32,174 31,129 Diluted shares outstanding. . . . . . . . . . . . . . . 34,439 34,080 33,484
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F2
RESMED INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 2003, 2002 AND 2001 (IN THOUSANDS) - -------------------------------------------------------------------------------------------------------------------------------- Accumulated Additional Other Common Stock Paid-in Treasury Stock Retained Comprehensive Shares Amount Capital Shares Amount Earnings Income (loss) Total Income - --------------------------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 2000 . . 30,594 $ 122 $ 41,495 $ - $65,507 $(13,152) $93,972 Common stock issued on exercise of options (note 10) 885 4 7,939 - - 7,943 Tax benefit from exercise of options . . . . . . . . - - 3,241 - - 3,241 Comprehensive income: Net income . . . . . . . . - - - 11,630 - 11,630 $ 11,630 Other comprehensive income: Foreign currency translation adjustments. . - - - - (16,420) (16,420) (16,420) Comprehensive income/(loss) ------------ $(4,790) ============ BALANCE, JUNE 30, 2001 . . 31,479 126 52,675 - 77,137 (29,572) 100,366 Common stock issued on exercise of options (note 10) 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 37,506 Other comprehensive income Foreign currency translation adjustments. . 21,342 21,342 21,342 Unrealized gains on marketable securities. . . 105 105 105 Comprehensive income/(loss). . . . ------------ $58,953 ============ BALANCE, JUNE 30, 2002 . . 33,108 132 94,153 (290) (7,873) 114,643 (8,125) 192,930 Common stock issued on exercise of options (note10) 678 2 9,029 9,031 Treasury stock purchases . (125) (3,542) (3,542) Tax benefit from exercise of options . . . . . . . . 4,250 4,250 Comprehensive income: Net income . . . . . . . . 45,729 45,729 45,729 Other comprehensive income Foreign currency translation adjustments. . 38,131 38,131 38,131 Unrealized losses on marketable securities. . . (96) (96) (96) .. . . . . . . ------------ Comprehensive income/(loss). . . . . . . $83,764 ============ - --------------------------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 2003 . . 33,786 $ 134 $107,432 (415) ($11,415) $ 160,372 $29,910 $286,433 - --------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F4
RESMED INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2003, 2002 AND 2001 (IN THOUSANDS) June 30, June 30, June 30, 2003 2002 2001 --------- ---------- ---------- Cash flows from operating activities: Net income:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,729 $ 37,506 $ 11,630 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . 12,583 9,972 7,015 Goodwill amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 1,430 Provision for service warranties . . . . . . . . . . . . . . . . . . . . . . . . . 332 (85) 174 Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,002 (6,153) (2,306) Foreign currency options revaluation . . . . . . . . . . . . . . . . . . . . . . . (2,117) 767 2,766 Deferred borrowing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 834 1,254 - Tax benefit from stock options exercised . . . . . . . . . . . . . . . . . . . . . 4,250 6,919 3,241 Gain on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . (529) (6,549) - Release of profit on sale of building. . . . . . . . . . . . . . . . . . . . . . . (2,012) - - Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (162) - 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,102) (9,765) (5,531) Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,988) (7,063) (8,130) Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . (2,333) 4,785 (3,470) Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . 9,635 3,864 4,474 --------- ---------- ---------- Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . 59,284 35,640 29,520 --------- ---------- ---------- Cash flows from investing activities: Purchases of property, plant and equipment . . . . . . . . . . . . . . . . . . . . (25,635) (28,185) (27,459) Purchases of marketable securities - available for sale. . . . . . . . . . . . . . (13,544) (393,072) (79,879) Proceeds from sale of marketable securities - available for sale . . . . . . . . . 26,845 435,871 20,976 Patent registration costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,560) (1,720) (516) Business acquisitions, net of cash acquired of $nil (2002: $812) (note 16) . . . . (300) (13,871) (55,070) Purchases of non-trading investments . . . . . . . . . . . . . . . . . . . . . . . (1,625) (3,987) (2,602) Proceeds from sale of non-trading investments. . . . . . . . . . . . . . . . . . . 3,936 - - Proceeds from sale-leaseback . . . . . . . . . . . . . . . . . . . . . . . . . . . - 18,500 - --------- ---------- ---------- Net cash provided by (used in) investing activities. . . . . . . . . . . . . . . . (11,883) 13,536 (144,550) --------- ---------- ---------- Cash flows from financing activities: Proceeds from issuance of common stock, net. . . . . . . . . . . . . . . . . . . . 9,031 9,781 7,943 Repayment of borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (3,022) (82,854) Proceeds from borrowings, net of borrowing costs . . . . . . . . . . . . . . . . . - 28,402 213,937 Redemption of borrowings, convertible note . . . . . . . . . . . . . . . . . . . . (9,217) (48,454) - Purchases of treasury stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,542) (7,873) - Installment payment for property purchase. . . . . . . . . . . . . . . . . . . . . (12,609) - - --------- ---------- ---------- Net cash provided by (used in) financing activities. . . . . . . . . . . . . . . . (16,337) (21,166) 139,026 --------- ---------- ---------- Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . . . . . 10,567 4,714 (2,110) --------- ---------- ---------- Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . 41,631 32,724 21,886 Cash and cash equivalents at beginning of the year . . . . . . . . . . . . . . . . 72,860 40,136 18,250 --------- ---------- ---------- Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . 114,491 $ 72,860 $ 40,136 ========= ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,308 $ 18,328 $ 12,908 Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,530 6,557 1,439 --------- ---------- ---------- Fair value of assets acquired in acquisitions. . . . . . . . . . . . . . . . . . . - $ 9,060 $ 33,139 Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (5,872) (24,821) Goodwill on acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 36,279 47,119 Fair value of shares issued for acquisitions . . . . . . . . . . . . . . . . . . . - (24,784) - --------- ---------- ---------- Cash paid for acquisition, including acquisition costs . . . . . . . . . . . . . . $ 300 $ 14,683 $ 55,437 ========= ========== ========== See accompanying notes to consolidated financial statements.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F5 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (1) ORGANIZATION AND BASIS OF PRESENTATION RESMED INC. (THE "COMPANY"), IS A DELAWARE CORPORATION FORMED IN MARCH 1994 AS A HOLDING COMPANY FOR THE RESMED GROUP. THE COMPANY, THROUGH ITS SUBSIDIARIES, DESIGNS, MANUFACTURES AND MARKETS DEVICES FOR THE EVALUATION AND TREATMENT OF SLEEP-DISORDERED BREATHING, PRIMARILY OBSTRUCTIVE SLEEP APNEA. THE COMPANY'S MANUFACTURING OPERATIONS ARE LOCATED IN AUSTRALIA, GERMANY, AND THE UNITED STATES OF AMERICA. MAJOR DISTRIBUTION AND SALES SITES ARE LOCATED IN THE UNITED STATES OF AMERICA, GERMANY, FRANCE, UNITED KINGDOM, SWITZERLAND, AUSTRALIA AND SWEDEN. (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 GENERALLY RECORDED UPON SHIPMENT, AT WHICH TIME TITLE TRANSFERS TO THE CUSTOMER. REVENUE ON PRODUCT SALES WHICH REQUIRE CUSTOMER ACCEPTANCE IS NOT RECORDED UNTIL ACCEPTANCE IS RECEIVED. ROYALTY REVENUE FROM LICENSE AGREEMENTS IS RECORDED WHEN EARNED. SERVICE REVENUE RECEIVED IN ADVANCE FROM SERVICE CONTRACTS IS INITIALLY DEFERRED AND RECOGNIZED RATABLY OVER THE LIFE OF THE SERVICE CONTRACT. REVENUE RECEIVED IN ADVANCE FROM RENTAL UNIT CONTRACTS IS INITIALLY DEFERRED AND RECOGNIZED RATABLY OVER THE LIFE OF THE RENTAL CONTRACT. REVENUE FROM SALE OF MARKETING AND DISTRIBUTION RIGHTS IS INITIALLY DEFERRED AND RECOGNIZED RATABLY AS REVENUE OVER THE LIFE OF THE CONTRACT. FREIGHT CHARGES BILLED TO CUSTOMERS ARE INCLUDED IN REVENUE. ALL FREIGHT-RELATED EXPENSES ARE CHARGED TO COST OF SALES. WE DO NOT OFFER A RIGHT OF RETURN OR OTHER RECOURSE WITH RESPECT TO THE SALE OF OUR PRODUCTS OR SIMILARLY OFFER VARIABLE SALE PRICES FOR SUBSEQUENT EVENTS OR ACTIVITIES. HOWEVER, AS PART OF OUR SALES PROCESSES WE MAY PROVIDE UPFRONT DISCOUNTS FOR LARGE ORDERS, ONE TIME SPECIAL PRICING TO SUPPORT NEW PRODUCT INTRODUCTIONS, SALES REBATES FOR CENTRALIZED PURCHASING ENTITIES OR PRICE-BREAKS FOR REGULAR ORDER VOLUMES. THE COSTS OF ALL SUCH PROGRAMS ARE RECORDED AS AN ADJUSTMENT TO REVENUE. IN OUR DOMESTIC SALES ACTIVITIES WE USE A NUMBER OF MANUFACTURER REPRESENTATIVES TO SELL OUR PRODUCTS. THESE REPRESENTATIVES ARE PAID A DIRECT COMMISSION ON SALES AND ACT AS AN INTEGRAL COMPONENT OF OUR DOMESTIC SALES FORCE. WE DO NOT SELL OUR PRODUCTS TO THESE REPRESENTATIVES AND DO NOT RECOGNIZE REVENUE ON SUCH SHIPMENTS. OUR PRODUCTS ARE PREDOMINANTLY THERAPY-BASED EQUIPMENT AND REQUIRE NO INSTALLATION. AS SUCH, WE HAVE NO SIGNIFICANT INSTALLATION OBLIGATIONS. F6 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED (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, DETERMINED PRINCIPALLY BY THE FIRST-IN, FIRST-OUT METHOD, OR NET REALIZABLE VALUE. THE COMPANY REVIEWS AND PROVIDES FOR ANY PRODUCT OBSOLESCENCE IN ITS MANUFACTURING AND DISTRIBUTION OPERATIONS WITH ASSESSMENTS OF INDIVIDUAL PRODUCTS AND COMPONENTS (BASED ON ESTIMATED FUTURE USAGE AND SALES) BEING PERFORMED THROUGHOUT THE YEAR. (E) PROPERTY, PLANT AND EQUIPMENT PROPERTY, PLANT AND EQUIPMENT, INCLUDING RENTAL 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 EXCEPT FOR BUILDINGS WHICH ARE DEPRECIATED OVER AN ESTIMATED USEFUL LIFE OF 40 YEARS. STRAIGHT-LINE AND ACCELERATED METHODS OF DEPRECIATION ARE USED FOR TAX PURPOSES. MAINTENANCE AND REPAIRS ARE CHARGED TO EXPENSE AS INCURRED. (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") 142, GOODWILL AND OTHER INTANGIBLE ASSETS. AS ALLOWED UNDER THE STANDARD, THE COMPANY 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. THE COMPANY CONDUCTED ITS ANNUAL REVIEW FOR GOODWILL IMPAIRMENT IN JULY 2003. IN CONDUCTING OUR REVIEW OF GOODWILL IMPAIRMENT, THE COMPANY IDENTIFIED REPORTING UNITS, BEING COMPONENTS OF OUR OPERATING SEGMENT, AS EACH OF THE ENTITIES ACQUIRED AND GIVING RISE TO THE GOODWILL. THE FAIR VALUE FOR EACH REPORTING UNIT WAS DETERMINED BASED ON DISCOUNTED CASH FLOWS AND INVOLVED A TWO STEP PROCESS AS FOLLOWS: F7 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED (G) GOODWILL (CONTINUED) STEP 1 - COMPARE THE FAIR VALUE FOR EACH REPORTING UNIT TO ITS CARRYING VALUE, INCLUDING GOODWILL. FOR EACH REPORTING UNIT WHERE THE CARRYING VALUE, INCLUDING GOODWILL, EXCEEDS THE REPORTING UNIT'S FAIR VALUE, MOVE ON TO STEP 2. IF A REPORTING UNIT'S FAIR VALUE EXCEEDS THE CARRYING VALUE, NO FURTHER WORK IS PERFORMED AND NO IMPAIRMENT CHARGE IS NECESSARY. STEP 2 - ALLOCATE THE FAIR VALUE OF THE REPORTING UNIT TO ITS IDENTIFIABLE TANGIBLE AND NON-GOODWILL INTANGIBLE ASSETS AND LIABILITIES. THIS WILL DERIVE AN IMPLIED FAIR VALUE FOR THE GOODWILL. THEN, COMPARE THE IMPLIED FAIR VALUE OF THE REPORTING UNIT'S GOODWILL WITH THE CARRYING AMOUNT OF THE REPORTING UNIT'S GOODWILL. IF THE CARRYING AMOUNT OF THE REPORTING UNIT'S GOODWILL IS GREATER THAN THE IMPLIED FAIR VALUE OF ITS GOODWILL, AN IMPAIRMENT LOSS MUST BE RECOGNIZED FOR THE EXCESS. THE RESULTS OF THE REVIEW INDICATED THAT NO IMPAIRED GOODWILL EXISTS. (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, $NIL, AND $72,000 FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001, 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 17, AND ARE INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (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. (J) RESEARCH AND DEVELOPMENT RESEARCH AND DEVELOPMENT COSTS ARE EXPENSED IN THE PERIOD INCURRED. F8 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED (K) EARNINGS PER SHARE THE WEIGHTED AVERAGE SHARES USED TO CALCULATE BASIC EARNINGS PER SHARE WERE 33,054,000, 32,174,000, AND 31,129,000 FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001, 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 1,385,000, 1,906,000 AND 2,355,000 FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001, RESPECTIVELY. STOCK OPTIONS OF 1,408,000, 726,000 AND NIL FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001 RESPECTIVELY, WERE NOT INCLUDED IN THE COMPUTATION OF DILUTED EARNINGS PER SHARE AS THE EFFECT OF EXERCISING THESE OPTIONS WOULD HAVE BEEN ANTI-DILUTIVE. (L) FINANCIAL INSTRUMENTS THE CARRYING VALUE OF FINANCIAL INSTRUMENTS, SUCH AS 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, 2003 APPROXIMATES $117.3 MILLION COMPARED WITH THE CARRYING VALUE OF $113.3 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. THE COMPANY'S FOREIGN CURRENCY DERIVATIVES PORTFOLIO REPRESENTS A CASHFLOW HEDGE PROGRAM AGAINST THE NET CASH FLOW OF ITS INTERNATIONAL MANUFACTURING OPERATIONS. THE COMPANY HAS DETERMINED ITS HEDGE PROGRAM TO BE A NON-EFFECTIVE HEDGE AS DEFINED UNDER SFAS 133. AS SUCH, THE FOREIGN CURRENCY DERIVATIVES PORTFOLIO IS RECORDED IN THE CONSOLIDATED BALANCE SHEETS AT FAIR VALUE AND INCLUDED IN OTHER ASSETS OR OTHER LIABILITIES. ALL MOVEMENTS IN THE FAIR VALUE OF THE FOREIGN CURRENCY DERIVATIVES ARE RECORDED WITHIN OTHER INCOME, NET ON THE COMPANY'S CONSOLIDATED STATEMENTS OF INCOME. F9 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (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, 2003 WAS $2.6 MILLION, WHICH REPRESENTS THE POSITIVE FAIR VALUE OF OPTIONS HELD BY THE COMPANY. THE COMPANY HELD FOREIGN CURRENCY OPTION CONTRACTS WITH NOTIONAL AMOUNTS TOTALING $124.5 MILLION AND $160.5 MILLION AT JUNE 30, 2003 AND 2002, RESPECTIVELY TO HEDGE FOREIGN CURRENCY ITEMS. THESE CONTRACTS MATURE AT VARIOUS DATES PRIOR TO JULY 2005. (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, 2003 AND 2002, 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. AT JUNE 30, 2003, CONTRACTUAL MATURITIES OF MARKETABLE SECURITIES AVAILABLE-FOR-SALE WERE ALL LESS THAN ONE YEAR. (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. F10 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (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 $1,557,000 AND $1,132,000 AT JUNE 30, 2003 AND 2002 RESPECTIVELY. (S) STOCK-BASED EMPLOYEE COMPENSATION 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. THE FOLLOWING TABLE ILLUSTRATES THE EFFECT ON NET INCOME AND EARNINGS PER SHARE IF THE COMPANY HAD APPLIED THE FAIR VALUE RECOGNITION PROVISIONS OF FASB STATEMENT 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, TO STOCK-BASED EMPLOYEE COMPENSATION.
------------------------------------------------------------------------------- Years Ended June 30 2003 2002 2001 - ------------------------------------------------------------------------------- Net income, as reported. . . . . . . . . . . . . . . $45,729 $37,506 $11,630 Deduct: Total stock-based employee compensation . . 14,102 18,975 8,770 expense determined under fair value based method for all awards, net of related tax effects. Pro forma net income . . . . . . . . . . . . . . . . 31,627 18,531 2,860 Earnings per share: Basic - as reported. . . . . . . . . . . . . . . . . $ 1.38 $ 1.17 $ 0.37 Basic - pro forma. . . . . . . . . . . . . . . . . . $ 0.96 $ 0.58 $ 0.09 Diluted - as reported . . . . . . . . . . . . . . . $ 1.33 $ 1.10 $ 0.35 Diluted - pro forma. . . . . . . . . . . . . . . . . $ 0.92 $ 0.54 $ 0.09 - -------------------------------------------------------------------------------
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 2.8%, 4.8% AND 6.0% FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001 RESPECTIVELY; NO DIVIDEND YIELD; EXPECTED OPTION LIVES OF 3.3 YEARS FOR THE YEAR ENDED JUNE 30, 2003 AND 5.5 AND 4.8 YEARS FOR THE YEARS ENDED JUNE 30, 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.

F16


RESMED INC.AND 2001, RESPECTIVELY, AND VOLATILITY OF 63% SUBSIDIARIES

Notes to Consolidated Financial Statements

(10)Long-term debt, Continued

As at June 30, 2005, we had convertible subordinated notes outstanding of $113.3 million.

The notes are convertible, at the option of the holder, at any time on or before maturity, into shares of common stock of ResMed Inc. The notes are currently 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 the notes, subject to adjustment.

We may redeem some or all of the notes at any time on or after June 22, 2005, at a redemption price of 100.8% of the principal amount of the notes, plus 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 does not limit us or our subsidiaries from incurring senior indebtedness or other indebtedness.

Interest is to be paid on the notes on June 20 and December 20 of each year.

Syndicated Facility

On May 16, 2005, our wholly-owned Australian subsidiary, ResMed Ltd. entered into a Syndicated Facility Agreement (the “Syndicated Facility Agreement”) with HSBC Bank Australia Limited, as Initial Lender, Facility Agent and Security Trustee, which provides for a 5 year term loan of EUR 50,000,000 (the “Loan”), 60% AND 61% FOR THE YEARS ENDED JUNEthe proceeds of which are required to be used solely to fund the obligations of our wholly-owned French subsidiary ResMed SA under its agreement to acquire Saime SA.

The Loan bears interest at a rate equal to LIBOR for deposits denominated in Euro plus a margin of 0.90% or 1.00%, depending on the ratio of the total debt to EBITDA, as defined in the Syndicated Facility Agreement, of ResMed Ltd. and its subsidiaries for the most recently completed fiscal year for the applicable interest period, and is payable quarterly. The effective interest rate is currently 3.03%. Payments of principal must be made to reduce the total outstanding principal amount of the Loan to EUR 48,250,000 on June 30, 2006, EUR 44,500,000 on June 30, 2007, EUR 37,750,000 on June 30, 2008, EUR 27,500,000 on June 30, 2009, EUR 15,000,000 on December 31, 2009, and the entire outstanding principal amount must be repaid in full on May 15, 2010. As at June 30, 2005, the facility loan with HSBC had an amount outstanding of $60.4 million.

The Loan is secured by a pledge of one hundred percent of the shares of Saime SA, and a Guarantee by ResMed SA and Take Air Medical Handels GmbH. The Syndicated Facility Agreement also contains customary covenants, including certain financial covenants and an obligation that ResMed Ltd. maintain certain financial ratios, including a minimum debt service cover ratio, a maximum ratio of total debt to EBITDA and a minimum tangible net worth. The entire principal amount of the Loan and any accrued but unpaid interest may be declared immediately due and payable in the event of the occurrence of an event of default as defined in the Syndicated Facility Agreement, which include, among other items, failure to make payments when due, breaches of representations, warranties or covenants, the occurrence of certain insolvency events, the occurrence of an event or change which could have a material adverse effect on ResMed Ltd. and its subsidiaries, and if ResMed Inc. ceases to control ResMed Ltd, ResMed SA, Saime SA or any of Saime SA’s subsidiaries

F17


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(10)Long-term debt, Continued

Capital Lease

As part of the acquisition of Saime we assumed a capital lease over land and buildings. This lease contains an option to purchase the property, for nominal consideration, at the end of the lease term in September 2014.

Details of contractual debt maturities at June 30, 2005 are as follows (in thousands):

      Payments Due by Period
   Total  2006  2007  2008  2009  2010  Thereafter

Long-Term Debt

  $173,694  $115,366  $4,534  $8,161  $12,392  $33,241  $-

Capital Leases

   675   69   69   69   69   69   330

Total

  $174,369  $115,435  $4,603  $8,230  $12,461  $33,310  $330

(11)Restructuring Expenses

Restructuring expenses incurred during the year ended June 30, 2005 were $5.3 million ($3.2 million net of tax). Restructuring expenses (predominantly one-time employee termination benefits) are associated with the integration of the separate operations of ResMed Germany and MAP into a single operating unit. We have substantially completed the relocation of our ResMed Germany operation (previously located in Moenchengladbach) to Munich and integration of the back office functions including customer service, logistics and administration. We will continue to monitor the progress of this restructure and adjust our business strategies and personnel accordingly to achieve maximum efficiencies and cost savings.

Following is a summary of the restructuring liabilities related to the restructure and integration of the separate operations of ResMed Germany and MAP into a single operating unit, that were recorded during the year ended June 30, 2005 (in thousands):

   Accrued
employee
costs
  Other
accrued
costs
  Total
accrued
costs
 

Balance at June 30, 2004

  $-  $-  $- 

Restructuring expenses

   4,673   479   5,152 

Cash payments

   (4,451)  (227)  (4,678)

Balance at June 30, 2005

  $222  $252  $474 

Restructuring expenses incurred are recorded in the consolidated statement of income as restructure expenses.

(12)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 or four years. The Company granted these options with the exercise price equal to the market value as determined at the date of grant.

F18


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(12)Stockholders’ Equity, Continued

The following table summarizes option activity:

   2005  Weighted
Average
Exercise
Price
  2004  Weighted
Average
Exercise
Price
  2003  Weighted
Average
Exercise
Price

Outstanding at beginning of year

   4,416,356  $32.53   4,745,178  $29.04   4,200,998  $27.94

Granted

   1,168,325   50.60   910,237   41.32   1,470,675   26.54

Exercised

   (1,316,623)  27.93   (958,391)  21.23   (678,400)  13.31

Forfeited

   (117,354)  36.67   (280,668)  40.56   (248,095)  38.85

Outstanding at end of year

   4,150,704  $38.77   4,416,356  $32.53   4,745,178  $29.04

Exercise price range of granted options

  $43.90–62.47      $39.19–51.56      $25.42–37.40    
  

Options exercisable at end of year

   1,993,877  $33.72   2,406,581  $28.70   2,192,309  $23.32

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, 2005.

Exercise Prices  Number
Outstanding
at June 30,
2005
  Weighted
Average
Remaining
Contractual
Life In
Years
  Number
Exercisable
at June 30,
2005

$ 0 - $10

  74,413  2.04  74,413

$11 - $20

  284,897  3.72  284,897

$21 - $30

  945,656  6.48  600,321

$31 - $40

  323,526  7.11  194,861

$41 - $50

  2,309,179  8.32  770,385

$51 - $60

  149,833  7.91  69,000

$61 - $70

  63,200  7.57  -
   4,150,704  6.16  1,993,877

F19


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(12)Stockholders’ Equity, Continued

Employee Stock Purchase Plan (the “ESPP”).    The ESPP was approved by our shareholders at the Annual General Meeting in November 2003. Under the ESPP, participants are offered the right to purchase shares of our common stock at a discount during successive offering periods. Each offering period under the ESPP will be for a period of time determined by the Board of Directors’ Compensation Committee of no less than 3 months and no more than 27 months. The purchase price for our common stock under the ESPP will be the lower of 85% of the fair market value of our common stock on the date of grant or 85% of the fair market value of our common stock on the date of purchase. An individual participant cannot subscribe for more than $25,000 in common stock during any calendar year. There is a maximum of 3,250,000 shares of our common stock authorized for sale under the ESPP.

During fiscal year 2005, the company issued 66,735 shares in two offerings at an average share price of $39.70 to our employees.

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, 2005.

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.    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 2005 and 2004, the Company repurchased 241,000 and 471,000 shares at a cost of $11.0 million and $19.0 million respectively. As of June 30, 2005, we have repurchased a total of 1,127,459 shares at a cost of $41.4 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.

Stock Split.    On August 10, 2005, our Board of Directors declared a two-for-one split of our Common Stock to be payable in the form of a 100% stock dividend. Shareholders will receive one additional share of Common Stock for every share held on September 15, 2005. No amounts in these financial statements have been adjusted for this stock split.

(13)Other, net

Other, net in the statement of operations is comprised of the following at June 30, 2005, 2004 and 2003 2002 (in thousands):

   2005  2004  2003

Gain/(loss) on foreign currency transactions and hedging

  $36  $655  $1,555

Realized gain (loss) on sale of marketable securities

   (34)  (11)  115

Other

   79   346   237
   $81  $990  $1,907

F20


RESMED INC.AND 2001 RESPECTIVELY. F11 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE SUBSIDIARIES

Notes to Consolidated Financial Statements

(14)Income Taxes

Income before income taxes for the years ended June 30, 2005, 2004, and 2003, was taxed under the following jurisdictions (in thousands):

   2005  2004  2003

U.S.

  ($54) $1,290  $3,061

Non-U.S.

   96,680   83,378   64,066
   $96,626  $84,668  $67,127

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

   2005  2004  2003

Current:

            

Federal

  $799  $3,567  $1,303

State

   246   372   14

Non-U.S.

   38,793   22,186   18,079
    39,838   26,125   19,396

Deferred:

            

Federal

   618   1,293   892

State

   (29)  (84)  325

Non-U.S.

   (8,586)  50   785
    (7,997)  1,259   2,002

Provision for income taxes

  $31,841  $27,384  $21,398

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. federal income tax rate of 34% (35% for 2003) to pretax income as a result of the following (in thousands):

   2005  2004  2003 

Taxes computed at statutory U.S. rate

  $32,853  $28,787  $23,495 

Increase (decrease) in income taxes resulting from:

             

State income taxes, net of U.S. tax benefit

   165   254   274 

Non-deductible expenses

   580   312   243 

Research and development credit

   (2,743)  (2,582)  (1,690)

Tax effect of intercompany dividends

   590   129   - 

Change in valuation allowance

   637   5,074   457 

Effect of non-U.S. tax rates

   (3,419)  (2,930)  (2,498)

In-process research and development write-off

   1,791   -   - 

Foreign tax credits

   -   (772)  - 

Other

   1,387   (888)  1,117 
   $31,841  $27,384  $21,398 

F21


RESMED INC.AND 2002 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED (S) STOCK-BASED EMPLOYEE COMPENSATION (CONTINUED) THE FOLLOWING TABLE ILLUSTRATES THE FAIR VALUE OF COMPENSATION COSTS AS DETERMINED UNDER THE PROVISIONS OF FASB STATEMENT 123 BY YEAR OF OPTION GRANT: SUBSIDIARIES

Notes to Consolidated Financial Statements

- ------------------------------------------------------------------------------- Fiscal
(14)Income Taxes, Continued

Deferred tax assets and liabilities are classified as current or non-current according to the classification of the related asset or liability. The components of the Company’s deferred tax assets and liabilities at June 30 Average Fair Value at Year of Grant 2003 2002 2001 Exercise Price Date of Grant - ------------------------------------------------------------------------------- 2003. . . . . . . $ 9,035 $ - $ - $ 26.54 $12.22 2002. . . . . . . 9,942 21,074 - 50.18 26.21 2001. . . . . . . 2,664 7,142 10,272 27.71 13.41 2000. . . . . . . 55 971 2,540 14.14 6.56 1999. . . . . . . - 5 682 11.93 5.27 - ------------------------------------------------------------------------------- Compensation Cost $21,696 $29,192 $13,494 =============================================================================== Tax Effected. . . $14,102 $18,975 $ 8,770 =============================================================================== (3) NEW ACCOUNTING PRONOUNCEMENTS IN MAY 2003, THE FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB") ISSUED STATEMENT OF FINANCIAL ACCOUNTING STANDARD ("SFAS") 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS 150 REQUIRES THAT CERTAIN FINANCIAL INSTRUMENTS, WHICH UNDER PREVIOUS GUIDANCE WERE ACCOUNTED FOR AS EQUITY, MUST NOW BE ACCOUNTED FOR AS LIABILITIES. THE FINANCIAL INSTRUMENTS AFFECTED INCLUDE MANDATORY REDEEMABLE STOCK, CERTAIN FINANCIAL INSTRUMENTS THAT REQUIRE OR MAY REQUIRE THE ISSUER TO BUY BACK SOME OF ITS SHARES IN EXCHANGE FOR CASH OR OTHER ASSETS AND CERTAIN OBLIGATIONS THAT CAN BE SETTLED WITH SHARES OF STOCK. SFAS 150 IS EFFECTIVE FOR ALL FINANCIAL INSTRUMENTS ENTERED INTO OR MODIFIED AFTER MAY 31, 2003, AND OTHERWISE IS EFFECTIVE AT THE BEGINNING OF THE FIRST INTERIM PERIOD BEGINNING AFTER JUNE 15, 2003. THE COMPANY INTENDS TO ADOPT SFAS 150 EFFECTIVE JULY 1, 2003 AND DOES NOT BELIEVE THAT THE ADOPTION WILL HAVE A MATERIAL IMPACT ON ITS CONSOLIDATED FINANCIAL POSITION OR RESULTS OF OPERATION. IN APRIL 2003, THE FASB ISSUED SFAS 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, WHICH AMENDS AND CLARIFIES FINANCIAL ACCOUNTING AND REPORTING FOR DERIVATIVE INSTRUMENTS, INCLUDING CERTAIN DERIVATIVE INSTRUMENTS EMBEDDED IN OTHER CONTRACTS AND FOR HEDGING ACTIVITIES UNDER SFAS 133. SFAS 149 IS EFFECTIVE FOR CONTRACTS ENTERED INTO OR MODIFIED AFTER JUNE 30, 2003. THE COMPANY IS CURRENTLY EVALUATING THE IMPACT OF THIS STATEMENT. IN DECEMBER 2002, THE FASB ISSUED SFAS 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, WHICH AMENDS SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS 148 AMENDS THE DISCLOSURE REQUIREMENTS IN SFAS 123 FOR STOCK-BASED COMPENSATION FOR ANNUAL PERIODS ENDING AFTER DECEMBER 15, 2002 AND FOR INTERIM PERIODS BEGINNING AFTER DECEMBER 15, 2002. SFAS 148 AMENDS SFAS 123 TO PROVIDE ALTERNATIVE METHODS OF TRANSITION FOR AN ENTITY THAT VOLUNTARILY CHANGES TO FAIR VALUE BASED METHOD OF ACCOUNTING FOR STOCK-BASED EMPLOYEE COMPENSATION. IT ALSO AMENDS THE DISCLOSURE PROVISIONS OF SFAS 123 TO REQUIRE PROMINENT DISCLOSURE ABOUT THE EFFECTS ON REPORTED NET INCOME OF AN ENTITY'S ACCOUNTING POLICY DECISIONS WITH RESPECT TO STOCK-BASED EMPLOYEE COMPENSATION. FINALLY, SFAS 148 AMENDS ACCOUNTING PRINCIPLES BOARD ("APB") OPINION NO. 28, INTERIM FINANCIAL REPORTING, TO REQUIRE DISCLOSURE ABOUT THOSE EFFECTS IN INTERIM FINANCIAL INFORMATION. THE COMPANY HAS ADOPTED THE AMENDED DISCLOSURE PROVISIONS OF SFAS 148. F12 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE2005 and 2004 are as follows (in thousands):

   2005  2004 

Deferred tax assets:

         

Employee benefit obligations

  $2,306  $1,732 

Inventory

   301   735 

Provision for service warranties

   596   419 

Provision for doubtful debts

   692   867 

Net operating loss carryforwards

   4,505   723 

Foreign tax credits

   8,422   8,836 

AMT tax credit

   399   634 

Intercompany profit in inventories

   14,376   8,958 

Capitalized internal use software

   741   308 

Deferred gain on sale-leaseback

   -   659 

Other

   1,290   1,885 
    33,628   25,756 

Less valuation allowance

   (9,096)  (8,459)

Deferred tax assets

   24,532   17,297 

Deferred tax liabilities:

         

Patents

   (65)  (91)

Unrealized gain on foreign currency options

   (905)  (599)

Unrealized foreign exchange gains

   (1,905)  (1,472)

Property, plant and equipment

   (2,366)  (2,885)

Goodwill and Other Intangibles

   (14,997)  (4,780)

Other

   (759)  (429)

Deferred tax liabilities

   (20,997)  (10,256)

Net deferred tax asset

  $3,535  $7,041 

The net deferred tax assets and liabilities have been reported in the consolidated balance sheet at June 30, 2003 AND 2002 (3) NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED IN JULY 2002, THE FASB ISSUED SFAS 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 REQUIRES 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. UNDER SFAS 146, A COMPANY MAY NOT RESTATE ITS PREVIOUSLY ISSUED FINANCIAL STATEMENTS AND SFAS 146 GRANDFATHERS THE ACCOUNTING FOR LIABILITIES THAT A COMPANY HAD PREVIOUSLY RECORDED UNDER EMERGING ISSUES TASK FORCE ISSUE 94-3. THE ADOPTION OF SFAS 146 DID NOT HAVE A MATERIAL IMPACT ON THE RESULTS OF OPERATIONS, FINANCIAL POSITION OR LIQUIDITY OF THE COMPANY. THE FASB ISSUED SFAS 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS AS OF APRIL 2002. SFAS 145 RESCINDS SFAS 4 AND SFAS 64, WHICH REQUIRED THAT ALL GAINS AND LOSSES FROM 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 APB OPINION NO.2005 and 2004 as follows (in thousands):

   2005  2004 

Current deferred tax asset

  $15,230  $12,033 

Non-current deferred tax liability

   (11,695)  (4,992)

Net deferred tax asset

  $3,535  $7,041 

As of June 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, 2005, the Company had $8,315,000, $7,763,000 and $9,825,000 of U.S. federal, state and non-U.S. net operating loss carryforwards, respectively, which expire in various years through 2025 or carry forward indefinitely. The Company also had foreign tax credit carryforwards of $8,422,000 and alternative minimum tax credit carryforwards of $399,000. The foreign tax credit carryforwards have expiration dates through 2014.

F22


RESMED INC.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 CLASSIFIED GAINS FROM THE EXTINGUISHMENT OF DEBT AS OTHER INCOME IN ITS CONSOLIDATED STATEMENTS OF INCOME. IN AUGUST 2001, THE FASB ISSUED SFAS 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS." FOR LONG-LIVED ASSETS TO BE HELD AND USED, SFAS 144 RETAINS THE REQUIREMENTS OF SFAS 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 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 144 REQUIRES THAT SUCH ASSETS BE CONSIDERED HELD AND USED UNTIL DISPOSED. 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 ADOPTED SFAS 144 ON JULY 1, 2002. ADOPTION OF THE STANDARD DID NOT HAVE A MATERIAL IMPACT ON THE RESULTS OF OPERATIONS, FINANCIAL POSITION OR LIQUIDITY OF THE COMPANY. F13 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE SUBSIDIARIES

Notes to Consolidated Financial Statements

(14)Income Taxes, Continued

The valuation allowance at June 30, 2003 AND 2002 (3) NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED IN JULY 2001, THE FASB ISSUED SFAS 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 COMPLETED ITS ANNUAL ASSESSMENT OF GOODWILL IMPAIRMENT IN JULY 2002. THE RESULTS OF THE REVIEW INDICATED THAT NO IMPAIRED GOODWILL CURRENTLY EXISTS. IN JUNE 2001, THE FASB ISSUED SFAS 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 143 ARE EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER JUNE 15, 2002. THE INITIAL ADOPTION OF SFAS 143 DID NOT HAVE A MATERIAL IMPACT ON THE RESULTS OF OPERATIONS, FINANCIAL POSITION OR LIQUIDITY OF THE COMPANY. (4) MARKETABLE SECURITIES THE ESTIMATED FAIR VALUE OF MARKETABLE SECURITIES AVAILABLE FOR SALE AS OF JUNE2005, relates primarily to a provision for uncertainty as to the utilization of foreign tax credits of $8,422,000 and net operating loss carryforwards of $482,000 for certain non-US countries. We believe that it is more likely than not that the benefits of deferred tax assets, net of any valuation allowance, will be realized.

The Company has not provided U.S. income taxes on undistributed earnings of certain of its non-U.S. subsidiaries. The total amount of these undistributed earnings at June 30, 2003 AND 2002, WAS $6,533,000 AND $19,979,000 RESPECTIVELY. EXPECTED MATURITIES MAY DIFFER FROM CONTRACTUAL MATURITIES BECAUSE THE ISSUERS OF THE SECURITIES MAY HAVE THE RIGHT TO PREPAY OBLIGATIONS WITHOUT PREPAYMENT PENALTIES. (5) INVENTORIES INVENTORIES, NET WERE COMPRISED OF THE FOLLOWING AS OF JUNE 30, 2003 AND 2002 (IN THOUSANDS):
- ------------------------------------ 2003 2002 - ------------------------------------ Raw materials. . $13,712 $ 8,130 Work in progress 2,288 2,057 Finished goods . 33,386 30,986 - ------------------------------------ $49,386 $41,173 - ------------------------------------
F14 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (6) PROPERTY, PLANT AND EQUIPMENT PROPERTY, PLANT AND EQUIPMENT IS COMPRISED OF THE FOLLOWING AS OF JUNE 30, 2003 AND 2002 (IN THOUSANDS):
- ------------------------------------------------------------------ 2003 2002 - ------------------------------------------------------------------ Machinery and equipment. . . . . . . . . . . $ 25,278 $ 19,381 Computer equipment 28,487 20,520 Furniture and fixtures . . . . . . . . . . . 11,528 9,204 Vehicles . . . . . . . . . . . . . . . . . . 1,749 1,531 Clinical, demonstration and rental equipment 18,056 11,651 Leasehold improvements . . . . . . . . . . . 1,213 685 Land . . . . . . . . . . . . . . . . . . . . 31,913 27,121 Buildings. . . . . . . . . . . . . . . . . . 19,231 19,188 Construction in Progress . . . . . . . . . . 12,611 1,082 - ------------------------------------------------------------------ 150,066 110,363 Accumulated depreciation and amortization. . (45,379) (31,084) - ------------------------------------------------------------------ $104,687 $ 79,279 - ------------------------------------------------------------------
(7) 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, 2003, 2002 AND 2001, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS).
- --------------------------------------------------------------------- 2003 2002 2001 - --------------------------------------------------------------------- OPERATING INCOME: Reported income from operations . . . . . $67,240 $51,159 $26,042 Add back: goodwill amortization . . . . . - - 1,430 - --------------------------------------------------------------------- Adjusted income from operations . . . . . $67,240 $51,159 $27,472 - --------------------------------------------------------------------- NET INCOME: Reported net income . . . . . . . . . . . $45,729 $37,506 $11,630 Add back: goodwill amortization after tax - - 1,430 - --------------------------------------------------------------------- Adjusted net income . . . . . . . . . . . $45,729 $37,506 $13,060 - --------------------------------------------------------------------- BASIC EARNINGS PER SHARE: Reported basic earnings per share . . . . $ 1.38 $ 1.17 $ 0.37 Goodwill amortization after tax . . . . . - - $ 0.05 - --------------------------------------------------------------------- Adjusted basic earnings per share . . . . $ 1.38 $ 1.17 $ 0.42 - --------------------------------------------------------------------- DILUTED EARNINGS PER SHARE: Reported diluted earnings per share . . . $ 1.33 $ 1.10 $ 0.35 Goodwill amortization after tax . . . . . - - $ 0.04 - --------------------------------------------------------------------- Adjusted diluted earnings per share . . . $ 1.33 $ 1.10 $ 0.39 - ---------------------------------------------------------------------
F15 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (7) GOODWILL AND OTHER INTANGIBLE ASSETS, CONTINUED CHANGES IN THE CARRYING AMOUNT OF GOODWILL FOR THE YEAR ENDED JUNE 30, 2003, WERE AS FOLLOWS:
- --------------------------------------------------------------------- (In US$thousands) 2003 - --------------------------------------------------------------------- Balance at June 30, 2002. . . . . . . . . . . . . . . $ 92,536 Foreign currency translation adjustments. . . . . . . 9,324 Goodwill on acquisition2005 amounted to approximately $251,030,000. Should the Company repatriate foreign earnings, the Company would have to adjust the income tax provision in the period management determined that the Company would repatriate earnings. Under the American Jobs Creation Act of John Stark and Associates. 300 - --------------------------------------------------------------------- Balance at June 30, 2003. . . . . . . . . . . . . . . $102,160 - ---------------------------------------------------------------------
OTHER INTANGIBLE ASSETS AMOUNTED TO $3.7 MILLION (NET OF ACCUMULATED AMORTIZATION OF $3.4 MILLION) AND $2.7 MILLION (NET OF ACCUMULATED AMORTIZATION OF $1.9 MILLION) AT JUNE 30, 2003 AND 2002, 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. (8) ACCRUED EXPENSES AT JUNE 30, 2003 AND 2002 CONSIST OF THE FOLLOWING (IN THOUSANDS):
- -------------------------------------------------------- 2003 2002 - -------------------------------------------------------- Service warranties. . . . . . . . . . $ 1,304 $ 744 Consulting and professional fees. . . 2,001 596 Value added taxes and other taxes due 1,173 847 Employee related costs. . . . . . . . 9,849 6,817 Research foundation grants. . . . . . 899 1,344 Convertible note interest . . . . . . 126 137 Promotional programs. . . . . . . . . 1,426 2,746 Other . . . . . . . . . . . . . . . . 2,362 2,042 - --------------------------------------------------------- $19,140 $15,273 - ---------------------------------------------------------
(9) LONG-TERM DEBT LONG-TERM DEBT AT JUNE 30, 2003 AND 2002 CONSISTS OF THE FOLLOWING (IN THOUSANDS):
------------------------------------------------------- 2003 2002 - -------------------------------------------------------- Outstanding at beginning of year $123,250 $150,000 Issued . . . . . . . . . . . . . - 30,000 Repurchased. . . . . . . . . . . (10,000) (56,750) - -------------------------------------------------------- Outstanding at end of year . . . $113,250 $123,250 - --------------------------------------------------------
F16 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (9) 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 JUNEenacted on October 22, 2004, BUT PRIOR TO JUNE 20,a one-time favorable foreign dividend provision would be available to the Company for certain earnings repatriated during its fiscal year ending June 30, 2006. The Company may decide to repatriate earnings under this provision and will complete an evaluation of this opportunity before June 30, 2006. The effects of any decision cannot be reasonably estimated at this time.

(15)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 9% of the salaries of all Australian employees. Total Company contributions to the plans for the years ended June 30, 2005, AT A REDEMPTION PRICE EQUAL TO 101.6% OF THE PRINCIPAL AMOUNT OF NOTES REDEEMED, 2004, and 2003 were $2,612,000, $2,410,000 and $1,663,391, 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 5% of the salaries of all United Kingdom employees. Total Company contributions to the plan were $67,000, $33,000 and $23,000 in fiscal 2005, 2004, and 2003 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 the employee’s salary. Total Company contributions to the plan were $514,000, $362,000 and $326,000 in fiscal 2005, 2004 and 2003 respectively.

(4) Switzerland - The Company sponsors a fixed return defined contribution fund for each permanent Swiss employee. As part of the Company’s contribution to the fund the company guarantees a fixed 3% net return on accumulated contributions per annum. The Company contributes to the plans at variable rates that have averaged 10% of salaries over the last three years. Total Company contributions to the plan were $85,000, $139,000 and $133,000 in fiscal 2005, 2004 and 2003 respectively.

(16)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, the Company operates as a single operating segment. The Company assesses performance and allocates resources on the basis of a single operating entity.

F23


RESMED INC.AND AT ANY TIME AFTER JUNE SUBSIDIARIES

Notes to Consolidated Financial Statements

(16)Segment Information, Continued

Financial information by geographic area for the years ended June 30, 2005, 2004 and 2003, is summarized below (in thousands):

   U.S.A  Germany  Australia  France  Rest of
World
  Total

2005

                    

Revenue from external customers

  $210,495  72,824  14,160  47,537  80,489   425,505
  

Long lived assets

  $32,090  11,615  130,310  2,544  6,900   183,459

2004

                    

Revenue from external customers

  $159,283  67,253  10,293  34,629  67,880  $339,338
  

Long lived assets

  $33,010  6,842  108,683  1,075  5,831  $155,441

2003

                    

Revenue from external customers

  $124,375  51,992  6,972  27,745  62,486  $273,570
  

Long lived assets

  $34,340  5,765  68,300  1,030  2,350  $111,785

Net revenues from external customers are 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 intangibles, deferred tax assets and goodwill.

(17)Commitments

The Company leases buildings, motor vehicles and office equipment under operating leases. As part of the acquisition of Saime the Company assumed a capital lease for land and buildings. This lease contains an option to purchase the property at the end of the lease term. Rental charges for operating leases are expensed as incurred. At June 30, 2005 the Company had the following future minimum lease payments under non-cancelable operating leases and capital leases (in thousands):

Years  Capital Leases  Operating Leases 

2006

  $94  $5,563 

2007

   91   3,323 

2008

   88   2,135 

2009

   86   1,650 

2010

   83   1,005 

Thereafter

   358   1,345 

Total minimum lease payments

  $800  $15,021 

Less: Sublease rental income

   -   (131)

Less: Interest portion

   (125)  - 

Present value of net minimum lease payments

  $675  $14,890 

Rent expenses under operating leases for the years ended June 30, 2005, 2004 and 2003 were approximately $5.3 million, $5.5 million and $3.8 million, respectively.

F24


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(17)Commitments, Continued

Details of other commercial commitments at June 30, 2005 are as follows (in thousands):

   Total
Amounts
Committed
  Amount of Commitment Expiration Per Period
     2006  2007  2008  2009  2010  Thereafter

Standby Letters of Credit

  $32  $32  $-  $-  $-  $-  $-

Guarantees*

   1,190   -   439   -   211   -   540

Total Commercial Commitments

  $1,222  $32  $439  $-  $211  $-  $540

*The above guarantees relate to guarantees required by statutory authorities as a pre-requisite to developing our site at Norwest Business Park, near Sydney, Australia, and to guarantees required by contracts with insurance companies transacting with our German subsidiaries.

(18)Business Acquisitions

Fiscal year ended June 30, 2005

Saime SA (“Saime”).    On May 19, 2005 AT A REDEMPTION PRICE OF 100.8% OF THE PRINCIPAL AMOUNT OF NOTES, PLUS IN ANY CASE ACCRUED we acquired 100% of the outstanding stock of Financiere ACE SAS, the holding company for Saime SA and its affiliates, for net cash consideration of $40.5 million. This was comprised of $51.0 million in consideration, including acquisition costs, less $10.5 million of cash acquired. Additionally, as part of the acquisition we assumed (and immediately repaid) debt of $65.8 million. The acquisition and the immediate repayment of the assumed debt was funded with cash on hand and a five-year secured loan of 50 million Euro, equivalent to $62.7 million, from HSBC Bank Australia Limited (note 10).

Saime is a leading developer of ventilation products and distributes its products directly in France and Germany and through a network of distributors in Europe and Asia-Pacific.

The acquisition has been accounted for using purchase accounting and has been included within our consolidated financial statements from May, 19, 2005. The company has not yet completed the purchase price allocation as the appraisals associated with the valuation of certain tangible assets are not yet complete. The company does not believe that the appraisals will materially modify the preliminary purchase price allocation. We expect to complete our purchase price allocation in the six months ended December 31, 2005.

F25


RESMED INC.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 SUBSIDIARIES

Notes to Consolidated Financial Statements

(18)Business Acquisitions, Continued

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed from Saime at the date of acquisition based on an independent appraisal and internal studies (in thousands):

   At May 19, 2005 

Cash

  $10,532 

Accounts receivable

   7,829 

Inventory

   7,031 

Other assets

   874 

Property, plant & equipment

   2,112 

Developed / core product technology (useful life of 7 years)

   30,733 

In-Process research and development (expensed immediately)

   5,268 

Customer relationships (useful life of 9 years)

   10,035 

Tradenames (useful life of 7 years)

   1,631 

Goodwill (non-amortizing, non-tax deductible)

   66,338 

Total assets acquired

  $142,383 

Current liabilities, primarily consisting of accounts payable, accrued expenses, taxes payable and deferred tax liabilities

   (12,329)

Non current liabilities, primarily consisting of capital leases and deferred tax liabilities

   (13,271)

Assumed debt repaid upon acquisition

   (65,764)

Net assets acquired

  $51,019 

Since its formation in 1987, Saime has developed a complete range of ventilators for use in the home and hospital markets. Saime distributes its products directly in France and Germany and through a network of distributors in Europe and Asia Pacific. Saime develops, manufactures and markets products from its headquarters near Paris, with a staff of approximately 100.

The company believes that the Saime acquisition resulted in the recognition of goodwill primarily because of its industry position and management strength. In addition, Saime’s products complete our line of homecare ventilation products and will immediately expand our market presence and distribution network in Europe and other regions. The Saime devices will complement our VPAPIII and Autoset CS devices and will allow us to provide the full range of options for patients who need ventilatory assistance.

Hoefner Medizintechnick GmbH (“Hoefner”).    On February 14, 2005 we acquired 100% of the outstanding stock of Hoefner Medizintechnick GmbH (“Hoefner”), for net cash consideration of $8.2 million. This was comprised of the $10.7 million in total consideration, including acquisition costs, less $2.5 million of cash acquired. Under the purchase agreement, we may also be required to make additional future payments of up to $0.9 million based on the achievement of certain performance milestones following the acquisition through December 31, 2006. Hoefner is a German-based company that distributes medical equipment and associated services for the treatment of sleep and respiratory patients. Hoefner was our Bavarian distributor before the acquisition, and the acquisition is consistent with our strategy for ongoing expansion of our international operations. We have been particularly successful in selling directly in Europe, which improves our understanding of local markets as well as our relationships with physicians and payers. The acquisition also brings us into closer contact with patients and allows us to more directly respond to their needs.

F26


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(18)Business Acquisitions, Continued

The acquisition has been accounted for using purchase accounting and has been included within our consolidated financial statements from February 14, 2005. An amount of $8.2 million, representing the excess of the purchase price over the fair value of identifiable net assets acquired of $2.5 million, has been recorded as goodwill.

The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values at the date of acquisition. The fair values were determined by an independent appraisal and internal studies. The following table summarizes the final purchase price allocation of the assets acquired and liabilities assumed from Hoefner at the date of acquisition (in thousands):

   At February 14, 2005 

Cash

  $2,450 

Accounts receivable

   1,576 

Inventory

   3,526 

Other assets

   235 

Property, plant & equipment

   747 

Customer relationships (useful life of 7 years)

   1,828 

Goodwill (non-amortizing, non-tax deductible)

   8,202 

Total assets acquired

  $18,564 

Current liabilities, primarily consisting of accounts payable, accrued expenses, taxes payable and deferred revenue

   (4,333)

Non-current liabilities, primarily consisting of deferred revenue and deferred tax liabilities

   (3,573)

Net assets acquired

  $10,658 

Resprecare BV.    On December 1, 2004 we acquired substantially all the assets of Resprecare BV, our Dutch distributor, for initial consideration of $5.9 million in cash, including acquisition costs. The acquisition of the exclusive Dutch distributor for our Resmed-branded products is consistent with our strategy for ongoing expansion of our international operations. Under the purchase agreement, we potentially were also required to make up to $1.4 million of additional future payments based on the achievement of certain milestones. Of these potential additional payments, $0.6 million was paid in January 2005 as a result of the successful achievement of a performance milestone and a further $0.7 million was accrued as additional consideration at June 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 2005 as a result of the integration of the Dutch subsidiary of our subsidiary MAP with the newly-acquired Resprecare business. The decision to integrate these operations determined the amount of the final future payment, which will be paid in January 2006.

The acquisition has been accounted for using purchase accounting and accordingly, the results of operations of Resprecare have been included within our consolidated financial statements from December 1, 2004. An amount of $4.4 million, representing the excess of the purchase price over the fair value of identifiable net assets acquired of $2.8 million, has been recorded as goodwill, which will be tax deductible under Dutch Law. An independent third party has completed a valuation of identifiable intangible assets associated with the Resprecare acquisition. As a result of this valuation, $1.7 million that was preliminarily allocated to goodwill has been recorded as a customer relationship intangible asset and is being amortized over its estimated useful life of seven years.

F27


RESMED INC.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 THE YEAR ENDED JUNE SUBSIDIARIES

Notes to Consolidated Financial Statements

(18)Business Acquisitions, Continued

The following unaudited pro-forma financial information presents the combined results of operations of the Company and Resprecare, Hoefner and Saime as if the acquisitions had occurred as of the beginning of the years ended June 30, 2003 THE COMPANY REPURCHASED $10.0 MILLION FACE VALUE OF ITS CONVERTIBLE SUBORDINATED NOTES. THE TOTAL PURCHASE PRICE OF THE NOTES WAS $9.4 MILLION, INCLUDING $0.2 MILLION IN ACCRUED INTEREST. THE COMPANY RECOGNIZED A GAIN OF $0.3 MILLION, NET OF TAX OF $0.2 MILLION, ON THESE TRANSACTIONS. DURING THE YEAR ENDED JUNE2005 and 2004, respectively. The pro-forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and Resprecare, Hoefner and Saime constituted a single entity during such years.

The pro-forma net income for the year ended June 30, 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. F17 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (9) LONG-TERM DEBT, CONTINUED INTEREST IS TO BE PAID ON THE NOTES ON JUNE 20 AND DECEMBER 20 OF EACH YEAR. (10) 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 OR FOUR 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: 2005 excludes the non-recurring acquisition charge of $5,268,000 for purchased in-process research and development.

   
(In thousands except per share data)  2005  2004

Net revenue

  465,165  376,685

Net income

  75,086  59,877
  

Basic earnings per share

  2.19  1.78

Diluted earnings per share(1)

  2.09  1.70
  

Basic shares outstanding

  34,322  33,694

Diluted shares outstanding

  37,471  35,125

- ----------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise 2003 Price 2002 Price ($) 2001 Price ($) - ----------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year . 4,200,998 $27.94 3,852,818 $ 17.14 3,298,022 $10.12 Granted. . . . . . . . . . . . . . 1,470,675 26.54 1,328,600 50.18 1,569,690 27.27 Exercised. . . . . . . . . . . . . (678,400) 13.31 (775,803) 12.61 (884,859) 8.98 Forfeited. . . . . . . . . . . . . (248,095) 38.85 (204,617) 26.75 (130,035) 17.78 - ----------------------------------------------------------------------------------------------------------------- Outstanding at end of year . . . . 4,745,178 $29.04 4,200,998 $ 27.94 3,852,818 $17.14 - ----------------------------------------------------------------------------------------------------------------- Price range of granted options . . $25.42-37.40 $33.15-$52.20 $24-$40 Options exercisable at end of year 2,192,309 23.32 1,631,044 13.76 1,240,427 $ 8.02 - -----------------------------------------------------------------------------------------------------------------
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. F18 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (10) STOCKHOLDERS' EQUITY, CONTINUED
The following table summarizes information about stock options outstanding at June 30, 2003. - --------------------------------------------------------------------------------------------- Number Outstanding at Weighted Average Number Exercisable at Exercise Prices June 30, 2003 Remaining Contractual Life June 30, 2003 - --------------------------------------------------------------------------------------------- 0 - $10. . . . 335,765 3.43 335,764 11 - $20. . . . 735,665 5.76 735,165 21 - $30. . . . 2,015,854 8.38 538,165 31 - $40. . . . 540,250 8.08 210,667 41 - $50. . . . 1,038,644 8.10 346,215 51 - $60. . . . 79,000 8.08 26,333 - --------------------------------------------------------------------------------------------- 4,745,178. . . . 2,192,309 - ---------------------------------------------------------------------------------------------
THE FOLLOWING TABLE SUMMARIZES IN-THE-MONEY AND OUT-OF-THE-MONEY OPTIONS AS AT JUNE 30, 2003.
- ----------------------------------------------------------------------------------------------------------------- Exercisable Unexercisable Total ----------------------------------------------------------------------------------------------------------------- Wtd. Avg. Wtd. Avg. Wtd. Avg. Shares Exer. Price ($) Shares Exer. Price ($) Shares Exer. Price ($) - ----------------------------------------------------------------------------------------------------------------- In-the-Money . . . . . . . 1,816,261 $ 17.68 1,800,773 $ 27.01 3,617,034 $ 22.33 Out-of-the-Money(1). . . . 376,048 $ 50.55 752,096 $ 50.55 1,128,144 $ 50.55 Total Options Outstanding 2,192,309 $ 23.32 2,552,869 $ 33.95 4,745,178 $ 29.04 - -----------------------------------------------------------------------------------------------------------------
(1) OUT-OF-THE-MONEY OPTIONS ARE THOSE OPTIONS WITH AN EXERCISE PRICE EQUAL TO OR ABOVE THE CLOSING SALES PRICE OF THE COMPANY'S COMMON STOCK ON THE NEW YORK STOCK EXCHANGE ON JUNE 30, 2003 ($39.20 PER SHARE). THE FOLLOWING TABLE SUMMARIZES OUTSTANDING STOCK OPTION PLAN BALANCES AS AT JUNE 30, 2003.
- ------------------------------------------------------------------------------------------- Plan Category Number of securities Weighted-average Number of securities to be issued upon exercise price of remaining available exercise of outstanding option for future issuance outstanding under equity . . . . options compensation plans - ------------------------------------------------------------------------------------------- Equity compensation plans approved by . . 4,745,178 $ 29.04 888,525 security holders Equity compensation plans not approved by security holders. . . - - - - ------------------------------------------------------------------------------------------- Total . . . . . . . . 4,745,178 $ 29.04 888,525 - -------------------------------------------------------------------------------------------
F19 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (10) STOCKHOLDERS' EQUITY, CONTINUED STOCK OPTIONS BY RECIPIENT THE FOLLOWING TABLE SUMMARIZES STOCK OPTION GRANTS BY RECIPIENT, WITH EXECUTIVE OFFICERS (AS DEFINED IN EXCHANGE ACT RULE 3B-7) SEPARATELY DISCLOSED. AS AT JUNE 30, 2003, THE COMPANY HAD 7 EXECUTIVE OFFICERS.
- ---------------------------------------------------------------------------- June 30, 2003 June 30, 2002 June 30, 2001 - ---------------------------------------------------------------------------- Non-Executive Directors. . . 60,000 73,000 69,000 Executive Officers . . . . . 278,500 167,000 167,500 Staff. . . . . . . . . . . . 1,132,175 1,088,600 1,333,190 - ---------------------------------------------------------------------------- Gross Options Issued . . . . 1,470,675 1,328,600 1,569,690 - ---------------------------------------------------------------------------- Employees. . . . . . . . . . 1,464 1,250 953 - ---------------------------------------------------------------------------- Average Options per Employee 1,005 1,063 1,647 - ----------------------------------------------------------------------------
THE FOLLOWING TABLE DISCLOSES EMPLOYEE AND EXECUTIVE OPTION GRANTS AS A PERCENTAGE OF TOTAL OPTIONS.
- ----------------------------------------------------------------------------------------------------- 2003 2002 2001 - ----------------------------------------------------------------------------------------------------- Net grants during the period as % of outstanding shares (%) . . . . . . . . . . . . 4 4 5 Grants to executive officers during the period as % of total options granted (%). . 19 13 11 Grants to executive officers during the period as % of outstanding shares (%) . . . 1 1 1 Cumulative options held by executive officers as % of total options outstanding (%) 16 16 17 - -----------------------------------------------------------------------------------------------------
OPTIONS GRANTED TO EXECUTIVE OFFICERS DURING THE FISCAL YEAR ENDED JUNE 30, 2003 ARE AS NOTED BELOW.
- ----------------------------------------------------------------------------------------------------------------- Potential Realizable Value at Assumed Annual Rates of Individual Grants Stock Price Appreciation for Option Term
(1)(2) - ----------------------------------------------------------------------------------------------------------------- Number of Securities Underlying Percent of Total Exercise Options Per Options Granted Price Grant to Employees (%) ($/Share) Expiration Date 5% 10% - ----------------------------------------------------------------------------------------------------------------- Peter Farrell . . . 60,000 4.08% $25.42 July 11, 2012 $ 840,886 $2,071,142 Walter Flicker. . . 6,000 0.41% $25.42 July 11, 2012 $ 84,089 $ 207,114 Kieran Gallahue . . 150,000 10.20% $31.97 January 13,2013 $2,643,894 $6,512,038 David Pendarvis . . 15,000 1.02% $27.63 October 1, 2012 $ 228,498 $ 562,801 David Pendarvis . . 15,000 1.02% $37.40 May 27, 2013 $ 309,295 $ 761,809 Christopher Roberts 15,000 1.02% $25.42 July 11, 2012 $ 210,221 $ 517,786 Klaus Schindhelm. . 7,500 0.51% $25.42 July 11, 2012 $ 105,111 $ 258,893 Adrian Smith. . . . 10,000 0.68% $25.42 July 11, 2012 $ 140,148 $ 345,190 - ----------------------------------------------------------------------------------------------------------------- Total . . . . . . . 278,500 18.94% - -----------------------------------------------------------------------------------------------------------------
F20 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (10) STOCKHOLDERS' EQUITY, CONTINUED (1) REPRESENTS OPTIONS GRANTED UNDER OUR 1997 EQUITY PARTICIPATION PLAN, WHICH TYPICALLY ARE EXERCISABLE STARTING 12 MONTHS AFTER THE GRANT DATE, WITH 33% OF THE SHARES COVERED THEREBY BECOMING EXERCISABLE AT THAT TIME AND AN ADDITIONAL 33% OF THE OPTION SHARES BECOMING EXERCISABLE ON EACH SUCCESSIVE ANNIVERSARY DATE, WITH ALL OPTION SHARES EXERCISABLE BEGINNING ON EITHER THE THIRD OR FOURTH ANNIVERSARY DATE. UNDER THE TERMS OF THE 1997 PLAN, THIS EXERCISE SCHEDULE MAY BE ACCELERATED IN CERTAIN SPECIFIC SITUATIONS. IN ADDITION, WE HAVE THE RIGHT TO REQUIRE THE SURRENDER OF OUTSTANDING OPTIONS UPON THE GRANT OF LOWER PRICED OPTIONS TO THE SAME INDIVIDUAL. (2) ASSUMED ANNUAL RATES OF STOCK APPRECIATION FOR ILLUSTRATIVE PURPOSES ONLY. ACTUAL STOCK PRICES WILL VARY FROM TIME TO TIME BASED UPON MARKET FACTORS AND OUR FINANCIAL PERFORMANCE. NO ASSURANCE CAN BE GIVEN THAT SUCH RATES WILL BE ACHIEVED. THE FOLLOWING TABLE SUMMARIZES OPTION EXERCISES AND REMAINING HOLDINGS OF EXECUTIVE OFFICERS DURING THE YEAR ENDED JUNE 30, 2003.
- ----------------------------------------------------------------------------------------------------------------------- No. of Securities Underlying Value of Unexercised In-the All Unexercised Options Money Options (1) - ----------------------------------------------------------------------------------------------------------------------- Shares Acquired on Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable - ----------------------------------------------------------------------------------------------------------------------- Peter Farrell. . 31,000 $ 658,355 181,634 140,000 $3,880,982 $ 1,215,472 Walter Flicker . 38,000 $ 855,544 3,601 15,999 $ 3,892 $ 131,258 Kieran Gallahue. 0 0 0 150,000 $ 0 $ 1,084,500 David Pendarvis. 0 0 0 30,000 $ 0 $ 200,550 Chris Roberts. . 60,000 $ 1,963,440 40,000 35,000 $ 711,453 $ 303,872 Klaus Schindhelm 0 0 42,501 17,499 $ 979,140 $ 151,928 Adrian Smith . . 0 0 60,000 24,000 $1,542,360 $ 196,100 - ------------------------------------------------------------------------------------------------------------------------
(1) REPRESENTS THE AMOUNT BY WHICH THE CLOSING SALES PRICE OF OUR COMMON STOCK ON THE NEW YORK STOCK EXCHANGE ON JUNE 30, 2003 ($39.20 PER SHARE) MULTIPLIED BY THE NUMBER OF SHARES TO WHICH THE OPTIONS APPLY EXCEEDED THE AGGREGATE EXERCISE PRICE OF SUCH OPTIONS. 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, 2003. 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. 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 2003, THE COMPANY REPURCHASED 125,000 SHARES AT A COST OF $3.5 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. F21 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (11) OTHER, NET OTHER, NET IS COMPRISED OF THE FOLLOWING AT JUNE 30, 2003, 2002 AND 2001 (IN THOUSANDS):
- ----------------------------------------------------------------------------- 2003 2002 2001 - ----------------------------------------------------------------------------- Gain/(loss) on foreign currency hedging position $2,117 $(767) (2,766) Gain/(loss) on foreign currency transactions . . (562) 182 4,747 Realized gain on sale of marketable securities. . 115 301 - Other. . . . . . . . . . . . . . . . . . . . . . 237 392 (19) - ----------------------------------------------------------------------------- $1,907 $ 108 $ 1,962 - -----------------------------------------------------------------------------
(12) INCOME TAXES INCOME BEFORE INCOME TAXES FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND 2001, WAS TAXED UNDER THE FOLLOWING JURISDICTIONS (IN THOUSANDS):
- ----------------------------------- 2003 2002 2001 - ----------------------------------- U.S. . . $ 3,061 $ 418 $ 3,482 Non-U.S. 64,066 54,174 23,832 $67,127 $54,592 $27,314 - -----------------------------------
THE PROVISION FOR INCOME TAXES IS PRESENTED BELOW (IN THOUSANDS):
- --------------------------------------------------------- 2003 2002 2001 - --------------------------------------------------------- Current: Federal . . . . . . . . . $ 1,303 $ 4,962 $ 2,938 State . . . . . . . . . . 14 752 203 Non-U.S.. . . . . . . . . 18,079 17,525 14,790 - --------------------------------------------------------- 19,396 23,239 17,931 - --------------------------------------------------------- Deferred: Federal . . . . . . . . . 892 (3,494) (652) State . . . . . . . . . . 325 (568) 90 Non-U.S.. . . . . . . . . 785 (2,091) (1,685) 2,002 (6,153) (2,247) - --------------------------------------------------------- Provision for income taxes $21,398 $17,086 $15,684 - ---------------------------------------------------------
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): F22 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (12) INCOME TAXES, CONTINUED
- ----------------------------------------------------------------------------------------- 2003 2002 2001 - ----------------------------------------------------------------------------------------- Taxes computed at statutory U.S. rate . . . . . . . . . . . $23,495 $19,108 $ 9,287 Increase (decrease) in income taxes resulting from: State income taxes, net of U.S. tax benefit . . . . . . . . 274 363 356 Non-deductible expenses . . . . . . . . . . . . . . . . . . 243 116 460 Research and development credit . . . . . . . . . . . . . . (1,690) (888) (781) Tax effect of intercompany dividends. . . . . . . . . . . . - 2,577 (3,885) Utilization of net operating loss carryforwards . . . . . . - - (5) Write-off of net operating losses due to business cessation - 1,046 - Change in valuation allowance . . . . . . . . . . . . . . . 457 (2,614) 4,431 Effect of non-U.S. tax rates. . . . . . . . . . . . . . . . (2,498) (3,379) 4 In-process research and development write-off . . . . . . . - 123 6,010 Provision for restructure . . . . . . . . . . . . . . . . . - - 187 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,117 634 (380) - ----------------------------------------------------------------------------------------- $21,398 $17,086 $15,684 - -----------------------------------------------------------------------------------------
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. 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, 2003 AND 2002 (IN THOUSANDS):
- -------------------------------------------------------------------- 2003 2002 - -------------------------------------------------------------------- Deferred tax assets: Employee benefit obligations . . . . . . . . . $ 1,208 $ 940 Inventory. . . . . . . . . . . . . . . . . . . 1,068 289 Provision for service warranties . . . . . . . 343 195 Provision for doubtful debts . . . . . . . . . 768 648 Net operating loss carryforwards . . . . . . . 1,277 1,088 Foreign tax credits. . . . . . . . . . . . . . 7,288 7,291 AMT tax credit . . . . . . . . . . . . . . . . 1,667 1,675 Accrual for legal costs. . . . . . . . . . . . 307 54 Intercompany profit in inventories . . . . . . 6,013 5,606 Capitalized software . . . . . . . . . . . . . 472 - Deferred gain on sale-leaseback. . . . . . . . 1,329 1,740 Other. . . . . . . . . . . . . . . . . . . . . 2,112 1,679 - -------------------------------------------------------------------- 23,852 21,205 - -------------------------------------------------------------------- Less valuation allowance . . . . . . . . . . . (3,385) (2,950) - -------------------------------------------------------------------- Deferred tax assets. . . . . . . . . . . . . . 20,467 $18,255 - -------------------------------------------------------------------- Deferred tax liabilities: Patents . . . . . . . . . . . . . . . . . . . (93) (74) Capitalized software. . . . . . . . . . . . . - (451) Unrealized gain on foreign currency options . (773) (829) Unrealized foreign exchange gains . . . . . . (1,678) (238) Property, plant and equipment. . . . . . . . . (2,244) (1,595) Undistributed German income . . . . . . . . . (3,448) (3,355) Deferred tax deductible goodwill amortization (3,634) (2,410) Other . . . . . . . . . . . . . . . . . . . . (296) (14) - -------------------------------------------------------------------- Deferred tax liabilities . . . . . . . . . . . (12,166) (8,966) - -------------------------------------------------------------------- Net deferred tax asset . . . . . . . . . . . . $ 8,301 $ 9,289 - --------------------------------------------------------------------
F23 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (12) INCOME TAXES, CONTINUED AS OF JUNE 30, 2003, THE COMPANY HAD $2,219,000, $4,602,000 AND $934,000 OF US FEDERAL, US STATE AND NON-US NET OPERATING LOSS CARRYFORWARDS, RESPECTIVELY, WHICH EXPIRE IN VARIOUS YEARS THROUGH 2023 OR CARRYFORWARD INDEFINITELY. THE COMPANY ALSO HAD FOREIGN TAX CREDIT CARRYFORWARDS OF $7,288,000 AND ALTERNATIVE MINIMUM TAX CREDIT CARRYFORWARDS OF $1,667,000. THE FOREIGN TAX CREDIT CARRYFORWARDS HAVE EXPIRATION DATES THROUGH 2008. THE VALUATION ALLOWANCE AT JUNE 30, 2003, PRIMARILY RELATES TO A PROVISION FOR UNCERTAINTY AS TO THE UTILIZATION OF FOREIGN TAX CREDITS OF $3,303,000 AND NET OPERATING LOSS CARRYFORWARDS OF $82,000 FOR MALAYSIA AND FINLAND. (13) 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. FROM JULY 1, 2002 THE COMPANY CONTRIBUTES TO THE PLANS AT THE RATE OF 9% OF THE SALARIES OF ALL AUSTRALIAN EMPLOYEES. PRIOR TO JULY 2002, THE COMPANY CONTRIBUTED 8% FOR ALL QUALIFIED EMPLOYEES. TOTAL COMPANY CONTRIBUTIONS TO THE PLANS FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND 2001 WERE $1,663,391, $968,000 AND $814,000, 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 5% OF THE SALARIES. PRIOR TO JANUARY 2002, THE COMPANY CONTRIBUTED 3% FOR ALL QUALIFIED EMPLOYEES. TOTAL COMPANY CONTRIBUTIONS TO THE PLAN WERE $23,376, $16,000 AND $7,000 IN FISCAL 2003, 2002, AND 2001 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 $326,000, $245,000 AND $158,000 IN FISCAL 2003, 2002 AND 2001 RESPECTIVELY. (4) SWITZERLAND - THE COMPANY SPONSORS A FIXED RETURN DEFINED CONTRIBUTION FUND FOR EACH PERMANENT SWISS EMPLOYEE. AS PART OF THE COMPANY'S CONTRIBUTION TO THE FUND THE COMPANY GUARANTEES A FIXED 3% NET RETURN ON ACCUMULATED CONTRIBUTIONS PER ANNUM. THE COMPANY CONTRIBUTES TO THE PLANS AT VARIABLE RATES WHICH HAVE AVERAGED 10% OF SALARIES OVER THE LAST THREE YEARS. TOTAL COMPANY CONTRIBUTIONS TO THE PLAN WERE $133,000 AND $94,000 IN FISCAL 2003 AND 2002 RESPECTIVELY. F24 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (14) 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, 2003, 2002 AND 2001, IS SUMMARIZED BELOW (IN THOUSANDS):
- ----------------------------------------------------------------------------------------- Rest of U.S.A Germany Australia France World Total - ----------------------------------------------------------------------------------------- 2003 Revenue from external customers $124,375 51,992 6,972 27,745 62,486 $273,570 Long lived assets . . . . . . . $ 34,340 5,765 68,300 1,030 2,350 $111,785 - ----------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------
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. F25 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (15) 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, 2003 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 income lease payments - ------------------------------------------------------------------------------ 2004 . . . . . . . . . . . . $ 5,134 $ 358 $ 4,776 2005 . . . . . . . . . . . . 4,817 387 4,430 2006 . . . . . . . . . . . . 1,571 72 1,499 2007 . . . . . . . . . . . . 1,244 - 1,244 2008 . . . . . . . . . . . . 952 - 952 Thereafter . . . . . . . . . 722 - 722 Total minimum lease payments $ 14,440 $ 817 $ 13,623 - ------------------------------------------------------------------------------
RENT EXPENSES UNDER OPERATING LEASES FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001 WERE APPROXIMATELY $3,801,000, $2,267,000 AND $1,087,000, RESPECTIVELY. (16) BUSINESS ACQUISITIONS FISCAL YEAR ENDED JUNE 30, 2003 ON JULY 24, 2002 WE ACQUIRED THE BUSINESS OF JOHN STARK AND ASSOCIATES, OUR TEXAS REPRESENTATIVE, FOR TOTAL CONSIDERATION OF $0.3 MILLION IN CASH. THE ACQUISITION HAS BEEN ACCOUNTED FOR AS A PURCHASE AND ACCORDINGLY, THE RESULTS OF OPERATIONS OF JOHN STARK AND ASSOCIATES WERE INCLUDED WITHIN THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FROM JULY 24, 2002. AN AMOUNT OF $0.3 MILLION REPRESENTING THE EXCESS OF THE PURCHASE PRICE OVER THE FAIR VALUE OF NET IDENTIFIABLE ASSETS ACQUIRED OF $NIL, HAS BEEN RECORDED AS GOODWILL. 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. AN AMOUNT OF $30.7 MILLION, REPRESENTING 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. F26 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (16) BUSINESS ACQUISITIONS, CONTINUED FISCAL YEAR ENDED JUNE 30, 2002 (CONTINUED) PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT OF $0.4 MILLION 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 OUR 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 AND AS AT MARCH 31, 2003. 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 AG HAVE BEEN INCLUDED IN THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FROM NOVEMBER 15, 2001. AN AMOUNT OF $4.2 MILLION, REPRESENTING 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. 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. F27 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (16) BUSINESS ACQUISITION, CONTINUED FISCAL YEAR ENDED JUNE 30, 2001 (CONTINUED) 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. AN AMOUNT OF $47.1 MILLION, REPRESENTING THE EXCESS OF THE PURCHASE PRICE OVER THE FAIR VALUE OF THE NET IDENTIFIABLE ASSETS ACQUIRED, HAS BEEN RECORDED AS GOODWILL. 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. 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 YEAR ENDED JUNE 30, 2001 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 FISCAL 2001.
- ------------------------------------------------ (In thousands except per share data) 2001 - ------------------------------------------------ Net revenue. . . . . . . . . . . . . $172,250 Net income . . . . . . . . . . . . . 28,556 Basic earnings per share . . . . . . $ 0.92
Diluted earnings per share . . . . . $ 0.85 Basic shares outstanding . . . . . . 31,129 Diluted shares outstanding . . . . . 33,484 - ------------------------------------------------
F28 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (16) BUSINESS ACQUISITION, CONTINUED FISCAL YEAR ENDED JUNE 30, 2001 (CONTINUED) 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. (17) COMPREHENSIVE INCOME MOVEMENTS IN COMPREHENSIVE INCOME (LOSS) FOR THE YEAR ENDED JUNE 30, 2003 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, 2002 ($8,230) 105 ($8,125) $114,643 $ 106,518 Current period change . . . . . 38,131 (96) 38,035 45,729 83,764 - ------------------------------------------------------------------------------------------------------------- Ending balance,has been calculated after adjusting the numerator (net income) by $3,285,000 and $NIL for the years ended June 30, 2003 . $ 29,901 9 $ 29,910 $160,372 $ 190,282 - ------------------------------------------------------------------------------------------------------------- 2005 and 2004, respectively for the effect of assumed conversion of our convertible notes, and the related reduction in interest expense, net of tax.
COMPREHENSIVE INCOME/(LOSS) FOR THE YEARS ENDED JUNE

Fiscal year ended June 30, 2004

On July 2, 2003 we acquired the assets of Respro Medical Company Limited (“Respro”), our Hong Kong distributor for total consideration of $184,000 in cash. The acquisition has been accounted for using purchase accounting and accordingly, the results of operations of Respro has been included within our consolidated financial statements from July 2, 2003. An amount of $89,000, representing the excess of the purchase price over the fair value of net identifiable assets acquired of $95,000, has been recorded as goodwill.

Fiscal year ended June 30, 2003 JUNE

On July 24, 2002 we acquired the business of John Stark and Associates, our Texas representative, for total consideration of $0.3 million in cash. The acquisition has been accounted for using purchase accounting and accordingly, the results of operations of John Stark and Associates has been included within the Company’s consolidated financial statements from July 24, 2002. An amount of $0.3 million representing the excess of the purchase price over the fair value of net identifiable assets acquired of $nil, has been recorded as goodwill.

(19)Legal Actions and Contingencies

In the normal course of business, we are subject to routine litigation incidental to our business. While the results of this litigation cannot be predicted with certainty, we believe that their final outcome will not have a material adverse effect on our consolidated financial statements taken as a whole.

F28


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(19)Legal Actions and Contingencies, Continued

During September and October 2004, the Company received tax assessment notices for the audit of one of its German subsidiaries by the German tax authorities for the years 1996 through 1998. Certain of these adjustments are being contested and appealed to the German tax authority office. We believe no additional provision is necessary for any tax adjustment that may result from the tax audit. However, the outcome of the audit cannot be predicted with certainty. Should any tax audit issues be resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period of resolution.

On December 23, 2002 three former contractors of our subsidiary MAP Medizin-Technologie GmbH initiated proceedings in Munich 1 Regional Court (Proceedings No. 7 O 23286/02), petitioning the Court for a declaration of inventorship with respect to MAP German Patent Applications identified as No. 100 31 079 and 101 92 802.5 and European Patent Application No. EP 01 967 819.7. On March 10, 2005 the Court entered judgment in favor of the plaintiffs, finding that they should be identified as co-inventors in place of certain individual defendants. In April 2005, MAP filed an appeal of that decision. We do not expect the outcome of this litigation to have an adverse material effect on our consolidated financial statements.

(20)In-Process Research and Development Charge (“IPR&D”)

On acquisition of Saime in May 2005, we recognized as an expense a charge of $5.3 million with respect to IPR&D programs under active development by Saime that, at date of acquisition, had not reached technological feasibility and had no alternative future use. The estimated fair value assigned to IPR&D was based on an independent appraisal and was comprised of the following projects (in thousands):

Project  Value of IPR&D

Upgrade of the Elisee Series of ventilators

  $1,379

Next generation of portable ventilators

   3,889

Total

  $5,268

The value of IPR&D 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 25%, which was based on the risk profile of the acquired assets.

As of the date of acquisition, these projects have estimated costs to complete totaling approximately $1.1 million. The projects were in various stages of development but are expected to reach completion at various dates ranging from 1 to 3 years.

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.

(21)Subsequent Events

On July 1, 2005 we acquired 100% of the outstanding stock of Pulmomed Medizinisch-technische Geräte GmbH (“Pulmomed), for cash consideration of $1.5 million. Under the purchase agreement we may also be

F29


RESMED INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(21)Subsequent Events, Continued

required to make additional future payments of up to $0.9 million based on the achievement of certain performance milestones following the acquisition through July 15, 2007. Pulmomed is an Austrian based company that distributes medical equipment and associated services for the treatment of sleep and respiratory patients.

On July 7, 2005, we purchased a 9.78-acre parcel of land in San Diego for $21.0 million. The new location at Kearney Mesa, San Diego will allow us to develop our new corporate headquarters. We expect to commence building during calendar year 2006 and begin moving into the facility in calendar 2007.

On August 10, 2005 we announced that our Board of Directors has approved a two-for-one split of its common stock, payable in the form of a 100 percent stock dividend. Shareholders of record will receive one additional share of common stock for every share held on September 15, 2005.

F30


Schedule II


RESMED INCAND SUBSIDIARIES

VALUATIONAND QUALIFYING ACCOUNTSAND RESERVES

YEARS ENDED JUNE 30, 2002 2005, 2004AND JUNE 30, 2001 WAS $83.8 MILLION, $59.0 MILLION 2003

(in thousands)

   Balance
at
Beginning
of Period
  Charged
to costs
and
expenses
  Other
(deductions)
  Balance
at end
of
period
  

Year ended June 30, 2005

             

Applied against asset account

             

Allowance for doubtful accounts

  $3,197  611  (609) 3,199
  

Year ended June 30, 2004

             

Applied against asset account

             

Allowance for doubtful accounts

  $2,474  1,178  (455) 3,197
  

Year ended June 30, 2003

             

Applied against asset account

             

Allowance for doubtful accounts

  $1,938  1,144  (608) 2,474

See accompanying report of independent registered public accounting firm.


RESMED INC.AND ($4.8) 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 INCOME (LOSS) AT JUNE 30, 2003 AND JUNE 30, 2002 CONSISTED OF FOREIGN CURRENCY TRANSLATION ADJUSTMENTS WITH NET CREDIT BALANCE OF $29.9 MILLION AND A NET DEBIT BALANCE OF $8.2 MILLION RESPECTIVELY AND UNREALIZED GAINS ON SECURITIES OF $9,000 (NET OF TAX OF $6,000) AND $105,000 (NET OF TAX OF $57,000), RESPECTIVELY. (18) LEGAL ACTIONS THE COMPANY WAS ENGAGED IN LITIGATION RELATING TO THE ENFORCEMENT AND DEFENSE OF CERTAIN OF ITS PATENTS DURING THE FISCAL YEAR. 1995 LITIGATION WITH RESPIRONICS. IN JANUARY 1995, OUR SUBSIDIARY, RESMED LIMITED, FILED A COMPLAINT IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA SEEKING MONETARY DAMAGES FROM AND INJUNCTIVE RELIEF AGAINST RESPIRONICS, INC. FOR ALLEGED INFRINGEMENT OF THREE OF ITS PATENTS. IN FEBRUARY 1995, RESPIRONICS FILED A COMPLAINT IN THE U.S. DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA, IN PITTSBURGH, AGAINST RESMED LIMITED SEEKING A DECLARATORY JUDGMENT THAT RESPIRONICS, INC. DOES NOT INFRINGE CLAIMS OF THESE PATENTS AND THAT RESMED LIMITED'S PATENTS ARE INVALID AND UNENFORCEABLE. THE RESPIRONICS COMPLAINT ALSO MADE THE UNIVERSITY OF SYDNEY A PARTY AS THE UNIVERSITY OF SYDNEY IS THE ASSIGNEE OF ONE OF THE PATENTS IN SUIT; RESMED LIMITED IS THE EXCLUSIVE LICENSEE OF THAT PATENT. THE TWO ACTIONS WERE COMBINED AND ARE PROCEEDING IN THE WESTERN DISTRICT OF PENNSYLVANIA. IN JUNE 1996, RESMED LIMITED FILED AN ADDITIONAL COMPLAINT AGAINST RESPIRONICS FOR INFRINGEMENT OF A FOURTH RESMED PATENT, AND THAT COMPLAINT WAS CONSOLIDATED WITH THE EARLIER ACTION. F29 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (18) LEGAL ACTIONS, CONTINUED THE COURT HAS GRANTED THREE PARTIAL SUMMARY JUDGMENT MOTIONS, FINDING THAT RESPIRONICS DOES NOT INFRINGE THREE OF THE FOUR PATENTS AT ISSUE. IN DECEMBER 1999, IN RESPONSE TO THE COURT'S RULING ON RESPIRONICS, INC.'S 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 OF THE THIRD PARTIAL SUMMARY JUDGMENT. ON SEPTEMBER 9, 2003, THE COURT VACATED THE SUMMARY JUDGMENTS. RESMED AND RESPIRONICS HAVE AGREED TO SETTLE THIS ACTION. RESMED AND RESPIRONICS WILL DISMISS ALL CLAIMS IN THE ACTION WITH PREJUDICE. 2002 LITIGATION WITH FISHER & PAYKEL HEALTHCARE. ON AUGUST 26, 2002, RESMED INC., RESMED CORP. AND RESMED LIMITED FILED A LAWSUIT IN U.S. DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA, IN SAN DIEGO AGAINST FISHER & PAYKEL HEALTHCARE INC AND FISHER & PAYKEL HEALTHCARE LIMITED ("FISHER & PAYKEL HEALTHCARE"). RESMED'S AMENDED COMPLAINT SOUGHT A JUDGMENT THAT SELECTED FISHER & PAYKEL HEALTHCARE MASK PRODUCTS INFRINGE PATENTS HELD BY RESMED. THE COMPLAINT FURTHER CHARGED THE DEFENDANTS WITH THE COPYING OF RESMED PROPRIETARY MASK TECHNOLOGY AND ALLEGES VIOLATIONS OF THE LANHAM ACT, TRADEMARK AND TRADE DRESS INFRINGEMENT AND COMMON LAW VIOLATIONS RELATING TO THE APPEARANCE OF RESMED MASK PRODUCTS. ON MAY 6, 2003, RESMED AND FISHER & PAYKEL HEALTHCARE AGREED TO SETTLE THIS PATENT INFRINGEMENT LAWSUIT. IN ACCORDANCE WITH THE SETTLEMENT, FISHER & PAYKEL INTRODUCED A NEW DESIGN OF ITS MASK IN THE UNITED STATES BY AUGUST 1, 2003 AND RESMED WILL NOT ASSERT INTELLECTUAL PROPERTY CLAIMS AGAINST THE NEW MASK. IN ADDITION, FISHER & PAYKEL MAY CONTINUE TO SELL ITS EXISTING MASKS OUTSIDE THE UNITED STATES UNTIL OCTOBER 1, 2003, UNDER LICENSE FROM RESMED, UNTIL IT INTRODUCES THE NEW VERSION THERE. RESMED HAS DISMISSED THE LAWSUIT WITH PREJUDICE. 2002 LITIGATION WITH RESPIRONICS. ON OCTOBER 11, 2002, RESMED INC, RESMED CORP, AND RESMED LIMITED FILED A LAWSUIT IN U.S. DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA, IN SAN DIEGO AGAINST RESPIRONICS, INC. RESMED'S SUIT SEEKS A JUDGMENT THAT CERTAIN OF RESPIRONICS' MASK PRODUCTS (CONTOUR DELUXE, COMFORT CLASSIC, COMFORT SELECT, AND IMAGE3 MASKS) INFRINGE PATENTS HELD BY RESMED. THE COMPLAINT FURTHER CHARGES RESPIRONICS WITH COPYING RESMED'S PROPRIETARY MASK TECHNOLOGY, AND ALLEGES VIOLATION OF THE LANHAM ACT, TRADEMARK AND TRADE DRESS INFRINGEMENT, AND COMMON LAW VIOLATIONS RELATING TO THE APPEARANCE OF RESMED'S MASK PRODUCTS. RESMED SEEKS AN INJUNCTION AND DAMAGES. ON MARCH 4, 2003, THE COURT DENIED RESPIRONICS' MOTION TO TRANSFER THE CASE TO THE U.S. DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. ON OCTOBER 16, 2002 RESPIRONICS, INC. FILED A LAWSUIT IN U.S. DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA, IN PITTSBURGH, AGAINST RESMED LIMITED SEEKING A DECLARATORY JUDGMENT THAT RESPIRONICS, INC. DOES NOT INFRINGE THE PATENTS THAT ARE THE SUBJECT OF RESMED'S OCTOBER 11, 2002 COMPLAINT FILED IN SAN DIEGO, THAT SUCH PATENTS ARE INVALID AND UNENFORCEABLE AND THAT RESPIRONICS HAS NOT COMMITTED ANY OTHER TRADEMARK, TRADE DRESS OR COMMON LAW VIOLATIONS. ON JULY 29, 2003, THE COURT ORDERED THE CASE TRANSFERRED TO THE US DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA. RESMED AND RESPIRONICS HAVE AGREED TO SETTLE THIS ACTION. RESMED AND RESPIRONICS WILL DISMISS ALL CLAIMS IN THE ACTION WITH PREJUDICE. F30 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (18) LEGAL ACTIONS, CONTINUED OTHER LITIGATION. IN ADDITION TO THE MATTERS DESCRIBED ABOVE, IN THE NORMAL COURSE OF BUSINESS, WE ARE SUBJECT TO ROUTINE LITIGATION INCIDENTAL TO OUR BUSINESS. WHILE THE RESULTS OF THIS LITIGATION CANNOT BE PREDICTED WITH CERTAINTY, WE BELIEVE THAT THEIR FINAL OUTCOME WILL NOT HAVE A MATERIAL ADVERSE EFFECT ON OUR CONSOLIDATED FINANCIAL STATEMENTS TAKEN AS A WHOLE. (19) IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE MAP ON ACQUISITION OF MAP IN FEBRUARY 2001, THE COMPANY RECOGNIZED AS AN EXPENSE A CHARGE OF $17.7 MILLION WITH RESPECT TO FIVE IN-PROCESS RESEARCH AND DEVELOPMENT PROGRAMS UNDER ACTIVE DEVELOPMENT BY MAP AT DATE OF ACQUISITION. THE FIVE PROJECTS WERE: (I) A SINGLE-WALLED NASAL CUSHION MASK SYSTEM. (II) A NEW HEADGEAR SYSTEM (III) STANDALONE ACTIVE HUMIDIFIER (IV) AN AUTOTITRATION CPAP DEVICE FOR TREATMENT OF OSA (V) A NEW OSA DIAGNOSTIC DEVICE. THE STATUS OF EACH PROJECT IS AS NOTED BELOW: (I) SINGLE-WALLED NASAL CUSHION THE NASAL CUSHION UNDER DEVELOPMENT BY MAP ON ACQUISITION WAS ORIGINALLY DUE FOR RELEASE IN OCTOBER 2001. DELAYS IN THE DESIGN AND MANUFACTURING PROCESS DELAYED THE RELEASE FOR SEVEN MONTHS, UNTIL APRIL 2002. THE DELAY IN RELEASE OF THE PRODUCT WAS NOT SIGNIFICANT OVER ITS EXPECTED LIFE CYCLE, AND HAS MADE NO SIGNIFICANT IMPACT ON THE NET RETURN ASSUMPTIONS USED IN THE INITIAL IN-PROCESS RESEARCH AND DEVELOPMENT MODEL. SINCE RELEASE, THE PRODUCT (NOW REFERRED TO AS THE PAPILLON) HAS MET OR EXCEEDED ALL SALES FORECASTS. (II) NEW HEADGEAR THE NEW HEADGEAR PRODUCT LINE WAS WITHHELD TO COINCIDE WITH THE RELEASE OF THE PAPILLION MASK SYSTEM IN APRIL 2002 AND SO WAS ALSO SEVEN MONTHS BEHIND SCHEDULE IN PROJECTED RELEASE DATES. SINCE RELEASE, THE NEW HEADGEAR SYSTEM HAS EXCEEDED ORIGINAL SALES PROJECTIONS AND CONTINUES TO MEET OR EXCEED INITIAL EXPECTATIONS. F31 RESMED INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (19) IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE, CONTINUED (III) STANDALONE ACTIVE HUMIDIFIER DUE TO OTHER PRIORITIES AND TO THE INTRODUCTION OF INTEGRATED HUMIDIFICATION FLOW GENERATOR DEVICES BY A NUMBER OF COMPETITORS DURING FISCAL 2002, WE HAVE DELAYED THE STANDALONE HUMIDIFIER PROJECT. GIVEN THE RELATIVELY SMALL REVENUE FORECAST OF THE PRODUCT LINE IN THE IN-PROCESS RESEARCH AND DEVELOPMENT MODEL, THE FINANCIAL IMPACT OF THIS PROJECT IS NOT MATERIAL TO RESMED OR THE NET RETURN OF THE MAP ACQUISITION. (IV) AUTO TITRATION CPAP DEVICE THE MAIN PRODUCT DEVELOPMENT EFFORT OF MAP SINCE ACQUISITION HAS BEEN ON THE COMPLETION OF THE AUTOTITRATION CPAP FLOW GENERATOR SPECIFIED IN THE INITIAL IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. THIS PROJECT EXPERIENCED SOME DELAYS DUE TO THE COMPLEXITY OF THE SOFTWARE ALGORITHM DEVELOPMENT PROCESS AND ASSOCIATED ELECTRONICS RESULTING IN THE PRODUCT BEING RELEASED IN NOVEMBER 2002. (V) OSA DIAGNOSTIC DEVICE MAP'S NEW DIAGNOSTIC DEVICE REMAINS ON TARGET FOR INITIAL MARKET RELEASE IN CALENDAR 2003 ALTHOUGH THE FORECASTED RELEASE DATE OF MARCH 2003 WAS NOT ACHIEVED. WE REMAIN CONFIDENT IN THE CAPACITY OF THE DEVICE TO ENHANCE THE DIAGNOSTIC PROCESS, AND REMAIN CONFIDENT IN THE POTENTIAL OF THE PRODUCT TO SIGNIFICANTLY IMPACT THE TREATMENT AND DIAGNOSIS OF OBSTRUCTIVE SLEEP APNEA IN THE GERMAN MARKET. AS AT JUNE 30, 2003, THREE OF THE FIVE PROGRAMS HAVE BEEN COMPLETED WITH THE RELEASE OF THE PAPILLON MASK SYSTEM, UPGRADED HEADGEAR AND THE MAGELLAN AUTOMATED FLOW GENERATOR CPAP DEVICE. ALL THREE PRODUCTS ARE GENERATING SALES REVENUE CONSISTENT WITH OUR ORIGINAL EXPECTATIONS AND ASSUMPTIONS USED IN CALCULATING THE IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. WE EXPECT TO RELEASE PRODUCTS WITH RESPECT TO BOTH REMAINING IN-PROCESS RESEARCH AND DEVELOPMENT PROGRAMS OVER THE NEXT TWELVE-MONTH PERIOD, WHICH IS GENERALLY CONSISTENT WITH OUR ORIGINAL EXPECTATIONS. GIVEN THE SUCCESSFUL COMPLETION OF THE ABOVE RESEARCH PROGRAMS AND PERFORMANCE OF THE ASSOCIATED PRODUCT LINES, WE REMAIN CONFIDENT IN THE ASSUMPTIONS USED TO DETERMINE THE IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE AND AS A RESULT THE NET RETURN OF THE MAP ACQUISITION. F32 RESMED INC. AND SUBSIDIARIES SUBSIDIARIES

SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION

Pursuant to the requirements of Section 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OFor 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. the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DATED SEPTEMBER 10, 2003 RESMED INC. /S/ PETER C. FARRELL - ---------------------------------------- PETER C. FARRELL PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OFSeptember 12, 2005

ResMed Inc

/S/    PETER C. FARRELL        


Peter C. Farrell

President and Chief Executive 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. this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

- --------------------------------------------------------------------------------------------
SIGNATURETITLEDATE

/S/    PETERC. . . . . . . . . . . . TITLE DATE - -------------------------------------------------------------------------------------------- /S/ PETERFARRELL        


Peter C. FARRELL Farrell

Chief Executive Officer,

President, Chairman of the Board

(Principal Executive Officer)

September 12, 2005

/S/    ADRIANM.SMITH        


Adrian M. Smith

Senior Vice President Finance and

Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

September 12, 2005

/S/    CHRISTOPHERG.ROBERTS        


Christopher G. Roberts

Director

September 12, 2005

/S/    MICHAELA.QUINN        


Michael A. Quinn

Director

September 12, 2005

/S/    GARYW.PACE        


Gary W. Pace

Director

September 12, 2005

/S/    DONAGHMCCARTHY        


Donagh McCarthy

Director

September 12, 2005

/S/    RICHARDSULPIZIO        


Richard Sulpizio

Director

September 12, 2005

/S/    RONTAYLOR        


Ron Taylor

Director

September 12, 2005

/S/    JOHNP.WAREHAM        


John P. Wareham

Director

September 12, 2005

S-1


RESMED INC.AND SUBSIDIARIES

EXHIBIT INDEX

3.1Certificate of Incorporation of Registrant, as amended(1)

3.2By-laws of Registrant(1)

4.1Form of certificate evidencing shares of Common Stock(1)

4.2Rights agreement dated as of April 23, 1997(2)

4.3Indenture dated as of June 20, 2001, between ResMed Inc and American Stock Transfer & Trust Company (5)

4.4Registration 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(5)

4.5Registration Rights Agreement dated as of May 14, 2002 between ResMed Inc, and Mr. Leslie Hoffman(6)

10.11995 Stock Option Plan(1)

10.21997 Equity Participation Plan(3)

10.3Licensing Agreement between the University of Sydney and ResMed Limited dated May 17, 1991, as amended(1)

10.5Loan Agreement between the Australian Trade Commission and ResMed Limited dated May 3, 1994(1)

10.6Lease for 10121 Carroll Canyon Road, San Diego 92131-1109, U.S.A.(4)

10.7Sale and Leaseback Agreements for 97 Waterloo Rd, North Ryde, Australia(5)

10.8Employment Agreement dated as of May 14, 2002, between Servo Magnetics Acquisition Inc., and Mr. Leslie Hoffman(6)

10.9Agreement for the purchase of Lot 6001, Norwest Boulevarde, Norwest Business Park, Baulkham Hills, Australia(6)

10.102003 Employee Stock Purchase Plan(7)

10.11Loan Agreement between ResMed Limited and HSBC Bank Australia Limited

10.12Saime Purchase Agreement

21.1Subsidiaries of the Registrant

23.1Independent Registered Public Accounting Firm’s Report on Schedule and Consent

31.1Certifications of Chief Executive Officer September 10, 2003 Peter C. Farrell . . . . . . .President, ChairmanPursuant to Section 302 of the Board (Principal Executive Officer) - -------------------------------------------------------------------------------------------- /S/ ADRIAN M. SMITH . . . . . . Vice President Finance and September 10, 2003 Adrian M. Smith. . . . . . . .ChiefSarbanes-Oxley Act of 2002

31.2Certifications of Chief Financial Officer - -------------------------------------------------------------------------------------------- /S/ CHRISTOPHER G. ROBERTS . Director September 10, 2003 Christopher G. Roberts - -------------------------------------------------------------------------------------------- /S/ MICHAEL A. QUINN . . . . . . Director September 10, 2003 Michael A. Quinn - -------------------------------------------------------------------------------------------- /S/ GARY W. PACE . . . . . . . . Director September 10, 2003 Gary W. Pace - -------------------------------------------------------------------------------------------- /S/ DONAGH MCCARTHY. . . . . . . Director September 10, 2003 Donagh McCarthy - -------------------------------------------------------------------------------------------- /S/ CHRISTOPHER A. BARTLETT. . . Director September 10, 2003 Christopher Bartlett - -------------------------------------------------------------------------------------------- /S/ LOUIS A. SIMPSON . . . . . . Director September 10, 2003 Louis Simpson - -------------------------------------------------------------------------------------------- Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
- -44- EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 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 REPORT; 3. BASED ON MY KNOWLEDGE, THE FINANCIAL STATEMENTS, AND OTHER FINANCIAL INFORMATION INCLUDED IN THIS 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 REPORT; 4. THE REGISTRANT'S OTHER CERTIFYING OFFICER AND I ARE RESPONSIBLE FOR ESTABLISHING AND MAINTAINING DISCLOSURE CONTROLS AND PROCEDURES (AS DEFINED IN EXCHANGE ACT RULES 13A-15(E) AND 15D-15(E)) FOR THE REGISTRANT AND HAVE: (A) DESIGNED SUCH DISCLOSURE CONTROLS AND PROCEDURES, OR CAUSED SUCH DISCLOSURE CONTROLS AND PROCEDURES TO BE DESIGNED UNDER OUR SUPERVISION, TO ENSURE THAT MATERIAL INFORMATION RELATING TO THE REGISTRANT, INCLUDING ITS CONSOLIDATED SUBSIDIARIES, IS MADE KNOWN TO US BY OTHERS WITHIN THOSE ENTITIES, PARTICULARLY DURING THE PERIOD IN WHICH THIS REPORT IS BEING PREPARED; (B) EVALUATED THE EFFECTIVENESS OF THE REGISTRANT'S DISCLOSURE CONTROLS AND PROCEDURES AND PRESENTED IN THIS REPORT OUR CONCLUSIONS ABOUT THE EFFECTIVENESS OF THE DISCLOSURE CONTROLS AND PROCEDURES, AS OF THE END OF THE PERIOD COVERED BY THIS REPORT BASED ON SUCH EVALUATION; AND (C) DISCLOSED IN THIS REPORT ANY CHANGE IN THE REGISTRANT'S INTERNAL CONTROL OVER FINANCIAL REPORTING THAT OCCURRED DURING THE REGISTRANT'S MOST RECENT FISCAL QUARTER (THE REGISTRANT'S FOURTH FISCAL QUARTER IN THE CASE OF AN ANNUAL REPORT) THAT HAS MATERIALLY AFFECTED, OR IS REASONABLY LIKELY TO MATERIALLY AFFECT, THE REGISTRANT'S INTERNAL CONTROL OVER FINANCIAL REPORTING; AND 5. THE REGISTRANT'S OTHER CERTIFYING OFFICER AND I HAVE DISCLOSED, BASED ON OUR MOST RECENT EVALUATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING, TO THE REGISTRANT'S AUDITORS AND THE AUDIT COMMITTEE OF THE REGISTRANT'S BOARD OF DIRECTORS (OR PERSONS PERFORMING THE EQUIVALENT FUNCTIONS): (A) ALL SIGNIFICANT DEFICIENCIES AND MATERIAL WEAKNESSES IN THE DESIGN OR OPERATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING WHICH ARE REASONABLY LIKELY TO ADVERSELY AFFECT THE REGISTRANT'S ABILITY TO RECORD, PROCESS, SUMMARIZE AND REPORT FINANCIAL INFORMATION; AND (B) ANY FRAUD, WHETHER OR NOT MATERIAL, THAT INVOLVES MANAGEMENT OR OTHER EMPLOYEES WHO HAVE A SIGNIFICANT ROLE IN THE REGISTRANT'S INTERNAL CONTROL OVER FINANCIAL REPORTING. SEPTEMBER 10, 2003 /S/ PETER C. FARRELL - ----------------------------------------- PETER C. FARRELL CHAIRMAN AND CHIEF EXECUTIVE OFFICER - -45- EXHIBIT 31.2 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 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 REPORT; 3. BASED ON MY KNOWLEDGE, THE FINANCIAL STATEMENTS, AND OTHER FINANCIAL INFORMATION INCLUDED IN THIS 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 REPORT; 4. THE REGISTRANT'S OTHER CERTIFYING OFFICER AND I ARE RESPONSIBLE FOR ESTABLISHING AND MAINTAINING DISCLOSURE CONTROLS AND PROCEDURES (AS DEFINED IN EXCHANGE ACT RULES 13A-15(E) AND 15D-15(E)) FOR THE REGISTRANT AND HAVE: (A) DESIGNED SUCH DISCLOSURE CONTROLS AND PROCEDURES, OR CAUSED SUCH DISCLOSURE CONTROLS AND PROCEDURES TO BE DESIGNED UNDER OUR SUPERVISION, TO ENSURE THAT MATERIAL INFORMATION RELATING TO THE REGISTRANT, INCLUDING ITS CONSOLIDATED SUBSIDIARIES, IS MADE KNOWN TO US BY OTHERS WITHIN THOSE ENTITIES, PARTICULARLY DURING THE PERIOD IN WHICH THIS REPORT IS BEING PREPARED; (B) EVALUATED THE EFFECTIVENESS OF THE REGISTRANT'S DISCLOSURE CONTROLS AND PROCEDURES AND PRESENTED IN THIS REPORT OUR CONCLUSIONS ABOUT THE EFFECTIVENESS OF THE DISCLOSURE CONTROLS AND PROCEDURES, AS OF THE END OF THE PERIOD COVERED BY THIS REPORT BASED ON SUCH EVALUATION; AND (C) DISCLOSED IN THIS REPORT ANY CHANGE IN THE REGISTRANT'S INTERNAL CONTROL OVER FINANCIAL REPORTING THAT OCCURRED DURING THE REGISTRANT'S MOST RECENT FISCAL QUARTER (THE REGISTRANT'S FOURTH FISCAL QUARTER IN THE CASE OF AN ANNUAL REPORT) THAT HAS MATERIALLY AFFECTED, OR IS REASONABLY LIKELY TO MATERIALLY AFFECT, THE REGISTRANT'S INTERNAL CONTROL OVER FINANCIAL REPORTING; AND 5. THE REGISTRANT'S OTHER CERTIFYING OFFICER AND I HAVE DISCLOSED, BASED ON OUR MOST RECENT EVALUATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING, TO THE REGISTRANT'S AUDITORS AND THE AUDIT COMMITTEE OF THE REGISTRANT'S BOARD OF DIRECTORS (OR PERSONS PERFORMING THE EQUIVALENT FUNCTIONS): (A) ALL SIGNIFICANT DEFICIENCIES AND MATERIAL WEAKNESSES IN THE DESIGN OR OPERATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING WHICH ARE REASONABLY LIKELY TO ADVERSELY AFFECT THE REGISTRANT'S ABILITY TO RECORD, PROCESS, SUMMARIZE AND REPORT FINANCIAL INFORMATION; AND (B) ANY FRAUD, WHETHER OR NOT MATERIAL, THAT INVOLVES MANAGEMENT OR OTHER EMPLOYEES WHO HAVE A SIGNIFICANT ROLE IN THE REGISTRANT'S INTERNAL CONTROL OVER FINANCIAL REPORTING. SEPTEMBER 10, 2003 /S/ ADRIAN M. SMITH - -------------------------------------------------------- ADRIAN M. SMITH VICE PRESIDENT FINANCE AND CHIEF FINANCIAL OFFICER - -46- EXHIBIT 32.1 THE FOLLOWING CERTIFICATIONS ARE BEING FURNISHED SOLELY TO ACCOMPANY THE REPORT PURSUANT TO 18 U.S.C. 1350 AND IN ACCORDANCE WITH SEC RELEASE NO. 33-8238. THESE CERTIFICATIONS SHALL NOT BE DEEMED "FILED" FOR PURPOSES OF SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, NOR SHALL THEY BE INCORPORATED BY REFERENCE IN ANY FILING OF THE COMPANY UNDER THE SECURITIES ACT OF 1933, AS AMENDED, WHETHER MADE BEFORE OR AFTER THE DATE HEREOF, REGARDLESS OF ANY GENERAL INCORPORATION LANGUAGE IN SUCH FILING. CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 1350, AS CREATED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, THE UNDERSIGNED OFFICER OF RESMED INC., A DELAWARE CORPORATION (THE "COMPANY"), HEREBY CERTIFIES, TO HIS KNOWLEDGE, THAT: (I) THE ACCOMPANYING ANNUAL REPORT ON FORM 10-K OF THE COMPANY FOR THE PERIOD ENDED JUNE 30, 2003 (THE "REPORT") FULLY COMPLIES WITH THE REQUIREMENTS OF SECTION 13(A) OR SECTION 15(D), AS APPLICABLE, OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED; AND (II) THE INFORMATION CONTAINED IN THE REPORT FAIRLY PRESENTS, IN ALL MATERIAL RESPECTS, THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY. DATED: SEPTEMBER 10, 2003 /S/ PETER C. FARRELL - ----------------------------------------- PETER C. FARRELL CHAIRMAN AND CHIEF EXECUTIVE OFFICER A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO RESMED INC. AND WILL BE RETAINED BY RESMED INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350, AS CREATED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, THE UNDERSIGNED OFFICER OF RESMED INC., A DELAWARE, CORPORATION (THE "COMPANY"), HEREBY CERTIFIES, TO HIS KNOWLEDGE, THAT: (I) THE ACCOMPANYING ANNUAL REPORT ON FORM 10-K OF THE COMPANY FOR THE PERIOD ENDED JUNE 30, 2003 (THE "REPORT") FULLY COMPLIES WITH THE REQUIREMENTS OF SECTION 13(A) OR SECTION 15(D), AS APPLICABLE, OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED; AND (II) THE INFORMATION CONTAINED IN THE REPORT FAIRLY PRESENTS, IN ALL MATERIAL RESPECTS, THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY. DATED: SEPTEMBER 10, 2003 /S/ ADRIAN M. SMITH - -------------------------------------------------------- ADRIAN M. SMITH VICE PRESIDENT FINANCE AND CHIEF FINANCIAL OFFICER A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO RESMED INC. AND WILL BE RETAINED BY RESMED INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. - -47- SCHEDULE II

RESMED INC. AND SUBSIDIARIES Valuation
32.1Certifications of Chief Executive Officer and Qualifying Accounts and Reserves Years EndedChief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(1)Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (No. 33-91094) declared effective on June 1, 1995.
(2)Incorporated by reference to the Registrant’s Registration Statement on Form 8-A12G filed on April 25, 1997.
(3)Incorporated by reference to the Registrant’s 1997 Proxy Statement.
(4)Incorporated by reference to the Registrant’s Report on Form 10-K dated June 30, 2003, 2002 and 2001 (in thousands) - -------------------------------------------------------------------------------------------- Balance at Charged1998.
(5)Incorporated by reference to Other Balance at Beginning of costs and (deductions) end of period Period expenses - -------------------------------------------------------------------------------------------- YEAR ENDED JUNE 30, 2003 Applied against asset account Allowance for doubtful accounts $ 1,938 1,144 (608) 2,474 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 - --------------------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT AUDITOR'S REPORT. - -48- RESMED INC. AND SUBSIDIARIES 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 (1) 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 (7) 3.1 CERTIFICATE OF INCORPORATION OF REGISTRANT, AS AMENDED (2) 3.2 BY-LAWS OF REGISTRANT (2) 4.1 FORM OF CERTIFICATE EVIDENCING SHARES OF COMMON STOCK (2) 4.2 RIGHTS AGREEMENT DATED AS OF APRIL 23, 1997 (3) 4.3 INDENTURE DATED AS OF JUNE 20, 2001, BETWEEN RESMED INC AND AMERICAN STOCK TRANSFER & TRUST COMPANY (6) 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 (6) 4.5 REGISTRATION RIGHTS AGREEMENT DATED AS OF MAY 14, 2002 BETWEEN RESMED INC., AND MR. LESLIE HOFFMAN (7) 10.1 1995 STOCK OPTION PLAN (2) 10.2 1997 EQUITY PARTICIPATION PLAN (4) 10.3 LICENSING AGREEMENT BETWEEN THE UNIVERSITY OF SYDNEY AND RESMED LIMITED DATED MAY 17, 1991, AS AMENDED (2) 10.4 CONSULTING AGREEMENT BETWEEN COLIN SULLIVAN AND RESMED LIMITED EFFECTIVE FROM 1 JANUARY 1998 (5) 10.5 LOAN AGREEMENT BETWEEN THE AUSTRALIAN TRADE COMMISSION AND RESMED LIMITED DATED MAY 3, 1994 (2) 10.6 LEASE FOR 1091 CARROLL CANYON ROAD, SAN DIEGO 92131-1109, U.S.A.(5) 10.7 SALE AND LEASEBACK AGREEMENTS FOR 97 WATERLOO RD, NORTH RYDE, AUSTRALIA (6) 10.8 EMPLOYMENT AGREEMENT DATED AS OF MAY 14, 2002, BETWEEN SERVO MAGNETICS ACQUISITION INC., AND MR. LESLIE HOFFMAN (7) 10.9 AGREEMENT FOR THE PURCHASE OF LOT 6001, NORWEST BOULEVARDE, NORWEST BUSINESS PARK, BAULKHAM HILLS, AUSTRALIA (7) 11.1 COMPUTATION OF EARNINGS PER COMMON SHARE 21.1 SUBSIDIARIES OF THE REGISTRANT 23.1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE 31.1 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 31.2 CERTIFICATIONS OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 32.1 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - -------------------------------------------------------------------------------- (1) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REPORT ON FORM 8-K DATED MARCH 2, 2001. (2) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-1 (NO. 33-91094) DECLARED EFFECTIVE ON JUNE 1, 1995. (3) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM 8-A12G FILED ON APRIL 25, 1997. (4) INCORPORATED BY REFERENCE TO THE REGISTRANT'S 1997 PROXY STATEMENT. (5) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REPORT ON FORM 10-K DATED JUNE 30, 1998. (6) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REPORT ON FORM 10-K DATED JUNE 30, 2001. (7) INCORPORATED BY REFERENCE TO THE REGISTRANT'S REPORT ON FORM 10-K DATED JUNE 30, 2002. - -49- EXHIBIT 11.1
RESMED INC. AND SUBSIDIARIES Computation of Earnings Per Common Share (in thousands, except per share amounts) - ----------------------------------------------------------------------------------------------------------------- Year Endedthe Registrant’s Report on Form 10-K dated June 30, 2001.
(6)Incorporated by reference to the Registrant’s Report on Form 10-K dated June 30, 2002.
(7)Incorporated by reference to the Registrant’s 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------- BASIC EARNINGS: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,729 $37,506 $11,630 - ----------------------------------------------------------------------------------------------------------------- Shares/ Weighted average number of common shares outstanding. . . . . . . . . . . . . 33,054 32,174 31,129 - ----------------------------------------------------------------------------------------------------------------- Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.38 $ 1.17 $ 0.37 - ----------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,729 $37,506 $11,630 - ----------------------------------------------------------------------------------------------------------------- Shares/ Weighted average number of common shares outstanding . . . . . . . . . . . . . 33,054 32,174 31,129 - ----------------------------------------------------------------------------------------------------------------- Additional shares assuming conversion of stock options under treasury stock method . . 1,385 1,906 2,355 - ----------------------------------------------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding as adjusted 34,439 34,080 33,484 - ----------------------------------------------------------------------------------------------------------------- Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.33 $ 1.10 $ 0.35 - ----------------------------------------------------------------------------------------------------------------- Proxy Statement.
SEE ACCOMPANYING INDEPENDENT AUDITOR'S REPORT. - -50- EXHIBIT 21.1 RESMED INC. SUBSIDIARIES OF THE REGISTRANT RESMED CORPORATION (A MINNESOTA CORPORATION) RESMED (MALAYSIA) SDN BHD (A MALAYSIAN CORPORATION) (2) RESMED (UK) LIMITED (A UNITED KINGDOM CORPORATION) (1) RESMED ASIA PACIFIC LIMITED (INCORPORATED UNDER THE LAWS OF NEW SOUTH WALES, AUSTRALIA) (1) RESMED BETEILIGUNGS GMBH (A GERMAN CORPORATION) RESMED FINLAND OY (A FINLAND CORPORATION) RESMED HOLDINGS LIMITED (INCORPORATED UNDER THE LAWS OF NEW SOUTH WALES, AUSTRALIA) RESMED HONG KONG LIMITED (A HONG KONG CORPORATION) RESMED INTERNATIONAL INC (A DELAWARE CORPORATION) RESMED KK (A JAPANESE CORPORATION) (2) RESMED LIMITED (INCORPORATED UNDER THE LAWS OF NEW SOUTH WALES, AUSTRALIA) (1) RESMED NEW ZEALAND LIMITED (A NEW ZEALAND CORPORATION) (2) RESMED PRIESS GMBH (A GERMAN CORPORATION) RESMED PRIESS GMBH AND CO KG (A GERMAN CORPORATION) (2) RESMED R&D LIMITED (INCORPORATED UNDER THE LAWS OF NEW SOUTH WALES, AUSTRALIA) (1) RESMED SA (A FRENCH CORPORATION) (2) RESMED SINGAPORE PTE LTD (A SINGAPOREAN CORPORATION) (2) RESMED SPAIN SL (A SPANISH CORPORATION) (2) RESMED SWEDEN AB (A SWEDISH CORPORATION) (2) SERVO MAGNETICS INC. (A DELAWARE CORPORATION) LABHARDT AG (A SWISS CORPORATION) (2) MAP HIRSCH MEDIZINTECHNIK F R ARZT UND PATIENT GMBH (AN AUSTRIAN CORPORATION) (4) MAP MEDISCHE TECHNIEK VOOR ARTS EN PATIENT BV (A DUTCH CORPORATION) (4) MAP MEDIZINTECHNIK F R ARZT UND PATIENT GMBH (A SWISS CORPORATION) (4) MAP MEDIZIN-TECHNOLOGIE GMBH (A GERMAN CORPORATION) (3) - -------------------------------------------------------------------------------- (1) A SUBSIDIARY OF RESMED HOLDINGS LIMITED (2) A SUBSIDIARY OF RESMED INTERNATIONAL INC (3) A SUBSIDIARY OF RESMED BETEILIGUNGS GMBH (4) A SUBSIDIARY OF MAP MEDIZIN-TECHNOLOGIE GMBH - -51- 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 8, 2003, INCLUDED THE RELATED FINANCIAL STATEMENT SCHEDULE AS OF JUNE 30, 2003 AND FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED JUNE 30, 2003. 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 STATEMENTS (NOS. 333-70500 AND 333-100825) ON FORM S-3 OF RESMED INC. OF OUR REPORTS INCLUDED HEREIN. /S/ KPMG LLP - ------------------------ SAN DIEGO, CALIFORNIA SEPTEMBER 10, 2003