10-K405

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K
(MARK ONE)
/X/   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
             ACT OF 1934 

                    FOR THE FISCAL YEAR ENDED JULY 2, 1995

                                       OR

/ /   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
             EXCHANGE ACT OF 1934 

                    FOR THE TRANSITION PERIOD FROM     TO

                         COMMISSION FILE NUMBER 0-14980

                      NELLCOR PURITAN BENNETT INCORPORATED
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

             DELAWARE                                           94-2789249
  (State or other jurisdiction of                           (I.R.S. Employer
   incorporation or organization)                           Identification No.)

          4280 HACIENDA DRIVE                                     94588
        PLEASANTON, CALIFORNIA                                 (Zip Code)
 (Address of principal executive offices)

       Registrant's telephone number, including area code: (510) 463-4000
          Securities registered pursuant to Section 12(b) of the Act:
                                      None

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

                         Common Stock, $.001 par value
                                (Title of class)

                        Preferred Share Purchase Rights
                                (Title of class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  X   No
                                              ---     ---

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

         Approximate aggregate market value of the registrant's Common Stock
held by non-affiliates (based on the closing sales price of such stock as
reported in the Nasdaq National Market) on September 1, 1995 was
$1,445,463,015.00.*

         Number of shares of Common Stock, $.001 par value, outstanding as of
September 1, 1995 was 28,358,496.

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                      DOCUMENTS INCORPORATED BY REFERENCE



                          DOCUMENT                                                   FORM 10-K PART
                          --------                                                   --------------
                                                                               
(1)      Annual Report to Stockholders for Fiscal Year Ended July 2, 1995             I, II, IV
(2)      Proxy Statement for Annual Meeting of Stockholders scheduled to                 III
         be held on October 19, 1995


- ---------
* Excludes 291,253 shares of Common Stock held by all directors and executive
officers at September 1, 1995. Exclusion of such shares should not be construed
to indicate that any such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of the registrant or
that such person is controlled by or under common control with the registrant.





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                                     PART I


ITEM 1.  BUSINESS.

GENERAL

         Nellcor Puritan Bennett Incorporated (together with its wholly-owned
subsidiaries, the "Company") is a corporation organized under the laws of the
State of Delaware in 1986 and, until the acquisition of Puritan-Bennett
Corporation in August 1995, operated under the name Nellcor Incorporated.  The
Company designs, manufactures and markets monitoring, diagnostic and therapeutic
instruments, sensors, airway adapters and detectors for the safety and
management of respiratory-impaired patients wherever they are treated. The
Company's arterial blood oxygen, respiratory gas, blood pressure and apnea
instruments provide intermittent and continuous, real-time, noninvasive
monitoring of physiologically unstable patients.  The Company's wide variety of
oximetry sensors are used with its own instruments, instruments that incorporate
the Company's oximetry OEM module and instruments produced by manufacturers
licensed to use the Company's sensors.

         With the acquisition of Puritan-Bennett Corporation, the Company
believes that it has combined the leaders in patient safety monitoring and
respiratory products to create the preeminent company serving the needs of the
respiratory-impaired patient worldwide.  The acquisition of Puritan-Bennett
Corporation enables the Company to offer its customers a comprehensive line of
products for the monitoring, diagnosis and treatment of the respiratory-impaired
patient across the spectrum of acute, alternate and home care. The Company's
expanded product line includes pulse oximetry monitors and sensors, critical
care and portable ventilators, home oxygen therapy products such as liquid
oxygen systems and oxygen concentrators, sleep apnea diagnostic and therapy
products and medical gas products and distribution systems.

         The Company's products are sold worldwide, principally through a direct
sales force, assisted by clinical education consultants and specialists,
corporate accounts and independent distributors.

FISCAL YEAR 1995 AND RECENT DEVELOPMENTS

         Acquisitions

         On August 25, 1995, the Company completed its acquisition of
Puritan-Bennett Corporation pursuant to the terms of an Agreement and Plan of
Merger entered into by the two companies on May 21, 1995.  On May 4, 1995,
EdenTec Corporation, the Company's home health care subsidiary, acquired Pierre
Medical, a privately-held French manufacturer of noninvasive ventilators, sleep
apnea therapy systems, oxygen concentrators and related respiratory products. 
In August 1995, EdenTec Corporation acquired Melville Software Ltd., a privately
held Canadian manufacturer of sleep diagnostic products used in sleep labs. See
"Acquisitions" below.

         Products

         Early in the second quarter of fiscal year 1995, the Company received
marketing clearance from the United States Food and Drug Administration (FDA)
for PEDI-CAP(TM) , a version of the Company's EASY CAP(R) CO(2) detector,
developed specifically for infants and children.  These disposable, non-invasive
CO(2) detection devices are used to verify and monitor correct endotracheal tube
placement in emergency





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situations.  Worldwide commercial shipments of the PEDI-CAP product began in the
second quarter of fiscal year 1995.

         During the second quarter of fiscal year 1995, the Company also began
limited shipments of its N-400 fetal pulse oximeter in Europe.  The N-400 is
used to measure fetal oxygen levels during labor and delivery and is expected to
aid obstetricians in evaluating fetal well-being.  In the fourth quarter of
fiscal year 1995, the Company filed an application for an Investigational Device
Exemption (IDE) for the N-400 with the FDA.  Clinical trials, which will
evaluate the N-400 fetal pulse oximeter as a tool to reduce Cesarean sections,
are expected to begin by the end of the second quarter of fiscal year 1996.

         In March 1995, the Company was awarded ISO 9001 certification for its
facilities, signifying that the Company has met a set of international standards
for product design, manufacturing, installation and service.  ISO, the
International Organization for Standardization, a worldwide federation of the
national standards bodies for over 90 countries, represents an effort to promote
international commerce through standardization.  ISO 9001 certification is the
first step necessary in order for the Company to affix the CE (Conformitee
European) mark to its products.

         During the fourth quarter of fiscal year 1995, the Company received
United States marketing clearance from the FDA for the first two modules of the
NELLCOR SYMPHONY(TM) monitoring system, the N-3000 pulse oximeter and the N-3100
noninvasive blood pressure monitor.  The NELLCOR SYMPHONY monitoring system is
designed for use primarily in noncritical care areas throughout the hospital,
particularly on the general care floor, as well as in alternate care settings.
The N-3000, the Company's next generation pulse oximeter, incorporates
OXISMART(TM) advanced signal processing and alarm management technology.  It is
designed to address the problem of nuisance alarms by identifying and rejecting
artifacts caused by patient movement or electronic and optical noise
interference, resulting in enhanced performance in high-motion, low-perfusion
patient environments.  The N-3100 blood pressure monitor incorporates advanced
noninvasive blood pressure monitoring and employs clinically proven
oscillometric technology.  Commercial shipments of the N-3000 and the N-3100 in
the United States began in June 1995.  Sales of the products outside of the
United States began in February 1994 and July 1994, respectively.

         Litigation

         In July 1996, the U.S. Federal District Court in Delaware issued a 
decision in favor of the Company, ruling that four key oximeter and sensor
technology patents are valid and would be infringed by Ohmeda Inc. ("Ohmeda"),
a subsidiary of BOC Health Care Inc. ("BOC"), if Ohmeda sold either its adult
or neonatal OxyTip sensors for use with non-Ohmeda monitors.  BOC had filed the
suit in December 1992, seeking a declaratory judgment that the Company's
patents were invalid and would not be infringed.  BOC has filed notice of its
intention to appeal the decision of the court. See "Item 3, Legal       
Proceedings."


ACQUISITIONS

         Puritan-Bennett Corporation

         The Company has set the strategic objectives of focusing on the
diagnosis, monitoring and treatment of the respiratory-impaired patient across
the worldwide continuum of care and of growing through product line extensions,
other internal developments and through acquisitions and strategic combinations
in order to broaden its product line and enhance its competitive position.  The
Company entered into an Agreement and Plan of Merger with Puritan-Bennett
Corporation on May 21, 1995.  The transaction was approved      at special
meetings of the stockholders of





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both companies held on August 24, 1995.  On August 25, 1995, the Company
acquired Puritan-Bennett by means of a wholly-owned subsidiary of the Company
merging with and into Puritan-Bennett, with Puritan-Bennett being the surviving
corporation and becoming a wholly-owned subsidiary of the Company.

         The merger with Puritan-Bennett is intended to qualify as a tax-free
reorganization and will be accounted  for  as  a pooling  of interests.  Under
the terms of the Agreement and Plan of Merger, each outstanding share of
Puritan-Bennett common stock was converted into the right to receive .88 share
of the Company's  common stock, resulting in the Company issuing approximately
11.5 million shares, valued at approximately $600 million, based on  $52 1/8 per
share, the  closing  price  of  the  Company's common  stock  on  August 25,
1995.  As of September 1, 1995, approximately 28.4 million shares of the
Company's common stock were outstanding.

         The Company believes that its acquisition of Puritan-Bennett 
represents the combination of market leaders in patient safety monitoring and 
respiratory products to create the preeminent company serving the needs of the
respiratory-impaired patient worldwide.  For a summary description of
Puritan-Bennett products, see "Puritan-Bennett Products" below.  With the
acquisition, the Company believes that it is the leading provider of pulse
oximetry monitoring and sensors, critical care ventilators, oxygen systems and
home sleep diagnostic and therapeutic products across the spectrum of acute,
alternate and home care. With revenues of over $600 million, facilities around
the world and an employee force of over 4,000, the Company believes that it is
the leader in the respiratory product market and will enjoy growth
opportunities in both established and new markets as a result of a combination
of product breadth and increased marketing flexibility.  Moreover, an enhanced
product line will provide the Company with broader access to the largest
domestic and international respiratory markets in the hospital, subacute care,
emergency medical services and the home. The Company also believes that the
acquisition of Puritan-Bennett provides the opportunity for cost savings
through consolidation of facilities and operations and for revenue and earnings
growth rates greater than those possible for either company alone.  The
achievement of these goals, however, is dependent on the successful integration
of two companies that had previously operated independently.  The successful
integration of the operations of the companies will require the dedication of
substantial management resources.  There can be no assurance that difficulties
encountered in integrating the operations of the companies will be overcome or
that the goals and benefits expected from a successful integration will be
realized.  Moreover, the process of integrating operations could cause an
interruption of, or loss of momentum in, the activities of either or both of
the companies' businesses.  Difficulties encountered in connection with the
integration of the two companies could have an adverse effect on the business,
results of operations or financial condition of the Company going forward.

         Set forth below is certain summary, unaudited supplemental combined
condensed financial information combining the Company's financial data for each
of the five fiscal years ended July 2, 1995 with Puritan-Bennett's financial
data for each of the three fiscal years ended January 31, 1995 and
Puritan-Bennett's two fiscal years ended December 31, 1991.


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                                               SUPPLEMENTAL COMBINED FINANCIAL DATA


                                                   Years ended (unaudited)


(In thousands, except per share      JULY 2, 1995       JULY 3, 1994      JULY 4, 1993     JULY 5, 1992      JULY 7, 1991
amounts)
                                                                                              
Revenue                              $ 600,066          $ 544,227         $ 518,246        $ 452,286         $ 410,805
R & D expenses                          47,203             48,867            48,545           46,256            33,661
Net income                              49,463             (6,422)           39,715           21,867            32,135
Earnings per share                        1.77              (0.23)             1.46             0.83              1.26
Working capital                        244,395            206,709           224,772          179,374           177,606
Total assets                           565,704            489,942           470,014          397,442           335,993
Long-term obligations                   85,026             66,117            64,351           49,085            46,293
Stockholders' equity                   361,905            316,625           326,187          275,421           238,752



         Pierre Medical

         On May 3, 1995, EdenTec Corporation, the Company's home health care
subsidiary, acquired Pierre Medical, a privately held French manufacturer of
respiratory products used in the home.  Pierre Medical manufactures and markets
noninvasive ventilators, sleep apnea therapy systems, oxygen concentrators and
related respiratory products for sale in Western Europe, primarily in France and
Germany.  The acquisition of Pierre Medical has been accounted for as a
purchase.
        
         Melville Software

         In August 1995, EdenTec Corporation acquired Melville Software Ltd., a
privately held Canadian company, that manufactures and markets sleep diagnostic
products used in sleep labs, including SANDMAN(TM), a line of sleep disorder
diagnostic systems sold primarily in the United States and Canada. Melville
products are currently approved for sale throughout North America.
        
PRODUCTS

         With the acquisition of Puritan Bennett, the Company's expanded product
line includes pulse oximetry moniters and sensors, critical care and portable
ventilators, home oxygen therapy products, sleep apnea diagnostic and therapy
products and medical gas products and distribution systems.  Following is a
summary discription of the Company's products.

         Oximetry Instruments

         The Company's pulse oximeters provide noninvasive measurement of a
patient's arterial blood oxygen saturation.  The Company's principal oximetry
instruments are the N-180, N-185, N-200 and N-3000 pulse oximeters and the N-20
and N-30 portable pulse oximeters. In addition, the Company's OXINET(R) pulse
oximetry network permits remote monitoring of multiple patients from a
centralized location.

         The N-180, N-185 and N-200 pulse oximeters provide continuous
monitoring of arterial blood oxygen saturation and heart rate and are designed
for use in all areas of the hospital, including intensive care units,
intermediate care and step-down units and general care floors, and in the
alternate site care market, including surgicenters, subacute care and skilled
nursing facilities and the home. The Company's N-20 and N-30 portable pulse
oximeters provide periodic (and in the case of the N-30, temporary





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continuous) monitoring of arterial blood oxygen saturation and heart rate and
are designed for use in areas of the hospital and the alternate site care market
where continuous monitoring is not necessary or viable, for example, on the
general care floor, in the home and in prehospital, emergency care and
ambulatory settings.

         During the fourth quarter of fiscal year 1995, the Company received
marketing clearance from the FDA for the N-3000 pulse oximeter and began
commercial shipments of the product in the United States in June 1995.  The
Company began selling the N-3000 pulse oximeter outside of the United States in
February 1994.  The N-3000, the Company's next generation pulse oximeter,
provides continuous monitoring of arterial blood oxygen saturation and heart
rate and is the first module of the NELLCOR SYMPHONY multiparameter monitoring
system designed for use primarily in noncritical care areas throughout the
hospital, particularly on the general care floor, as well as in alternate care
settings. The N-3000 incorporates OXISMART advanced signal processing and alarm
management technology.  It is designed to address the problem of nuisance alarms
by identifying and rejecting artifacts caused by patient movement or electronic
and optical noise interference, resulting in enhanced performance in
high-motion, low-perfusion patient environments.

         The Company's OXINET pulse oximetry network is designed for use in
hospital and alternate care settings and allows for the continuous monitoring of
up to eight patients from one centralized location using multiple N-3000 or
N-200 pulse oximeters and a central computer display.

         The Company is planning to expand into the labor and delivery market
with the N-400 fetal pulse oximeter, a product for monitoring the blood oxygen
saturation of a fetus during labor and delivery.  The Company believes that the
information provided by the N-400 will aid obstetricians significantly in
evaluating fetal well-being.  During the second quarter of fiscal year 1995, the
Company began limited shipments of the N-400 fetal pulse oximeter in Europe.

         In the first quarter of fiscal year 1994, the FDA notified the Company
that the N-400 fetal pulse oximeter must be submitted for approval for marketing
clearance in the United States under Premarket Approval Application (PMA)
regulations and not under the 510(k) premarket notification clearance process. A
PMA application, compared to the 510(k) procedures, requires more laboratory and
clinical testing data and more detailed design and manufacturing information,
and therefore, requires more time for the gathering of data and preparation of
the PMA application.  Historically, the time elapsed between the submission of a
PMA application and receipt of premarket approval is significantly longer than
that for clearance to market under the 510(k) procedures.  Since being informed
of the need to file a PMA for the N-400, the Company has focused on finalizing
an IDE protocol to be used in the conduct of United States clinical trials of
the N-400. In the fourth quarter of fiscal year 1995, the Company filed an
application for an IDE for the N-400 with the FDA.  Clinical trials, which will
evaluate the N-400 fetal pulse oximeter as a tool to reduce Cesarean sections,
are expected to begin by the end of the second quarter of fiscal 1996.  Given
the uncertainties and delays associated with the FDA and the PMA process, there
can be no assurance that the Company will receive approval from the FDA to
market the N-400 in the United States or, when such approval, if it is granted,
can be expected.  For a summary discussion of the FDA regulatory        
framework, see "Regulatory Matters" below.





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         OEM Oximetry Modules

         The Company's OEM oximetry modules are sold to manufacturers of
multi-parameter monitoring systems which incorporate the Company's oximetry
technology into their own systems.  See "Competition" below.  The Company
currently has agreements with 36 OEM customers.  These customers include medical
equipment manufacturers in the United States, Europe, Japan and Latin America.
During fiscal year 1995, nine new OEM agreements were entered into with, among
others, Bese Bioengenharia Sist. Equip. S/A. of Brazil, Fukuda M-E Kogyo Company
of Japan and Dima Italia SAS of Italy.

         Multi-function Monitors/Systems

         The Company's ULTRA CAP(R) N-6000 combination pulse oximeter/capnograph
combines pulse oximetry with advanced carbon dioxide monitoring technology.
While providing  continuous monitoring of arterial blood oxygen saturation, the
N-6000 also measures the concentration of carbon dioxide in a patient's breath.
In some clinical situations, abnormal patterns and levels of carbon dioxide may
indicate a ventilation problem before blood oxygen levels become depressed.  The
ULTRA CAP monitor is designed for use primarily in critical care settings,
particularly intensive care units, hospital emergency rooms and post-anesthesia
care units, and can be used in other hospital settings such as the operating
room and during intra-hospital transport.  Pryon Corporation (Menomonee Falls,
Wisconsin) designed and manufactures the ULTRA CAP for Nellcor on a private
label basis.

         As discussed above, during the fourth quarter of fiscal year 1995, the
Company received marketing clearance from the FDA for the first two modules of 
the NELLCOR SYMPHONY monitoring system, the N-3000 pulse oximeter and the N-3100
noninvasive blood pressure monitor.

         Oximetry Sensors

         The Company produces and sells a full line of proprietary adhesive
(patient dedicated) and reusable oxygen transducers (reusable sensors) for use
with the Company's own instruments, monitors and monitoring systems
incorporating the Company's OEM oximetry module, and monitors and monitoring
systems licensed to use its sensors. The Company's sensors include the adhesive
(patient dedicated) OXISENSOR(R) II line of sensors, the combination
adhesive/reusable OXICLIQ(R) sensor line and reusable sensors such as the
DURASENSOR(R), DURA-Y(R), and OXIBAND(R) oxygen transducers.  During fiscal year
1995, the Company broadened its line of sensors with the addition of the
neonatal model of its OXICLIQ oxygen transducer.  Moreover, in fiscal year 1995,
the Company received marketing clearance from the FDA for the DURA-Y ear clip
which allows the DURA-Y sensor to be attached to a patient's ear.  During fiscal
year 1995, the Company also expanded its sensor recycling program which now
includes more than 480 hospitals in the United States.  Hospitals participating
in the recycling program are able to reduce sensor costs and medical waste by
purchasing adhesive sensors that have been returned to the Company for
recycling.  The recycling process consists of re-manufacturing, testing and
sterilization of the sensors.

         In fiscal year 1995, sales of the Company's oximetry products, which
include oximetry instruments, sensors and OEM modules, accounted for more than
three-quarters of the Company's net revenue.  This is comparable to the portion
of the Company's net revenues accounted for by sales of oximetry products in
each of fiscal years 1994 and 1993.


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         End-Tidal CO2 Detector/Indicator

         The Company's EASY CAP end-tidal CO2 detector is a disposable,
noninvasive carbon dioxide detection device used in emergency departments, on
resuscitation carts and during patient transport. The single-use EASY CAP device
contains a specially-impregnated paper which reacts to the presence of carbon
dioxide by changing color and provides a quick and easy way to verify and
monitor correct endotracheal tube placement during emergency situations. In the
second quarter of fiscal year 1995, the Company received marketing clearance
from the FDA for PEDI-CAP, a version of the EASY CAP device, developed
specifically for use with infants and children. Worldwide commercial shipments 
of the PEDI-CAP product began in the second quarter of fiscal year 1995.

         The Company's STAT CAP(R) airway CO2 indicator is a small (hand-held),
light-weight, electronic instrument that provides a semi-quantitative estimate
(a numerical range) of end-tidal CO2.  Its durability, portability and long
battery life make the STAT CAP indicator particularly well-suited for use in
emergency care and transport, both in the hospital and ambulance. The STAT CAP
can assist clinicians in verifying proper placement of an endotracheal tube and
can be used in emergency situations to evaluate ventilation or effectiveness of
cardio pulmonary resuscitation.

         Sleep Disorder Products

         The Company's wholly-owned subsidiary, EdenTec Corporation, designs,
manufactures and markets infant and adult apnea monitors, recorders and
diagnostic systems for use in the hospital and the home. EdenTec's ASSURANCE(R)
2000 Heart and Respiration Monitor provides continuous noninvasive monitoring to
detect central apnea, slow breathing, and slow and fast heart rate.  The
addition of the EDENTREND(R) Memory Module to the ASSURANCE 2000 enables the
monitor to record, store and report alarm events for up to 45 days.  In the
second quarter of fiscal year 1994, EdenTec introduced for sale outside of the
United States the ASSURANCE(R) 3000 Heart and Respiration Monitor.  The
ASSURANCE 3000 Heart and Respiration Monitor has more memory than the ASSURANCE
2000 and is lighter and more compact.

         EdenTec's EDENTRACE II(TM) Recording System is designed to assist in
the diagnosis of sleep apnea in sleep labs, hospitals, clinics and the home. The
recording system monitors and records up to six physiologic parameters including
heart rate, respiratory effort, airflow, oxygen saturation with motion
annotation, body position and snoring sounds. The EDENTRACE II PLUS Recording
System, like the EDENTRACE II, is designed to assist in the diagnosis of sleep
apnea.  However, the EDENTRACE II PLUS Recording System can be used on infants
as well as adults. EdenTec also markets the EDENTRACE(R) Analysis Software for
use with the EDENTRACE II and the EDENTRACE II PLUS Recording Systems to aid
clinicians in the archiving, retrieval and analysis of patient data.

         On May 3, 1995, EdenTec Corporation acquired Pierre Medical.  Pierre
Medical manufactures and markets noninvasive ventilators, sleep apnea therapy
systems, oxygen concentrators and related respiratory products for sale in
Western Europe, primarily in France and Germany.  Its products include the
O'MEGA(TM) oxygen concentrator for patients requiring supplemental oxygen, the
O'NYX(TM) noninvasive ventilator that provides bilevel pressure (ventilation)
for patients who have difficulty breathing, and the MORPHEE PLUS(TM)
computerized, nasal CPAP device that administers air pressure to a patient's
airway, via nasal mask, for treatment of obstructive sleep apnea.  The Company
may seek United States marketing clearance for select Pierre Medical
products.


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         HEALTHQUIZ(TM) System

         The HEALTHQUIZ system is a patient-driven, automated, medical history
system which combines a simple, user-friendly, hand- held device with
proprietary application software that can be tailored to a variety of uses and
health care settings. HEALTHQUIZ(TM) PRESCREEN(TM), the first application
software commercialized for use with the HEALTHQUIZ device, is designed to aid
clinicians in conducting pre-anesthetic assessments of patients.  The HEALTHQUIZ
PRESCREEN software application allows a patient to answer a series of yes/no
questions and uses branching logic to collect a standardized, pre-anesthetic
patient history and provides clinicians with summary reports that calculate a
patient-specific anesthesia risk score and suggest appropriate lab tests.  A
second software application for use with the HEALTHQUIZ device, HEALTHQUIZ(TM)
PREVENT(TM), when completed, will be designed to allow patients to complete
their own health histories and provide clinicians with summary reports and
preventive care recommendations.  The HEALTHQUIZ system is not subject to the
510(k) premarket notification process or the PMA process.  Sales of the
HEALTHQUIZ system have been limited since it was introduced in the fourth
quarter of fiscal year 1994.  The Company regularly reviews its net investment
in the HEALTHQUIZ system assets and the related market opportunities.

         Blood Pressure Monitors

         The NELLCOR(R) N-CAT(R)  noninvasive blood pressure monitor displays
continuous blood pressure information, including a waveform. This contrasts with
conventional noninvasive blood pressure monitors, which provide only
intermittent measurements.  Because the N-CAT monitor performs best in the
absence of motion, Nellcor has marketed the instrument only for use in areas of
low patient motion such as hospital operating rooms.  In the second half of
fiscal 1991, Nellcor began commercial shipments of the N-CAT continuous
noninvasive blood pressure monitor developed and manufactured by Colin
Electronics of Japan (Colin).  Shipments of the N-CAT monitor to date have been
limited, and, since the fourth quarter of fiscal 1992, shipments have been
suspended pending evaluation of new versions of the product software developed
by Colin intended to improve the product's operating performance. Costs
associated with this evaluation were not material in fiscal year 1995 and were
expensed as incurred.  After evaluating the most recent enhancements to the
product's software, the Company is now satisfied with the performance of the
N-CAT monitor.  Because of modifications made to the product's software, Colin
may be required to resubmit a 510(k) to the FDA for clearance to market the 
product in the United States.

         As discussed above, during the fourth quarter of fiscal year 1995, 
the Company received marketing clearance from the FDA for the N-3100
noninvasive blood pressure monitor and began commercial shipments of the
product in the United States in June 1995. The Company began selling the N-3100
noninvasive blood pressure monitor outside of the United States in July 1994.
The N-3100 blood pressure monitor incorporates advanced noninvasive blood
pressure monitoring and employs clinically proven oscillometric technology.

PURITAN-BENNETT PRODUCTS

         Ventilators and Related Products

         7200(R) SERIES ventilator system

         The 7200 SERIES ventilator system is a critical care ventilator
purchased primarily by hospitals to assist or manage patient respiration in a
variety of acute care settings.  The 7200 SERIES ventilator is designed to ease
the work of patient breathing and lessen patient discomfort.  It automatically
performs pulmonary function diagnostic tests and reduces therapists' time
attending to patients and preparing the ventilator for patient use.  The 7200
SERIES ventilator is finding increasing use in sub- acute care settings, where
chronically ventilator-dependent patients, who are otherwise stable, require
sophisticated ventilation modes to improve the prospects of weaning. The 7200
SERIES ventilator is sold in three basic





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configurations to cover the wide range of cost/performance applications and
provides upgrade paths to incorporate new options as they become available.

         7250(R) METABOLIC MONITOR

         Metabolic monitoring is the measurement of oxygen consumption and
carbon dioxide production to determine patient nutritional requirements and
metabolic status. The 7250 METABOLIC MONITOR measures a patient's inspired
oxygen and carbon dioxide and compares these measurements with the patient's
expired oxygen and carbon dioxide. From such measurements and the volume of
inspired and expired gas, the 7250 METABOLIC MONITOR calculates oxygen
consumption and carbon dioxide production. From these calculated parameters, the
monitor can determine values used for deciding daily caloric intake needs.
Metabolic monitoring, in general, is a tool for detecting and monitoring
conditions that can affect clinical outcomes such as nutritional support, drug
titration and respiratory muscle workload, and that can affect weaning from
mechanical ventilation. The 7250 METABOLIC MONITOR can be integrated with the
7200 SERIES ventilator, is relatively simple to use and provides more accurate,
continuous measurements of a patient's energy expenditure.

         CLINIVISION(R)

          CLINIVISION is a personal, computer-based, patient care and
respiratory therapy department management information system that integrates the
patient data captured and processed by the 7200 SERIES ventilator, as well as
other clinical data, into a management information system that can be used by
respiratory therapy department directors and therapists to manage and monitor
patient care and staffing requirements. Once interfaced to the host hospital's
information system, CLINIVISION electronically handles admitting, discharge,
transfer, and order entry data, as well as transmitting billing and results
reporting.  Last fiscal year, Puritan-Bennett introduced new enhancements to
CLINIVISION's system communications and report generation features. 
RADIOLINK(TM) 3.0 allows users to transfer new work orders or work order
changes to therapists while working in remote parts of the hospital.  The
RADIOLINK product uses spread spectrum radio frequency transmission, adding
cable-free data communication capabilities to the CLINIVISION system. With
RADIOLINK 3.0, the Company has also added electronic mail, allowing supervisors
to relay messages from any workstation to therapists on the floor.  Last fiscal
year, Puritan-Bennett also released PHONELINK(TM) 2.0.  With this feature,
therapists can download information from any phone, rather than having to
return to the hospital or office to transfer information.  In December 1994,
Puritan-Bennett introduced CLINIVISION "Lite", an entry level, lower cost
single workstation system that enables smaller hospitals to take advantage of
productivity tools they need but without as substantial a capital outlay.
        
         COMPANION(R) 2801 PORTABLE VENTILATOR

         In addition to the 7200 SERIES critical care ventilator,
Puritan-Bennett also manufacutes the COMPANION 2801 PORTABLE VENTILATOR for sale
outside of the United States.  The COMPANION 2801 PORTABLE VENTILATOR is used by
patients requiring breathing assistance as a result of neuromuscular disease,
chronic obstructive pulmonary disease or spinal cord injury. The COMPANION 2801
PORTABLE VENTILATOR is compact in size, operates from either AC power or 12VDC
battery power and incorporates an internal battery for short-term emergency
power outages. The COMPANION 2801 PORTABLE VENTILATOR can be used at the
patient's bedside, mounted on wheelchairs or in automobiles and airplanes.
Portable ventilators offer a reduced cost alternative to hospital care for
patients who can be discharged to their home or a skilled nursing facility or
other alternate care site. Puritan-Bennett manufactures the COMPANION 





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2801 PORTABLE VENTILATOR in the Republic of Ireland where it is marketed to
customers outside the United States.

         Home Oxygen Therapy Products

         COMPANION(R) 492a/590/550

         The Company's principal home oxygen therapy products are oxygen
concentrators and liquid oxygen systems.  The COMPANION 492a and 590 oxygen 
concentrators (four and five liter per minute capacity units) extract oxygen
from room air and provide a supply of oxygen to home-bound patients who require
a continuous supply of oxygen and whose prescribed flow rates do not exceed
five liters per minute. The COMPANION 492a and 590 oxygen concentrators
incorporate an optional OCI(R) indicator (Oxygen Concentration Indicator) that
continuously monitors the oxygen percentage of the output of the device and
alerts the patient in the event of performance degradation, automatically
shutting the device down in the event of significant deterioration.  In the
event of such a shut down, the patient reverts to an alternate supply of
oxygen.  By utilizing an oxygen concentrator at home, a patient reduces the
frequency with which a finite oxygen supply needs to be renewed. The OCI
indicator option on the COMPANION 492a and 590 allows a home care provider to 
verify over the phone that the concentrator is generating high oxygen 
concentrations, detect problems early before they become expensive ones and 
reduce trips for routine filter replacement.

         For patients requiring a continuous supply of oxygen, Puritan-Bennett
also manufactures several liquid oxygen systems.  Liquid oxygen systems store
oxygen at a very low temperature in liquid form.  Puritan-Bennett's stationary
unit can be refilled at home and can be used to fill a portable device, thereby
permitting enhanced patient mobility.  The COMPANION(R) 550 ambulatory unit for
mobile patients utilizes a proprietary, pneumatic oxygen conserving device that
requires no batteries and is significantly smaller and lighter than its
predecessor, while providing essentially the same duration of use.

          The COMPANION or Mark "Low Loss" Oxygen Reservoir is designed to
refill portable liquid oxygen units for extended periods of time with reduced
evaporation loss.

         Sleep Disorder Products

         Puritan-Bennett manufactures the COMPANION(R) 318 Nasal CPAP System, a
therapeutic device for patients with adult sleep apnea, the temporary cessation
of breathing while asleep.  The COMPANION 318 Nasal CPAP System is smaller than
competitive products and offers additional diagnostic tools for sleep lab
clinicians.  Last fiscal year, Puritan-Bennett introduced the COMPANION(R) 320
I/E Bi-level(R) Respiratory System for patients requiring higher respiratory
pressures to overcome airway obstruction.

         In late January 1994, Puritan-Bennett acquired SEFAM S.A., a French
manufacturer of sleep diagnostic and therapeutic products.  SEFAM products
include the REM+ CONTROL CPAP device for treating sleep disorders and the
RESPISOMNOGRAPHE and the MINISOMNO(TM) diagnostic systems used by hospital sleep
labs and home care providers.

         Medical Gas Products and Distribution Systems

         The production and distribution of medical gases represents
Puritan-Bennett's oldest product line. Puritan-Bennett is the largest producer
of nitrous oxide in North America.  This gas is used in anesthesia and analgesia
and is sold by Puritan-Bennett under its own label and through distributors. The
Company also distributes other medical gases, including oxygen,  Sodalime (used
to absorb CO2 during anesthesia) and special gas mixtures that are used for
calibration, testing, and other purposes.  Puritan-Bennett also manufactures
the hospital distribution systems for medical gases.


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         Spirometry

         The PB100 Spirometer is a small, hand held spirometer that offers true
portability.  The patient data memory card and the rechargeable batteries allow
testing of multiple patients at off-site locations.  The RENAISSANCE(R)
Spirometry System consists of the PB100 Spirometer and a base station used for
downloading patient information to a choice of printers along with the option of
sending patient data to a computer.  Two disposable pneumotachs eliminate
cleaning and minimize the risk of cross-infection for both patients and staff.

PRODUCT DEVELOPMENT

         The Company is continuing to develop new products to address existing
and new markets.  The introduction of new products may be prevented or delayed
by engineering obstacles, regulatory procedures, clinical trials, production
difficulties and other factors.  In addition, the costs of producing, promoting
and servicing new products are generally greater than in the case of mature,
higher volume products.  New product introductions can also temporarily reduce
revenues by interfering with sales of existing products.

         As the Company's existing products reach life cycle maturity, the
Company's ability to develop or acquire new products and technologies increases
in importance.  The Company has and will continue to pursue technology, new
product and business acquisition opportunities intended to broaden the Company's
product offerings.  Examples of such activities include the acquisitions of
Pierre Medical and Puritan-Bennett Corporation.  Such activities may result in
increased expenses which could have an adverse impact on the Company's net
income.

MARKETS

         Customers

         The Company's traditional customers have been the critical care units
of hospitals, for example, operating rooms, post-anesthesia recovery rooms and
intensive care units.  However, with the increasing pressure to lower health
care costs, more patients are being treated in lower-cost areas in and outside
the hospital.  The Company's products are now purchased for use throughout the
hospital, including intermediate care and step-down units, labor and delivery
rooms, emergency rooms and general care floors, and marketed and sold into the
alternate site care market, including surgicenters, subacute care and skilled
nursing facilities, ambulatory emergency care settings and the home.  With the
acquistion of Puritan-Bennett the Company expects the home care market to
become a more significant part of its customer base. The Company's sales are
broadly based, and no individual customer accounts for more than 10% of the
Company's total net revenues.
        
         Market Trends

         As health care increasingly becomes managed care, patient care is
shifting to lower-cost areas of the hospital and alternate care sites outside of
the hospital, including subacute care centers, skilled nursing facilities and
the home.  Additionally, in an effort to create larger, more cost-effective
entities capable of competing for managed care contracts, health care providers
are consolidating and vertically integrating, and hospitals are joining local or
regional multiple hospital systems in greater numbers.  As a result of these
ongoing changes in the delivery of health care, the Company expects that a
greater proportion of its future revenue will come from sales of its products to
a smaller customer base, primarily comprised of larger, consolidated health care
providers and buying groups, and from sales of its products into the growing
alternate site care market, especially the home.  Moreover, in the current
health care business environment, hospitals, which are the Company's principal
customers, face increasing pressure to control costs.  This pressure may, in the
future, lead to a decrease in the average selling prices for a number of the
Company's products, which could adversely affect the Company's gross margin.


                                       13
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         Health Care Reform

         The health care industry in the United States continues to experience a
period of extensive change.  Changes in the law or new interpretations of
existing laws may have a dramatic effect on the definition of permissible or
impermissible activities, the relative costs associated with doing business and
the amount of reimbursement by both government and third-party payors.  In
addition, economic forces, regulatory influences and political initiatives are
subjecting the health care industry to fundamental change.  Health care reform
proposals have been formulated by the current administration and by members of
Congress.  In addition, state legislatures periodically consider various health
care reform proposals.  Federal, state and local government representatives
will, in all likelihood, continue to review and assess alternative health care
delivery systems and payment methodologies, and ongoing public debate of these
issues can be expected. The ultimate timing or effect of legislative efforts
cannot be predicted, and short-term cost containment initiatives may vary
substantially from long-term reforms and may impact the business of the Company
in different ways. Although the Company believes that it is well positioned to
respond to changes resulting from health care reform, no assurance can be given
that any such efforts or reforms will not have an adverse effect on the future
business, results of operations or financial condition of the Company.

MARKETING AND SALES

         North America.  In North America, the Company sells its products
principally through its direct sales force, supplemented by several full-line
sales distributors, rental and "just-in-time" distributors and several sensor
distributors.  With the acquisition of Puritan-Bennett, the Company is
expecting to consolidate its sales force under area directors and regional 
business managers who will oversee sales forces for the hospital and home care
markets, and sensor and ventilator specialists.  The Company will also employ 
clinical education consultants (CECs), who are typically registered nurses,
respiratory therapists or nurse anesthetists, and who provide customers with
continuing education and in-service training on the use of the Company's
products.  The CECs also maintain contact with clinicians and medical
organizations to educate medical professionals on new clinical applications for
monitoring or assessment for which the Company's products can be used.  The
Company 's CEC organization is accredited by the American Nurses Association as
a provider of continuing nursing education.

         Latin America.   In early fiscal year 1993, the Company increased its
marketing and sales efforts in this market.  Sales into Latin America are
through distributors. The Company has distributors in all major Latin American
countries, including Mexico and Brazil.

         Europe.  The Company has devoted significant resources to the
development of its European markets and administrative infrastructure.  The
Company continues to expand sales, service and distribution efforts in this
market.  Through its acquisition of Puritan-Bennett and Pierre Medical, the
Company has broadened its product offerings in the European home care market.
The Company has sales and marketing offices and direct sales forces throughout
Western Europe, including in the Netherlands, France, Germany, the United
Kingdom, Belgium and Spain.   Sales in Europe are made through the Company's
direct sales forces and distributors.

         Asia.  The Company has a sales and marketing office in Hong Kong.  The
Company has distributors in most major countries in Asia.

         Japan.  In fiscal year 1995, the Company increased to 50 percent its
ownership interest in Nellcor-CMI, Inc. (NCI), the Company's Tokyo-based joint
venture with Century Medical, Inc.  With a greater





                                       14
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level of investment in the venture and increased management involvement and
marketing resources, the Company plans to pursue more aggressively opportunities
for the Company's products in Japan.  The Company sells its products in Japan
through NCI's direct sales force and distributors.

         Sales outside the United States  (including sales by the Company's
subsidiaries) accounted for approximately 23 percent of net revenue in fiscal
year 1995, 18 percent of net revenue in fiscal year 1994 and 17 percent of net
revenue in fiscal year 1993.  Financial information concerning the Company's
foreign and domestic operations and export sales is found in Note 9 to the
Financial Statements in  the Company's 1995 Annual Report to Stockholders, which
is incorporated herein by reference.

         Timing of Orders and Shipments; Backlog.  Historically, orders in the
first fiscal quarter have been lower than in the second, third and fourth
quarters.  Of the orders received by the Company in any fiscal quarter, a
disproportionately large percentage has typically been received and shipped
toward the end of that quarter. Accordingly, backlog has historically been
modest and not an accurate predictor of future revenues, and results for a given
quarter can be adversely affected if there is a substantial order shortfall late
in that quarter. Total backlog at the end of fiscal year 1995 and fiscal year
1994 was approximately $9.8 million and $10.7 million, respectively. The
decrease in backlog in fiscal year 1995 was primarily due to increased shipments
of the N-3000 pulse oximeter as compared to fiscal year 1994.  Approximately 
14% of the total backlog as of the end of fiscal year 1995 is shippable in 
fiscal years after 1996.

COMPETITION

         The medical device industry is characterized by rapidly evolving
technology and increased competition. Competitors of the Company include large
medical companies, some of which have greater financial and technical resources
and broader product lines than the Company.  The Company believes that the
principal competitive factors in its product markets are product features,
price, quality, customer service, performance, market reputation, breadth of
product offerings and effectiveness of sales and marketing efforts.  The Company
also believes that the speed with which companies can identify customer needs
and develop products to meet those needs are important competitive factors. The
Company believes that it competes favorably with respect to each of these
factors.  However, there are a number of companies that currently offer, or are
in the process of developing, products that compete with products offered by the
Company.  Some of these competitors may have substantially greater capital
resources, research and development staffs and experience in the medical device
industry, including with respect to regulatory compliance, and in the 
development, manufacturing and sale of medical products similar to those
offered by the Company.  There can be no assurance that some of these
competitors will not succeed in developing technologies and products that are
more effective than those currently produced by the Company or that would
render some products offered by the Company obsolete or non-competitive.
Moreover, competition based on price is expected to become an increasingly
important factor in customer purchasing patterns as a result of cost
containment pressures on, and consolidation in, the health care industry. Such
competition has exerted, and is likely to continue to exert, downward pressure
on the prices that the Company is able to charge for its products.  There can
be no assurance that the Company will be able to offset  such downward price
pressure through corresponding cost reductions.

         The Company's principal competitor in pulse oximetry in the United
States is Ohmeda, Inc., a subsidiary of BOC Health Care, Inc. ("BOC").  The
Company and BOC have cross-licensed certain patents from one another (see
"Licenses and Patents" and "Item 3.  Legal Proceedings." below). The Company
also faces competition from manufacturers of multi-parameter monitoring systems,
including Hewlett-Packard Co., SpaceLabs Medical, Inc., Datascope Corporation
and Protocol Systems, Inc., whose systems frequently include pulse oximetry.  In
response, the Company sells OEM oximetry modules and





                                       15
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has licensed certain systems manufacturers to make their instruments compatible
with the Company's sensors.  The Company has entered into OEM and/or licensing
agreements with the major systems manufacturers in the United States, including
Hewlett-Packard Co., SpaceLabs Medical, Inc., Datascope Corporation and Protocol
Systems, Inc.

RESEARCH AND DEVELOPMENT

         The principal focus of the Company's research and development effort is
to apply technology to well-defined clinical problems through innovative
engineering. In this process, the Company is also focused on the development of
products specifically designed to meet customer demands for performance,
cost-effectiveness and environmental responsibility.  With the acquisition of
Puritan-Bennett, the Company expects to fund an investment in research and
development of more than $50 million in fiscal year 1996.

         Introduction of any product now under development will require
completion of development and engineering work, successful conclusion of
clinical trials, compliance with regulatory procedures and the transfer of the
product to production. There can be no assurance that the Company's product
development work will result in viable new products.  The Company's research and
development expenditures were approximately $27.2 million (10% of net revenue)
in fiscal year 1995, $24.0 million (10.2% of net revenue) in fiscal year 1994
and $22.7 million (10.4% of net revenue) in fiscal year 1993.

MANUFACTURING AND SUPPLIERS

        The Company's products are assembled using both standard components and
components manufactured to the Company's specifications such as printed circuit
board assemblies. The Company's instruments contain microprocessors for which
proprietary software is designed, written and tested by the Company.  The
Company maintains test and inspection procedures for components and assembled
instruments.

         The Company currently procures most of its components  from outside
suppliers, including foreign vendors.  Though multiple sources are generally
available for these components, the Company also relies upon single-source
suppliers to provide certain components for its products.  To the extent the
Company relies on single-source suppliers, there can be no assurance that supply
shortages or interruptions will not arise, which, if they were to occur, could
increase the cost or delay the shipment of the Company's products or cause the
Company to incur costs to develop alternative sources.  Any of these occurrences
could have a material adverse effect on the Company's results of operations.

         With the acquisition of Puritan-Bennett, the Company will produce some
components for its own products made from a wide variety of raw materials that
are generally available in quantity from alternate sources of supply.

         Because the Company believes that prompt shipment of orders is
important to compete effectively, the Company has maintained substantial
inventories of raw material, work in process and finished goods to be able to
respond rapidly to customer demands.  Should the Company's order forecasts
exceed the orders actually achieved, excess inventories may prove unsalable or
salable only at reduced prices. The Company maintains reserves for obsolete or
excess inventory which it believes to be adequate.





                                       16
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LICENSES AND PATENTS

         At July 2, 1995, the Company held 57 United States patents and 75
patents in foreign countries.  With the acquisition of Puritan-Bennett, the
Company holds 111 United States patents and 105 patents in foreign countries. 
The Company has patent applications pending in the United States and in
selected foreign countries covering features of its current products and
products under development. There can be no assurance that any patents will be
issued on the pending applications or that any of its issued patents will
withstand challenge. Although the patents that the Company has been issued are
of value and those for which the Company has applied would be of additional
value, the Company believes that other factors are of greater competitive
importance (see "Competition" above).

         Many patents in the general area of the Company's current products and
products under development have been and may in the future be issued to others.
The Company has entered into license agreements under which it may practice
certain patents for the lives of the patents. The Company may in the future
determine that it is advisable to seek licenses on other such patents. There can
be no assurance that such licenses will be available or, if available, will be
available on terms favorable to the Company.

         In 1986, the Company and BOC Health Care, Inc., the parent corporation
of Ohmeda, one of Nellcor's principal competitors, entered into cross licenses
of certain oximetry patents (see "Item 3.  Legal Proceedings." below).

         The Company has also granted licenses under its sensor coding patents
to Hewlett-Packard Company, Siemens Medical Electronics, Inc., SpaceLabs, Inc.
and Marquette Electronics, Inc. These licenses permit those companies to
manufacture monitors that are compatible with the Company's oximetry sensors but
do not permit the manufacture of sensors incorporating the patented invention.
The Company believes that these licenses, together with the Company's sale of
pulse oximetry modules on an OEM basis, have expanded the base of instruments
using the Company's proprietary sensors and are helping to promote market
acceptance of adhesive sensors as a standard of care.

         The Company has granted licenses to Hewlett-Packard Company, Siemens
Medical Electronics, Inc., and Bruel & Kjaer Export under its variable pitch
beeper patent. The licenses permit those companies to make and sell oximeter
monitors whose pulse-to-pulse beep tones vary in pitch as the patient's
saturation changes.

REGULATORY MATTERS

         FDA Regulation

         The Company manufactures and sells medical devices. The FDA regulates
the development, testing, manufacturing, packaging, distribution and marketing
of medical devices in the United States, including the products manufactured by
the Company. The development, testing, manufacturing, packaging, distribution
and marketing of medical devices in the United States are regulated under the
Medical Device Amendments of 1976 to the Federal Food, Drug, and Cosmetic Act
(the "1976 Amendments"), the Safe Medical Devices Act of 1990, the Medical
Device Amendments of 1992 and additional regulations promulgated by the FDA. The
State of California (through its Department of Health Services ("DHS")), where
the Company has several manufacturing plants, as well as other states, also
regulate the manufacture of medical devices. The Company believes that it is
substantially in compliance with applicable FDA and DHS regulations.

         In general, these statutes and regulations require that manufacturers
adhere to certain standards designed to ensure the safety and effectiveness of
medical devices.  Under the 1976 Amendments, each





                                       17
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medical device manufacturer must comply with statutes and regulations applicable
generally to manufacturing practices, clinical investigations involving humans,
sale and marketing of medical devices, post-market surveillance, repairs,
replacements and refunds, recalls, and other matters. The FDA is authorized to
obtain and inspect devices and their labeling and advertising, and to inspect
the facilities in which they are manufactured in order to ensure that a device
is not improperly manufactured or labeled.

         The 1976 Amendments also require compliance with specific manufacturing
and quality assurance standards, including regulations promulgated by the FDA
with respect to good manufacturing practices.  FDA regulations require that each
manufacturer establish a quality assurance program by which the manufacturer
monitors the manufacturing process and maintains records that show compliance
with the FDA regulations and the manufacturer's written specifications and
procedures relating to the devices. Compliance with the good manufacturing
practices regulation is necessary to receive FDA approval to market new products
and is necessary for a manufacturer to be able to continue to market approved
product offerings.

         The FDA makes unannounced inspections of medical device manufacturers
and may issue reports of observations where the manufacturer has failed to
comply with all appropriate regulations and procedures. Failure to comply with
applicable regulatory requirements can, among other consequences, result in
warning letters, civil penalties, injunctions, suspensions or losses of
regulatory clearances, product recalls, seizure or administrative detention of
products, operating restrictions through consent decrees or otherwise, refusal
of the government to approve product license applications or allow a
manufacturer to enter into supply contracts, and criminal prosecution.

         There has been a trend in recent years both in the United States and
outside the United States toward more stringent regulation of, and enforcement
of requirements applicable to, medical device manufacturers.  The continuing
trend of more stringent regulatory oversight in product clearance and
enforcement activities has caused medical device manufacturers to experience
longer approval cycles, more uncertainty, greater risk and higher expenses.  At
the present time, there are no meaningful indications that this trend will be
discontinued in the near-term or the long-term either in the United States or
abroad.

         The FDA requires that a new medical device or a new indication for use
of or other significant change in an existing medical device obtain either
510(k) premarket notification clearance or an approved PMA prior to being
introduced into the market in the United States. The 510(k) premarket
notification process is applicable when the new product being submitted to the
FDA can be compared to a pre-existing commercially available product that
performs similar functions (a "substantially equivalent product"). If a product
does not meet the eligibility requirements for the 510(k) process, then it must
be submitted, instead, under the PMA process.  The process of obtaining 510(k)
clearance may take at least six months from the date of filing of the
application and generally requires the submission of supporting data, which can
be extensive and extend the process for a considerable length of time.  In
addition, the FDA may require review by an advisory panel as a condition for
510(k) clearances, which can further lengthen the process.  The PMA process
generally takes more than two years from initial filing and requires the
submission of extensive supporting data and clinical information.  In recent
years, there has been a trend for the FDA to require more supporting data with
respect to both 510(k) clearance notifications and PMA filings. Historically,
substantially all of the products of the Company have been submitted to the FDA
under the 510(k) premarket notification clearance process.  However, the Company
was informed in early fiscal year 1994 that the N-400 fetal pulse oximeter would
have to be submitted under the PMA process.  Moreover, as the Company broadens
is product base, new products could be required to be submitted under the PMA
process rather than the 510(k) process.





                                       18
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         Foreign Regulation

         Sales of medical devices outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.  The
time required to obtain clearance to sell medical devices in foreign countries
may be longer or shorter than that required for FDA clearance, and requirements
for licensing may differ significantly from FDA requirements.  Some countries
have historically permitted human studies earlier in the product development
cycle than regulations in the United States.  Other countries, such as Japan,
have standards similar to those of the FDA.  This disparity in the regulation of
medical devices may result in more rapid product clearance in certain countries
than in the United States, while clearance in countries such as Japan may
require longer periods than in the United States.  In addition, the European
Union has developed a new approach to the regulation of medical products that
may significantly change the situation in those countries.  The receipt or
denial of FDA clearance for a particular product may affect the receipt or
denial of regulatory clearance for that product in certain other countries.

         FDA/Puritan-Bennett Consent Decree

         Puritan-Bennett has been subject to significant FDA enforcement
activity with respect to its operations in recent years.  In January 1994,
Puritan-Bennett entered into a consent decree with the FDA pursuant to which
Puritan-Bennett agreed to maintain systems and procedures complying with the
FDA's good manufacturing practices regulation and medical device reporting
regulation in all of its device manufacturing facilities.  Under the decree,
domestic shipments of Puritan-Bennett's portable ventilator products and
intra-arterial blood gas monitoring systems were suspended until the FDA could
become satisfied with Puritan-Bennett's manufacturing practices for such
products.  Both Burton A. Dole, Jr., Puritan-Bennett's former Chairman, 
President and Chief Executive Officer, and John H. Morrow, its former Executive
Vice President and Chief Operating Officer, are parties to the consent decree. 
Under the terms of the Agreement and Plan of Merger between the Company and
Puritan-Bennett, following consummation of the acquisition, Mr.  Dole became
the Chairman of the Company's Board of Directors and Mr. Morrow became
Executive Vice President of the Company and President of the Company's Home
Health Care Business.
        
         Impact of Puritan-Bennett Consent Decree

         Puritan-Bennett has experienced and will continue to experience
incremental operating costs due to ongoing compliance requirements and quality
assurance programs initiated in part as a result of the FDA consent decree. The
Company expects for Puritan-Bennett to continue to incur additional operating
expenses associated with its ongoing regulatory compliance program, but the
amount of these incremental costs currently cannot be completely predicted and
will depend upon a variety of factors, including future changes in statutes and
regulations governing medical device manufacturers and the manner in which the
FDA continues to enforce and interpret the requirements of the consent decree.
        




                                       19
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         There can be no assurance that the Company will not experience problems
associated with FDA regulatory compliance, including increased general costs of
ongoing regulatory compliance and specific costs associated with the
Puritan-Bennett consent decree.  The Company could experience a material adverse
effect on business, operations, profitability and outlook from, among other
things:  (i) requirements associated with the Puritan-Bennett consent decree;
(ii) requirements arising from continuing company-wide adherence to quality
assurance and good manufacturing practices; (iii) the results of future FDA
inspections of the operations and facilities of the Company; and (iv) any
modification, extension or adverse interpretation of the Puritan-Bennett consent
decree or any product recall, plant closure or other FDA enforcement activity
with respect to the Company.

         Environmental Regulation

         The Company is subject to various environmental laws and regulations 
both in the United States  and abroad. The operations of the Company, like
those of other medical device companies, involve the use of substances
regulated under environmental laws, primarily in the manufacturing and
sterilization processes. While it is difficult to quantify the potential impact
of compliance with environmental protection laws, management believes that such
compliance will not have a material effect on the Company's financial position.
The Company believes that it is substantially in compliance with applicable
environmental laws and regulations.
        
PRODUCT LIABILITY EXPOSURE

         Because most of the Company's products are intended to be used in
hospitals on patients who are physiologically unstable and may be severely ill,
the Company is exposed to serious potential product liability claims. From time
to time, patients on whom the Company's products are being used will sustain
injury or death related to their medical treatment or condition, and this could
lead to product liability claims against the Company. The Company has in fact
received notice of claims of product liability.  The Company believes that none
of these claims, either alone or in the aggregate, will have a material adverse
affect on the Company's financial position or results of operation. There is no
assurance, however, that the Company will not in the future be subject to a
claim that could have a material adverse impact on the Company's financial
position, results of operations, reputation or ability to market its products.

         The Company presently carries product liability insurance coverage in
amounts which the Company feels are sufficient to protect the Company. However,
it is possible that this coverage could be insufficient to cover claims which
might be made against the Company. The availability and cost of such coverage
varies from time to time and could be affected by product liability claims.  At
times in the past, coverage has been more difficult and more expensive to obtain
than at present. There is no assurance that the Company will always be able to
obtain adequate product liability coverage on terms it finds acceptable, or that
the Company will be able to obtain such insurance at all.

EMPLOYEES

         At July 2, 1995, the Company had a total of 1788 employees, including
889 employees in the United States, 754 employees in Mexico and 145 employees
in other countries.
        
         Many of the Company's employees are highly skilled, and competition in
recruiting and retaining such personnel is intense in the labor markets in which
the Company operates. Locating persons with experience in regulated industries
is particularly difficult. The Company believes that its continued success





                                       20
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is predicated in part on its ability to continue to attract highly qualified
management, marketing, medical and technical personnel.


         Other than a total of approximately 15 Puritan-Bennett employees, 
none of the Company's employees is subject to a collective bargaining
agreement. The Company believes that its relations with its employees are good.
        

                      EXECUTIVE OFFICERS OF THE REGISTRANT

         Set forth below is information regarding current executive officers who
are not also directors.


                NAME                   AGE                   POSITION WITH THE COMPANY
        ---------------------          ---              ------------------------------------
                                                  
        Laureen DeBuono                38               Executive Vice President, Human
                                                         Resources, General Counsel and
                                                         Secretary

        Michael P. Downey              48               Executive Vice President,
                                                         Chief Financial Officer

        Robert L. Doyle                52               Executive Vice President, Worldwide
                                                         Sales and Distribution

        Russell B. Hays                50               Executive Vice President, President,
                                                         Hospital Business

        John H. Morrow                 50               Executive Vice President, President,
                                                         Home Care Business

        Kenneth Sumner, Ph.D.          53               Vice President, Regulatory/Clinical
                                                         Affairs and Quality Assurance

        David B. Swedlow, M.D.         49               Vice President, Medical Affairs and
                                                         Technology Development


MS. DEBUONO joined the Company in April 1992 as General Counsel and Secretary
and currently serves as Executive Vice President, Human Resources, General
Counsel and Secretary. Prior to joining the Company, Ms. DeBuono was Division
and Corporate Counsel with The Clorox Company, a diversified consumer products
company, from 1987 to 1992, and Corporate Counsel with Varian Associates, Inc.,
an electronics device company, from 1984 to 1987.

MR. DOWNEY joined the Company in 1986 as Corporate Controller and became Vice
President, Finance in April 1987 and Vice President, Chief Financial Officer in
July 1989. Mr. Downey currently serves as Executive Vice President, Chief
Financial Officer. Prior to joining the Company, Mr. Downey was Vice President,
Finance with Shugart Corporation, a manufacturer of disk drives, from 1984 to
1986.

MR. DOYLE joined the Company upon consummation of the acquisition of
Puritan-Bennett by the Company in August 1995.  Mr. Doyle was elected Senior
Vice President of Puritan-Bennett in 1988 and became Senior Vice President,
Marketing in 1991.
        
MR. HAYS joined the Company in June 1995. Prior to joining the Company, Mr. Hays
served as the President and Chief Executive Officer of Sequenom from 1993 to
1995. Previously, Mr. Hays served as President and Chief Executive Officer of
Enzytech, Inc. from 1992 to 1993, and in various capacities at Baxter Healthcare
Corporation from 1985 to 1992. He also served as a General Manager at Stryker





                                       21
   22
Corporation from 1981 to 1985 and in various capacities at Baxter Travenol
Laboratories, Inc. from 1976 to 1981.

MR. MORROW joined the Company upon consummation of the acquisition of
Puritan-Bennett by the Company in August 1995.  Mr. Morrow was elected Vice
President of Puritan-Bennett in 1979 and has served as its Executive Vice
President and Chief Operating Officer since 1989. Prior to joining
Puritan-Bennett, Mr. Morrow was a management consultant with McKinsey &
Company, Inc.  from 1970 to 1979.

MR. SUMNER joined the Company in September 1994 as Vice President, Regulatory/
Clinical Affairs and Quality Assurance.  Immediately prior to joining the
Company, Mr. Sumner served as Vice President, Regulatory Affairs and Quality
Assurance with Cytyc Corporation, a privately-held medical device company. From
1990 to 1993, Mr. Sumner was with the Cardiology Group of C.R. Bard, Inc. as
Vice President, Medical and Regulatory Affairs, and, from 1980 to 1990, Mr.
Sumner was Director of Clinical and Regulatory Affairs at Zimmer, Inc., an
orthopedic medical device division of Bristol-Myers Squibb, Co.

DR. SWEDLOW joined the Company in June 1987 as Vice President, Medical Affairs
and currently serves as Vice President, Medical Affairs and Technology
Development. Prior to joining the Company, Dr. Swedlow was employed by the
University of Pennsylvania as an Assistant Professor of Anesthesia and
Pediatrics at the University of Pennsylvania School of Medicine and as an
Anesthesiologist and Critical Care Attending Physician and Director of Research
in the Department of Anesthesia and Critical Care of The Children's Hospital of
Philadelphia.

         Compliance with Section 16(a) of the Securities Exchange Act of 1934.

         Section 16(a) of the Securities and Exchange Act of 1934, as amended,
requires the Company's executive officers and directors to file reports of
beneficial ownership on Form 3 and changes in beneficial ownership on Forms 4 or
5 with the Securities and Exchange Commission ("SEC").  Executive officers and
directors are also required by SEC rules to furnish the Company with copies of
all Section 16(a) reports filed.  As part of a Section 16 compliance program
established by the Company for its executive officers and directors, the Company
undertakes to file these reports on their behalf.  Based solely on its review of
the Forms 3 and 4 filed on behalf of its executive officers and directors, as
well as written representations from these individuals that no Form 5 filings
are required, the Company believes that, during the fiscal year ended July 2,
1995, all Section 16(a) filing requirements applicable to its executive officers
and directors were complied with pursuant to SEC rules.

ITEM 2.  PROPERTIES.

         The Company's headquarters occupy a newly constructed 141,000 square
foot two-story facility built for the Company in Hacienda Business Park,
Pleasanton, California. The Pleasanton facility is being leased under a lease
with an initial 12-1/2 year term with options to renew for two additional
five-year periods at a rent approximating the then fair market value.

         The Company also maintains its manufacturing facilities and related
offices in 90,000 square feet in Chula Vista, California (near San Diego) and
60,000 square feet in Tijuana, Mexico, occupied under leases expiring in March
2000 and December 1994, respectively (the lease expiring in December 1994 has 9
one-year renewal options). The Company leases additional office space in Lenexa,
Kansas, which is used





                                       22
   23
for certain of the Company's research and development, and Coral Springs,
Florida, which is used to service Latin America . EdenTec maintains leased
facilities in Eden Prairie, Minnesota. The Company leases additional space for
its international operations in the Netherlands, France, United Kingdom,
Belgium, Germany, Spain and Hong Kong.

         With the acquisition of Puritan-Bennett, the Company has acquired
additional owned and leased facilities.  The Company believes that its 
facilities are adequate for its space requirements through fiscal 1996. If 
additional space is required in the future, the Company believes that suitable
facilities can readily be leased on commercially reasonable terms.

ITEM 3.  LEGAL PROCEEDINGS.

         From time to time, the Company has received, and in the future may
receive, notice of claims against it, which in some instances have developed, or
may develop, into lawsuits.  The claims may involve such matters, among others,
as product liability, patent infringement and employment related claims.  In
management's opinion, the ultimate resolution of claims currently pending,
either individually or in the aggregate, will not have a material adverse effect
on the Company's financial condition or results of operations.  There can be no 
assurance that the Company's financial condition or results of operations will
not be materially adversely affected as a result of future claims that may be
commenced against the Company.

         In September 1984, the Company was sued for patent infringement
relating to its pulse oximeters by BOC Health Care, Inc.  ("BOC"), the parent
corporation of Ohmeda, Inc. ("Ohmeda"), one of the Company's principal
competitors. In June 1986, the parties settled and agreed to dismiss BOC's
infringement claims and the Company's antitrust and unfair competition
counterclaims. As part of the settlement, the parties consented to a judgment
that the BOC patent was valid and entered into cross licenses of certain
oximetry patents, and applications therefor, of each party for the duration of
the applicable patents.

         On August 26, 1992, the Company brought an action in U.S. District
Court for declaratory judgment against Camino Laboratories, Inc. (San Diego, CA)
("Camino") seeking a judgment that the Company's pulse oximeter systems and
sensor products do not infringe United States Patent No. 4,446,715 or
Reexamination Certificate B1 4,446,715, owned by Camino. The Company filed an
amended complaint on September 1, 1992, adding a count for declaratory judgment
that Camino's claims were barred in whole or in part by laches. On September 17,
1992, Camino filed an answer, jury demand and counterclaim against the Company,
asserting that the Company's oximeters and sensors infringe Camino's patent and
seeking damages for past infringement and an injunction against future
infringement.

         In the fourth quarter of fiscal year 1994, the Company agreed to settle
its patent litigation with Camino.  Under the terms of the settlement, Camino
agreed not to sue the Company or its current or future customers relating to the
use or sale of the Company's sensors and monitors intended for use with such
sensors. A cash payment of $15 million was made by the Company to Camino and was
recorded as a non-operating expense.  This settlement neither recognizes the
validity nor acknowledges infringement of the Camino patent at issue.

         On December 10, 1992, the Company brought an action in Alameda County
Superior Court, Eastern Division, State of California, for misappropriation of
trade secrets, unfair competition and for return of property against BOC and
Square One Technology ("Square One").  On December 18, 1992, the Company filed
an amended complaint naming Daniel S. Goldberger, a former Company employee and
partner in Square One, as an individual defendant. The Company sought damages,
assignment of patent rights and injunctive relief to bar BOC, Square One and Mr.
Goldberger from continuing to sell a pulse





                                       23
   24
oximeter sensor based on a trade secret design that the Company claimed was
developed at the Company and was misappropriated by Square One and Mr.
Goldberger.

         Also on December, 10, 1992, BOC, Square One and Mr. Goldberger brought
an action in United States District Court for the District of Delaware against
the Company, seeking a declaratory judgment that certain patents of the Company
were invalid and/or not infringed by the manufacture, use or sale of the BOC
pulse oximeter sensor which was the subject matter of the California Superior
Court action described above.

         In the third quarter of fiscal year 1994, the Company agreed to settle
the trade secrets litigation with BOC and Square One.  Under the terms of the
agreement, the patent in issue was assigned to the Company.  The Company also
received a pretax $2 million payment and will receive ongoing royalties.  The $2
million payment was recorded as non-operating income.

         In July 1995, the U.S. Federal District Court in Delaware issued a 
decision in favor of the Company, ruling that four key oximeter and sensor 
technology patents are valid and would be infringed by Ohmeda, if Ohmeda sold 
either its adult or neonatal OxyTip sensors for use with non-Ohmeda monitors.  
BOC has filed notice of its intention to appeal the decision of the court.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY OWNERS.

         None





                                       24
   25
                                    PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS.

         The Company's common stock is traded on the Nasdaq National Market
under the symbol NELL.  The following table sets forth the high and low prices
for the Company's common stock as reported in that system for each quarter in
the Company's fiscal years 1995 and 1994.  These prices reflect interdealer
prices, without retail mark-up, mark-down or commission.



                                               HIGH       LOW
                                               ----       ---
                                                    
             Fiscal 1995:
               Fourth Quarter.............     $47.75     $36.00
               Third Quarter..............      38.25      31.50
               Second Quarter.............      34.00      28.25
               First Quarter..............      31.50      26.00
              Fiscal 1994:
               Fourth Quarter.............      28.75     24.375
               Third Quarter..............      29.50      24.25
               Second Quarter.............      26.50      19.75
               First Quarter..............      23.50      19.00



         At September 1, 1995, the Company had approximately 1,586 
stockholders of record (not including beneficial holders of stock held in 
street name).  The Company has not paid or declared dividends on its common 
stock.  The Company presently intends to retain its earnings for use in its
business and therefore does not anticipate paying any cash dividends in the 
foreseeable future.

ITEM 6.  SELECTED FINANCIAL DATA.

         The following table presents the Company's historical financial results
prior to the Company's acquisition of Puritan-Bennett on August 25, 1995.

                            SELECTED FINANCIAL DATA


                                                        Years ended
                                 ----------------------------------------------------------
  (In thousands, except per        JULY 2,     JULY 3,     JULY 4,     JULY 5,      JULY 7,
  share amounts)                    1995        1994        1993        1992         1991
                                                                   
  Net revenue                    $ 264,040   $ 234,972   $ 218,186   $ 196,164    $ 158,929
  Gross profit                     160,859     141,266     129,424     117,067       86,962
  Income from  operations           54,345      42,851      37,837      30,987       22,360
  Litigation settlements                 -     (13,000)          -          -             -
  Income before income
  taxes                             59,947      32,998      40,846      34,342       25,812
  Net income                        37,165      20,557*     25,120      21,293       16,262
  Net income per share                2.20        1.22*       1.50        1.31         1.05
  Working capital                  170,823     154,827     143,686     108,527       96,201
  Total assets                     296,469     238,148     225,606     188,654      142,836
  Stockholders' equity             240,721     204,113     192,464     154,492      121,384



                                       25
   26

No cash dividends have been declared or paid in the five-year period ended July
2, 1995

*Net of after-tax charge of $8.0 million ($0.48 per share) from litigation
settlements.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

         The section labeled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing on pages 34 through 38 of the
Company's 1995 Annual Report to Stockholders is incorporated herein by
reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The Report of Independent Accountants appearing on page 39, the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
appearing on pages 19 through 33, and the section entitled "Selected Quarterly
Data" appearing on page 39 of the Company's 1995 Annual Report to Stockholders,
are incorporated herein by reference.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         None.


                                       26
   27

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

      (a)     The section labeled "Proposal One -- Election of Directors"
appearing on pages 2 through 19 of the Company's Proxy Statement dated September
15, 1995 and filed with the Securities and Exchange Commission on the same date
is incorporated herein by reference.

      (b)     Information concerning the Company's executive officers who are
not directors is set forth in Part I of this Report on Form 10-K.

ITEM 11.  EXECUTIVE COMPENSATION.

      The sections labeled "Executive Compensation" and "Compensation Committee
Report on Executive Compensation", appearing on pages 9 through 18 of the
Company's Proxy Statement dated September 15, 1995 are incorporated herein by
reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The section labeled "Beneficial Owners of Voting Securities" appearing on
pages 7 and 8 of the Company's Proxy Statement dated September 15, 1995 is
incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The section labeled "Indebtedness of Management" appearing on page 14 of
the Company's Proxy Statement dated September 15, 1995 are incorporated herein
by reference.





                                       27
   28
                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)   1.      INDEX TO FINANCIAL STATEMENTS

      THE FOLLOWING FINANCIAL STATEMENTS ARE INCLUDED IN THE COMPANY'S 1995
ANNUAL REPORT TO STOCKHOLDERS AND ARE INCORPORATED HEREIN BY REFERENCE PURSUANT
TO ITEM 8:


                                                                                    PAGE IN 1995
                                                                                    ANNUAL REPORT
                                                                                   TO STOCKHOLDERS
                                                                                   ---------------
                                                                                
      Consolidated Balance Sheet at July 2, 1995 and July 3, 1994                          19
      Consolidated Statement of Income for each of the three years in the
        period ended July 2, 1995                                                          20
      Consolidated Statement of Stockholders' Equity for each of the three
        years in the period ended July 2, 1995                                             21
      Consolidated Statement of Cash Flows for each of the three years in the
        period ended July 2, 1995                                                          22
      Notes to Consolidated Financial Statements                                         23-33
      Report of Independent Accountants                                                    39
      Selected Quarterly Data (Unaudited)                                                  39



      2.      INDEX TO FINANCIAL STATEMENT SCHEDULES

      All schedules are omitted because they are not applicable or not required 
or because the required information is included in the consolidated financial 
statements or notes thereto.





                                       28
   29
3.      EXHIBITS

 EXHIBIT
   NO.                               DESCRIPTION OF EXHIBIT

   2.1           Agreement and Plan of Merger, dated as of May 21, 1995, as
                 amended, among Registrant, a wholly-owned subsidiary of 
                 Registrant and Puritan-Bennett Corporation (filed as Annex A 
                 to Form S-4 Registration Statement No. 33-61169 and 
                 incorporated herein by reference).

   2.2           Amendment No. 1 to Agreement and Plan of Merger, dated as of
                 June 30, 1995, among Registrant, a wholly-owned subsidiary of
                 Registrant and Puritan-Bennett Corporation (filed as Annex B
                 to Form S-4 Registration Statement No. 33-61169 and 
                 incorporated herein by reference).

   3.1           Restated Certificate of Incorporation of Registrant (filed as
                 Exhibit 3.1 to the Report on Form 10-K for the year ended July
                 7, 1991 and incorporated herein by reference).

   3.2           Certificate of Determination of Preferences of Series A Junior
                 Participating Preferred Stock (filed as Exhibit 3.2 to the
                 Report on Form 10-K for the year ended July 7, 1991 and
                 incorporated herein by reference).

   3.3           By-laws of Registrant, as amended (filed as Exhibit 3.3 to the
                 Report on Form 10-K for the year ended July 3, 1994 and 
                 incorporated herein by reference).

   4.1           Rights Agreement, dated as of September 1, 1992, between
                 Registrant and The First National Bank of Boston, as Rights 
                 Agent (incorporated by reference to Exhibit 2.1 of Amendment 
                 No. 1 to the Registrants' Registration Statement as Form 8-A 
                 filed with the Commission on July 13, 1995).  Reference is 
                 also made to Exhibits 3.1, 3.2 and 3.3.  

   4.2           Credit Agreement, dated as of November 16, 1994, entered into
                 by Registrant, the Banks Named Therein and ABN AMRO Bank N.V.,
                 San Francisco International Branch, as Agent (filed as 
                 Exhibit 10.1 to the Report on Form 10-Q for the period ended 
                 January 1, 1995 and incorporated herein by reference).

  10.1           Lease Agreement dated August 17, 1983 between Registrant and
                 Crow-Spieker-Singleton #87, together with Lease Amendment No.
                 One thereto, dated January 3, 1994,  Lease Amendment No. Two
                 thereto, dated as of May 5, 1986, and related letters dated
                 July 31, 1984 and October 15, 1984 (filed as Exhibit 10.1 to
                 Form S-1 Registration Statement No. 33-8211, filed August 22,
                 1986 and incorporated herein by reference).

  10.2           Lease Agreement dated March 31, 1986 between Registrant and
                 Crow-Spieker-Singleton #115 (filed as Exhibit 10.2 to Form S-1
                 Registration Statement No. 33-8211, filed August 22, 1986 and
                 incorporated herein by reference).

  10.3           Letters dated June 17, 1987 and April 28, 1987 relating to the
                 terms of the Lease Agreement listed as Exhibits 10.1 and 10.2
                 (filed as Exhibit 10.4 to the Report on Form 10-K for the year
                 ended June 28, 1987 and incorporated herein by reference).

  10.4           Lease Agreement dated October 21, 1987 between egistrant and
                 Crow-Spieker-Singleton #87 (filed as Exhibit 19.1 to the Report
                 on Form 10-Q for the period ended December 27, 1987 and
                 incorporated herein by reference).

  10.5           Lease Agreement dated July 10, 1989 between egistrant and Baja
                 de Mar, S.A. de C.V. (filed as Exhibit 10.14 to the Report on
                 Form 10-K for the year ended July 2, 1989 and incorporated
                 herein by reference).


                                       29

   30

  10.6           Lease Agreement dated February 1, 1990 between Registrant and
                 Eastlake Development Company (filed as Exhibit 19.1 to the
                 Report on Form 10-Q for the period ended April 1, 1990 and
                 incorporated hereby by reference).

  10.7           First Amendment dated September 26, 1990 to Lease Agreement
                 listed as Exhibit 10.6 (filed as Exhibit 10.13 to the Report on
                 Form 10-K for the year ended July 1, 1990 and incorporated
                 herein by reference).

  10.8           Lease Agreement dated April 18. 1991 between Registrant and
                 Britannia Developments, Inc. (filed as Exhibit 10.8 to the
                 Report on Form 10-K for the year ended July 7, 1991 and
                 incorporated herein by reference) and the First Amendment to
                 the Lease Agreement dated February 13, 1992 between the
                 Registrant and Britannia Developments, Inc.

  10.9           Settlement Agreement effective as of June 1, 1986 between
                 Registrant and The BOC Group (portions with respect to which
                 confidentiality has been requested were filed separately with
                 the request for confidential treatment) (filed as Exhibit 10.4
                 to Amendment No. 3 to Form S-1 Registration Statement No.
                 33-8211, filed April 16, 1987 and incorporated herein by
                 reference).

 10.10           Settlement Agreement dated as of December 15, 1986 between
                 Registrant and Robert F. Shaw and related documents (filed as
                 Exhibit 10.21 to Amendment No. 3 to Form S-1 Registration
                 Statement No. 33-8211, filed April 16, 1987 and incorporated
                 herein by reference).

*10.11           Registrant's 1982 Incentive Stock Option Plan, as amended
                 (filed as Exhibit 10.16 to the Report on Form 10- K for the
                 year ended June 26, 1988 and incorporated herein by reference),
                 and forms of documents in connection with the 1982 Plan (filed
                 as Exhibit 28.1 to Amendment No. 1 to Form S-8 Registration
                 Statement No. 33-16590, filed August 31, 1987 and incorporated
                 herein by reference).

*10.12           Registrant's 1985 Equity Incentive Plan, as amended filed as
                 Exhibit 10.22 to the Report on Form 10-K for the year ended
                 July 1, 1990 and incorporated herein by reference) and forms of
                 documents used in connection with the 1985 Plan (filed as
                 Exhibit 10.22 to the Report on Form 10-K for the year ended
                 July 1, 1990 and incorporated herein by reference).

*10.13           Registrant's 1988 Stock Option Plan for Non-Employee Directors
                 and forms of documents used in connection with such Plan, as
                 amended (filed as Exhibit 10.13 to the Report on Form 10-K for
                 the year ended July 7, 1991 and incorporated herein by
                 reference).

*10.14           Registrant's 1991 Equity Incentive Plan (filed as Exhibit 10.14
                 to the Report on Form 10-K for the year ended July 7, 1991 and
                 incorporated herein by reference).

*10.15           Notice of Grant of Stock Options and Stock Option Grant
                 Agreement dated March 30, 1988 between Registrant and Frederick
                 M. Grafton (filed as Exhibit 10.21 to the Report on Form 10-K
                 for the year ended June 26, 1988 and incorporated herein by
                 reference).



                                       30

   31

 10.16           Fourth Amended Registration Rights Agreement dated as of
                 December 31, 1984, January 15, 1985, March 6, 1985, March 29,
                 1985 and April 19, 1985 between Registrant and certain
                 purchasers of its securities (filed as Exhibit 10.15 to Form
                 S-1 Registration Statement No. 33-8211, filed August 22, 1986
                 and incorporated herein by reference).

 10.17           Amendment to Fourth Amended Registration Rights Agreement
                 listed as Exhibit 10.16 dated as of August 19, 1986 (filed as
                 Exhibit 10.21 to Amendment No. 1 to Form S-1 Registration
                 Statement No. 33-8211, filed September 10, 1986 and
                 incorporated herein by reference).

 10.18           Second Amendment to Fourth Amended Registration Rights
                 Agreement listed as Exhibit 10.16 dated as of December 24, 1986
                 (filed as Exhibit 10.20 to Amendment No. 3 to Form S-1
                 Registration Statement No. 33- 8211, filed April 16, 1987 and
                 incorporated herein by reference).

*10.19           Indemnification Agreement dated as of June 17, 1986 between
                 Registrant and Robert S. Smith (filed as Exhibit 10.16 to Form
                 S-1 Registration Statement No. 33-8211, filed August 22, 1986,
                 and incorporated herein by reference).

*10.20           Form of Indemnification Agreement entered into between
                 Registrant and each of its directors, current officers and one
                 former officer (filed as Exhibit 10.22 to Amendment No. 3 to
                 Form S-1 Registration Statement No. 33-8211, filed April 16,
                 1987 and incorporated herein by reference).

 10.21           License Agreement between Registrant and Andros Analyzers
                 Incorporated dated October 30, 1987 (portions with respect to
                 which confidentiality has been requested were filed separately
                 with the request for confidential treatment) (Filed as Exhibit
                 10.37 to the Report on Form 10-K for the year ended June 26,
                 1988 and incorporated herein by reference).

*10.22           Letter agreement between Registrant and Paul J. Malloy, dated
                 September 11, 1989 (filed as Exhibit 10.18 to the Report on
                 Form 10-K for the year ended July 2, 1989 and incorporated
                 herein by reference), letter agreement between Registrant and
                 James E. Corenman, dated May 19, 1989 (filed as Exhibit 10.19
                 to the Report on Form 10-K for the year ended July 2, 1989 and
                 incorporated herein by reference), letter agreement and letter
                 of indemnification between Registrant and Robert S. Smith dated
                 August 5, 1989 (filed as Exhibit 10.20 to the Report on Form
                 10-K for the year ended July 2, 1989 and incorporated herein by
                 reference), letter agreement between Registrant and Charles C.
                 Wilson dated October 5, 1989 (filed as Exhibit 10.35 to the
                 Report on Form 10-K for the period ended July 1, 1990 and
                 incorporated herein by reference), letter agreement between
                 Registrant and L. Jack Lloyd dated March 16, 1990 (filed as
                 Exhibit 10.36 to the Report on Form 10-K for the period ended
                 July 1, 1990 and incorporated herein by reference) and letter
                 agreement between Registrant and Tibor Foldvari dated June 27,
                 1990 (filed as Exhibit 10.37 to the Report on Form 10- K for
                 the period ended July 1, 1990 and incorporated herein by
                 reference).



                                       31

   32

*10.23           Agreement and General Release dated as of July 24, 1991 between
                 Registrant and Lauren F. Yazolino (filed as Exhibit 10.23 to
                 the Report on Form 10-K for the year ended July 7, 1991 and
                 incorporated herein by reference) and the First Amendment to
                 the Agreement and General Release dated May 1, 1992.

*10.24           Employment Agreement dated effective as of May 23, 1989 between
                 Registrant and Virginia Perry, Vice President, Quality
                 Assurance and Regulatory Affairs (filed as Exhibit 10.38 to the
                 Report on Form 10-K for the period ended July 1, 1990 and
                 incorporated herein by reference).

*10.25           Employment Agreement dated as of September 2, 1991 between
                 Registrant and Theodore H. Toch, Vice President and General
                 Manager, Instruments (filed as Exhibit 10.25 to the Report on
                 Form 10-K for the year ended July 7, 1991 and incorporated
                 herein by reference).

 10.26           Agreement and Plan of Reorganization dated as of March 2, 1990
                 by and among Registrant, Nellcor Merger Corporation, Radiant
                 Systems, Inc., Jeffrey J. Alholm and Edward Kleban and related
                 Letter Agreement and Exchange Agreement (filed as Exhibits
                 19.2, 19.3 and 19.4 to the Report on Form 10-Q for the period
                 ended April 1, 1990 and incorporated herein by reference).

 10.27           Buy-Sell Agreement for Rights and Products between Registrant
                 and Colin Medical Instruments dated April 23, 1990, as amended
                 July 24, 1990 (filed as Exhibit 10.34 to the Report on Form
                 10-K for the period ended July 1, 1990 and incorporated herein
                 by reference).

 10.28           Amendment dated February 8, 1991 to the Buy-Sell Agreement for
                 the Rights and Products listed as Exhibit 10.27 (filed as
                 Exhibit 10.28 to the Report on Form 10-K for the period ended
                 July 7, 1991 and incorporated herein by reference) and the
                 Third Amendment dated June 1, 1992 to the Buy-Sell Agreement
                 aforementioned.

 10.29           Stock Purchase Agreement dated August 12, 1991 among
                 Registrant, EdenTec Corporation and the Stockholders and
                 Optionholders of EdenTec Corporation and related Employment
                 Agreements between Registrant and Edward Schuck and Bruce
                 Bowman, respectively (filed as Exhibit 10.29 to the Report on
                 Form 10-K for the year ended July 7, 1991 and incorporated
                 herein by reference).

 10.30           Asset Purchase Agreement dated September 20, 1991 among
                 Registrant, Fenem, Inc., Carl Fehder, M.D. and Edward
                 Nemerovsky (filed as Exhibit 10.30 to the Report on Form 10-K
                 for the year ended July 7, 1991 and incorporated herein by
                 reference).

*10.31           Letter agreement dated November 1, 1992, regarding Offer of
                 Employment between Registrant and David J. Illingworth (filed
                 as Exhibit 10.31 to the Report on Form 10-K for the year ended
                 July 4, 1993 and incorporated herein by reference).



                                       32
   33


      *10.32           Promissory Note secured by Deed of Trust, dated February
                       18, 1993 made by David J. Illingworth in favor of
                       Registrant (filed as Exhibit 10.32 to the Report on Form
                       10-K for the year ended July 4, 1993 and incorporated
                       herein by reference).

      *10.33           Separation Agreement and General Release between
                       Registrant and Theodore H. Toch dated as of January 15,
                       1993 (filed as Exhibit 10.33 to the Report on Form 10-K
                       for the year ended July 4, 1993 and incorporated herein
                       by reference).

      *10.34           Separation Agreement and General Release between
                       Registrant and Walter J. McBride dated as of March 9,
                       1993 (filed as Exhibit 10.34 to the Report on Form 10-K
                       for the year ended July 4, 1993 and incorporated herein
                       by reference).

      *10.35           Separation Agreement between Registrant and Robert M.
                       Johnson dated November 24, 1993 (filed as Exhibit 10.35
                       to the report on Form 10K for the year ended July 3, 
                       1994 and incorporated herein by reference).

      *10.36           Agreement between Registrant and Virginia Perry dated
                       March 16, 1994 (filed as Exhibit 10.36 to the report on
                       Form 10K for the year ended July 3, 1994 and 
                       incorporated herein by reference).

      *10.37           Separation Agreement between Registrant and Julio
                       Guardado dated May 16, 1994 (filed as Exhibit 10.37 to
                       the report on Form 10K for the year ended July 3, 1994
                       and incorporated herein by reference).

      *10.38           Separation Agreement between Registrant and Patricia E.
                       Bashaw dated May 27, 1994 (filed as Exhibit 10.38 to the
                       report on Form 10K for the year ended July 3, 1994 and
                       incorporated herein by reference).

      *10.39           Agreement between Registrant and David L. Schlotterbeck
                       dated June 13, 1994 (filed as Exhibit 10.39 to the
                       report on Form 10K for the year ended July 3, 1994 and
                       incorporated herein by reference).

      *10.40           Forms of Chief Executive Officer, Executive Officer and
                       Key Employee Severance Agreements (filed as Exhibits
                       10.2, 10.3 and 10.4 to the Report on Form 10Q for the
                       period ended January 1, 1995 and incorporated herein
                       by reference).

      *10.41           Registrant's 1994 Equity Incentive Plan, as amended
                       (filed as Exhibit 4.5 to Form S-8 Registration Statement
                       No. 33-87490 and incorporated herein by reference).

      *10.42           Registrant's 1995 Merger Stock Incentive Plan (filed as
                       Exhibit 4.5 to Form S-8 Registration Statement No. 
                       33-62465 and incorporated herein by reference).

       11.1            Statement of computation of Net Income per share.

       13.1            Excerpts from 1995 Annual Report to Stockholders.

       21.1            List of Subsidiaries (filed as Exhibit 21.1 to the
                       Report on Form 10K for the year ended July 3, 1994 and
                       incoroprated herein by reference).

       23.1            Consent of Independent Accountants (Price Waterhouse). 
                       Reference is made to page S-1 hereof.

       27              Financial Data Schedule

- -------
*      An asterisk next to the number of an exhibit indicates that the exhibit
       is a management contract or compensatory plan or arrangement.





                                       33
   34
(b)      REPORTS ON FORM 8-K

         Form 8-K dated March 13, 1995, filed April 3, 1995, reporting (i) the
acquisition of Pierre Medical by EdenTec Corporation, the Company's home health
care subsidiary, and (ii) a $2.1 million equity investment by the Company in
Heartstream, Inc.  Each of these disclosures were pursuant to Item 5 ("Other
Event").

         Form 8-K dated May 21, 1995, filed May 23, 1995, reporting the entering
into by the Company and Puritan-Bennett Corporation of an Agreement and Plan of
Merger dated as of May 21, 1995 pursuant to Item 5 ("Other Event").





                                       34
   35

                                   SIGNATURES

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

                                    NELLCOR PURITAN BENNETT INCORPORATED


                                    By: /s/    C. Raymond Larkin, Jr.
                                       -------------------------------------
                                               C. Raymond Larkin, Jr.
                                       President and Chief Executive Officer

                                    Date:   September 29, 1995

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



           SIGNATURE                                TITLE                        DATE
           ---------                                -----                        ----
                                                                   

/s/ C. Raymond Larkin, Jr.
- ------------------------------        Director, President and Chief       September 29, 1995
    C. Raymond Larkin, Jr.            Executive Officer (Principal
                                      Executive Officer)

/s/   Burton A. Dole, Jr.
- ------------------------------        Director, Chairman of               September 29, 1995
      Burton A. Dole, Jr.             the Board

/s/    Michael P. Downey
- ------------------------------        Executive Vice President            September 29, 1995
       Michael P. Downey              and Chief Financial Officer
                                      (Principal Financial &
                                      Accounting Officer)

/s/  Robert J. Glaser, M.D.
- ------------------------------        Director                            September 29, 1995
     Robert J. Glaser, M.D.

/s/  Frederick M. Grafton
- ------------------------------        Director                            September 29, 1995
     Frederick M. Grafton

/s/    Donald L. Hammond
- ------------------------------        Director                            September 29, 1995
       Donald L. Hammond

/s/   Thomas A. McDonnell
- ------------------------------        Director                            September 29, 1995
      Thomas A. McDonnell




                                       35
   36



           SIGNATURE                   TITLE                 DATE
           ---------                   -----                 ----
                                                


/s/    Walter J. McNerney
- ------------------------------        Director         September 29, 1995
       Walter J. McNerney

/s/ Edwin E. van Bronkhorst
- ------------------------------        Director         September 29, 1995
    Edwin E. van Bronkhorst






                                       36
   37
                       CONSENT OF INDEPENDENT ACCOUNTANTS


         We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-16590, 33-25586, 33-25587, 33-32521, 33-38241,
33-45010, 33-87490, 33-87492, 33-87496, 33-62463, and 33-62465) of Nellcor 
Incorporated of our report dated July 26, 1995, except as to Note 11, which is
dated as of August 24, 1995, appearing on page 39 of the Annual Report to 
Stockholders which is incorporated in this Annual Report on Form 10-K for the 
year ended July 2, 1995.  

/s/ PRICE WATERHOUSE LLP


PRICE WATERHOUSE LLP
San Francisco, California
September 29, 1995





                                     S-1

EX-11.1

   1
                                                                         EXHIBIT
                                                                            11.1

                     NELLCOR PURITAN BENNETT INCORPORATED
                STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)




                                                                                 Fiscal  Year
                                                                 ---------------------------------------------
                                                                 JULY 2,            JULY 4,            JULY 5,
                                                                    1995               1993               1992
                                                                 -------            -------            -------
                                                                                              
Computation of common and equivalent shares outstanding:
  Common Stock                                                    16,624             16,715             16,471
  Stock options                                                      299                128                274
                                                                 -------            -------            -------
Total weighted average common and common equivalent shares
  outstanding                                                     16,923             16,843             16,745
                                                                 =======            =======            =======

Net Income                                                       $37,165            $20,557            $25,120
                                                                 =======            =======            =======
Net income  per common and common equivalent share                 $2.20              $1.22              $1.50
                                                                 =======            =======            =======

EX-13.1

   1
                                                                    EXHIBIT 13.1

CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)



                                                                                    July 2, 1995     July 3, 1994
- -----------------------------------------------------------------------------------------------------------------
                                                                                                       
ASSETS
Current assets:
    Cash and cash equivalents                                                        $  75,642         $  68,163
    Marketable securities (Note 2)                                                      65,039            53,470
    Accounts receivable, net of allowance for doubtful
        accounts of $1,274 ($1,128 at July 3, 1994)                                     44,304            34,308
    Inventories (Note 1)                                                                31,446            27,238
    Deferred income taxes (Note 6)                                                       4,898             3,581
    Other current assets                                                                 2,038             1,650
                                                                                     ---------         ---------
        Total current assets                                                           223,367           188,410
                                                                                     ---------         ---------
Property and equipment, at cost:
    Machinery and equipment                                                             57,057            47,814
    Demonstration equipment                                                             12,155            13,093
    Furniture and fixtures                                                               7,737             7,304
    Leasehold improvements                                                               4,947             5,276
                                                                                     ---------         ---------
                                                                                        81,896            73,487
    Accumulated depreciation                                                           (46,083)          (39,315)
                                                                                     ---------         ---------
        Net property and equipment                                                      35,813            34,172
                                                                                     ---------         ---------
Intangibles and other assets, net (Notes 3 and 4)                                       35,289            15,566
                                                                                     =========         =========
                                                                                     $ 294,469         $ 238,148
                                                                                     =========         =========

LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                                 $  20,697         $  14,229
    Accrued liabilities:
        Payroll and payroll related                                                     16,711            11,091
        Warranty                                                                         4,195             1,882
        Other                                                                            8,070             4,811
    Income taxes payable (Note 6)                                                        3,207             1,570
                                                                                     ---------         ---------
        Total current liabilities                                                       52,880            33,583
Deferred income taxes (Note 6)                                                             868               452
                                                                                     ---------         ---------
        Total liabilities                                                               53,748            34,035

Commitments and contingencies (Notes 8 and 10) 
    Stockholders' equity (Note 7):
    Preferred stock, $.001 par value; 5,000,000 shares authorized;
        none outstanding
    Common stock, $.001 par value; 50,000,000 shares authorized;
        17,854,250 shares issued and outstanding (17,058,059 in 1994)                       18                17
    Additional paid-in-capital                                                         111,012            90,302
    Treasury stock, at cost (1,148,000 shares in 1995; 522,500 shares in               (34,539)          (13,630)
        1994)
    Retained earnings                                                                  164,494           127,329
    Accumulated translation adjustment                                                    (259)              100
    Notes receivable from stockholders                                                      (5)               (5)
                                                                                     ---------         ---------
          Total stockholders' equity                                                   240,721           204,113
                                                                                     =========         =========
                                                                                     $ 294,469         $ 238,148
                                                                                     =========         =========


See accompanying notes to consolidated financial statements


   2

CONSOLIDATED STATEMENT OF INCOME

(In thousands, except per share amounts)



Years ended                                  July 2, 1995  July 3, 1994   July 4, 1993
- --------------------------------------------------------------------------------------
                                                                         
Net revenue                                   $ 264,040      $ 234,972      $ 218,186
Cost of goods sold                              103,181         93,706         88,762
                                              ---------      ---------      ---------
         Gross profit                           160,859        141,266        129,424
                                              ---------      ---------      ---------
Operating expenses:
         Research and development                27,225         23,980         22,696
         Selling, general and
              administrative                     79,289         73,935         68,891
            Restructuring charge (Note 5)           ---            500            ---
                                              ---------      ---------      ---------
                                                106,514         98,415         91,587
                                              ---------      ---------      ---------
Income from operations                           54,345         42,851         37,837
Interest income                                   6,139          4,209          3,410
Litigation settlements, net (Note 10)               ---        (13,000)           ---
Other income (expense), net                        (537)        (1,062)          (401)
                                              ---------      ---------      ---------
Income before income taxes                       59,947         32,998         40,846
Provision for income taxes (Note 6)              22,782         12,441         15,726
                                              ---------      ---------      ---------
         Net income                           $  37,165      $  20,557      $  25,120
                                              =========      =========      =========
Income per common and
  common equivalent share                     $    2.20      $    1.22      $    1.50
                                              =========      =========      =========
Weighted average common
  and common equivalent
  shares used in the calculation
  of income per share                            16,923         16,843         16,745
                                              =========      =========      =========


See accompanying notes to consolidated financial statements

   3

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)



                                                                                                      COMPENSATION
                                                                                                         AND NOTES
                                          COMMON       STOCK    ADDITIONAL               ACCUMULATED    RECEIVABLE
                                        ----------------------     PAID-IN     RETAINED  TRANSLATION          FROM
                                          SHARES     PAR VALUE     CAPITAL     EARNINGS   ADJUSTMENT  STOCKHOLDERS
- --------------------------------------------------------------------------------------------------------------------
                                                                                     
BALANCE AT JULY 5, 1992                 16,122,099      $16       $ 73,174     $ 81,652     $ 204      $(554)
Issuance of common stock
  and related tax benefits of              591,163        1         12,521
  $3,621 under employee stock plans
Compensation related to
  acquisition of Radiant
  Systems (Note 7)                                                                                       549
Accumulated translation
  adjustment                                                                                 (219)
Net income                                                                       25,120
                                        ----------      ---       --------     --------     -----      -----
BALANCE AT JULY 4, 1993                 16,713,262       17         85,695      106,772       (15)        (5)
Issuance of common stock and
  related tax benefits of
  $2,394 under employee stock
  plans                                    554,797                  10,460
Acquisition of treasury
  stock (Note 7)
Acquisition and retirement of
  common stock (Note 7)                   (210,000)                 (5,853)
Accumulated translation
  adjustment                                                                                  115
Net income                                                                       20,557
                                        ----------      ---       --------     --------     -----      -----
BALANCE AT JULY 3, 1994                 17,058,059       17         90,302      127,329       100         (5)
Issuance of common stock and
  related tax benefits of
  $3,487 under employee stock
  plans                                    796,191        1         20,710
Acquisition of treasury stock
  (Note 7)
Accumulated translation
  adjustment                                                                                 (359)
Net income                                                                       37,165
                                        ----------      ---       --------     --------     -----      -----
BALANCE AT JULY 2, 1995                 17,854,250      $18       $111,012     $164,494     $(259)     $  (5)
                                        ==========      ===       ========     ========     =====      =====


                                         TREASURY      STOCK
                                        ----------------------
                                          SHARES     PAR VALUE
- --------------------------------------------------------------
                                               
BALANCE AT JULY 5, 1992                         0     $      0
Issuance of common stock
  and related tax benefits of
  $3,621 under employee stock plans
Compensation related to
  acquisition of Radiant
  Systems (Note 7)
Accumulated translation
  adjustment
Net income
                                        ---------     --------
BALANCE AT JULY 4, 1993                         0     $      0
Issuance of common stock and
  related tax benefits of
  $2,394 under employee stock
  plans
Acquisition of treasury                   522,500      (13,630)
  stock (Note 7)
Acquisition and retirement of
  common stock (Note 7)
Accumulated translation
  adjustment
Net income
                                        ---------     --------
BALANCE AT JULY 3, 1994                   522,500      (13,630)
Issuance of common stock and
  related tax benefits of
  $3,487 under employee stock
  plans
Acquisition of treasury stock             625,500      (20,909)
  (Note 7)
Accumulated translation
  adjustment
Net income
                                        ---------     --------
BALANCE AT JULY 2, 1995                 1,148,000     $(34,539)
                                        =========     ========


See accompanying notes to consolidated financial statements


   4

CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)



Years ended                                                                 July 2, 1995   July 3, 1994   July 4, 1993
- ----------------------------------------------------------------------------------------------------------------------
                                                                                                        
Cash flows from operating activities:
   Net income                                                                 $ 37,165      $  20,557      $  25,120
   Adjustments to reconcile net income to cash
      provided by operating activities:
      Depreciation and amortization                                             16,089         16,281         13,153
      Compensation to Radiant stockholders (Note 7)                                ---            ---            549
      Deferred income taxes (Note 6)                                               901            400           (493)
      Increases (decreases) in cash flows, net of effects of purchases of
        companies, as a result of changes in:
        Accounts receivable                                                     (3,336)        (1,218)        (3,046)
        Inventories                                                             (1,251)        (4,676)            51
        Other current assets                                                    (3,181)        (1,319)         1,764
        Other assets                                                            (5,007)        (1,949)          (588)
        Accounts payable                                                         3,340          1,809            685
        Accrued liabilities                                                      8,082            404          1,108
        Income taxes payable                                                     1,601         (1,845)        (1,083)
                                                                              --------      ---------      ---------
   Cash provided by operating activities                                        54,403         28,444         37,220
                                                                              --------      ---------      ---------

Cash flows from investing activities:
   Capital expenditures                                                        (11,906)       (14,133)       (14,767)
   Cash used to purchase securities held-to-maturity                           (47,245)       (87,212)      (156,078)
   Proceeds from maturities of securities held-to-
      maturity                                                                  35,676        104,643        144,860
   Investment in non-marketable equity securities                               (2,100)           ---            ---
   Payment for purchase of Pierre Medical, net of
      cash acquired (Note 3)                                                   (21,415)           ---            ---
   Other investing activities                                                     (305)          (680)           ---
                                                                              --------      ---------      ---------
   Cash provided by (used for) investing activities                            (47,295)         2,618        (25,985)
                                                                              --------      ---------      ---------

Cash flows from financing activities:
   Proceeds from the issuance of common stock under
      the Company's stock plans and related tax
      benefits, net of notes receivable from
      stockholders                                                              20,710         10,460         12,521
   Purchase of treasury stock, including shares retired                        (20,909)       (19,483)           ---
                                                                              --------      ---------      ---------
   Cash provided by (used for) financing activities                               (199)        (9,023)        12,521
                                                                              --------      ---------      ---------
Effect of exchange rate changes on cash balances                                   570            218           (790)
                                                                              --------      ---------      ---------
Increase in cash and cash equivalents                                            7,479         22,257         22,966
Cash and cash equivalents at the beginning of the year                          68,163         45,906         22,940
                                                                              ========      =========      =========
Cash and cash equivalents at the end of the year                              $ 75,642      $  68,163      $  45,906
                                                                              ========      =========      =========


See accompanying notes to consolidated financial statements

   5

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION.

The financial statements include the accounts of Nellcor Incorporated and its
wholly owned subsidiaries (the Company). All significant intercompany
transactions have been eliminated. The Company uses the equity method of
accounting for investments that represent greater than 20% of the net book value
of the investee at the date of investment. Investments which represent less than
20% of the net book value of the investee at the date of investment are recorded
at cost. All such investments were immaterial as of July 2, 1995.

FISCAL YEAR.

The Company's fiscal year ends on the first Sunday in July, which results in a
52 or 53-week fiscal year. Fiscal 1993, 1994 and 1995 were 52-week years.

FOREIGN CURRENCY TRANSLATION.

The financial statements of the Company's subsidiaries located in Europe use the
local currency as their functional currency. Assets and liabilities denominated
in foreign currencies are translated at the rates of exchange at the balance
sheet date. Income and expense items are translated at average monthly rates of
exchange. Any resulting translation adjustments are recorded as a separate
component of stockholders' equity. Realized and unrealized gains and losses on
foreign currency transactions and hedge contracts are included in non-operating
income and expense. Foreign currency transaction gains or losses have not been
material in any year or period presented.

REVENUE RECOGNITION AND PRODUCT WARRANTY.

The Company recognizes revenue at the time of shipment of product and provides
currently for the estimated cost to repair or replace products under the
warranty provisions in effect at the time of sale.

CASH EQUIVALENTS.

The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. These investments are stated at
cost which approximates fair value due to their short maturity.

INVENTORIES.

Inventories are stated at the lower of cost (first-in, first-out) or market (net
realizable value). Allowances are made for slow-moving, obsolete, unsalable, or
unusable inventories. Inventories were as follows (in thousands):



                                                  July 2, 1995        July 3, 1994
- ----------------------------------------------------------------------------------
                                                                       
Raw materials                                        $14,437             $10,040
Work-in-process                                        4,843               5,180
Finished goods                                        12,166              12,018
                                                     =======             =======
                                                     $31,446             $27,238
                                                     =======             =======


PROPERTY AND EQUIPMENT.

Depreciation is provided using the straight-line method and estimated useful
lives of three to seven years. Leasehold improvements are amortized over the
life of the lease, or the estimated useful life of the asset, whichever is
shorter. Depreciation expense was approximately $10.2 million in fiscal 1995,
$10.6 million in fiscal 1994, and $9.0 million in fiscal 1993.

INTANGIBLE AND OTHER ASSETS.

Intangible and other assets, including excess of cost over net assets acquired,
are amortized on a straight-line basis over useful lives ranging from two to
fifteen years. An impairment of intangible assets is recognized when it is
deemed probable that the carrying amount of an asset cannot be fully recovered,
based on estimated future cash flows of the related business.


   6

INCOME TAXES.

Deferred income taxes are computed using the liability method. Under the
liability method, taxes are recorded based on the future tax effect of the
difference between the tax and financial reporting bases of the Company's assets
and liabilities. In estimating future tax consequences, all expected future
events are considered, except for potential income tax law or rate changes. The
Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109)
"Accounting for Income Taxes" in fiscal 1994. Adoption of SFAS 109 did not have
a material effect on the Company's financial position or result of operations.

INCOME PER SHARE.

Income per share is based upon weighted average common shares and includes the
dilutive effect of stock options outstanding (using the treasury stock method).

RECLASSIFICATIONS.

Certain reclassifications have been made to the consolidated financial
statements in the prior years to conform to the 1995 presentation.

NOTE 2

FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK

FOREIGN CURRENCY INSTRUMENTS.

The Company enters into foreign currency exchange contracts, primarily forward
currency contracts, to reduce exposure to currency exchange risk. The effect of
this practice is to minimize the impact of foreign exchange rate movements on
the Company's operating results as gains and losses on these contracts offset
losses and gains on the assets, liabilities and transactions being hedged. The
Company does not engage in foreign currency speculation. The counterparties to
foreign currency exchange contracts are major domestic and international
financial institutions. To decrease the risk of non-performance which may result
in currency losses, the Company diversifies its selection of counterparties. At
July 2, 1995, the Company had foreign currency forward exchange contracts with a
notional amount of $35.4 million ($9.8 million at July 3, 1994), and a fair
market value of approximately $35.9 million ($10.0 million at July 3, 1994), all
of which were denominated in European currencies. The fair market value was
determined based upon foreign currency exchange rates in effect at the end of
each fiscal period. The Company records both the amortized premium and any
unrealized gain or loss on outstanding foreign currency forward exchange
contracts as non-operating income or expense. For both fiscal 1995 and fiscal
1994, all outstanding foreign currency exchange contracts were due to mature
within six months of fiscal year end.

CREDIT FACILITY.

The Company has a $50 million credit facility with a group of four banks which
provides an option to convert outstanding borrowings to a term loan repayable
over four years. The rate of interest payable under this facility is a floating
rate, which is a function of the London Interbank Offered Rate. A facility fee
equal to 0.25% of the total commitment is paid quarterly.

The credit agreement contains various covenants which require the Company to
maintain a specified financial ratio, limit liens, regulate asset disposition
and subsidiary indebtedness and restrict certain acquisitions and investments.
At July 2, 1995, the Company was in compliance with these covenants and no
borrowings had been made.

MARKETABLE SECURITIES.

During fiscal 1995, the Company adopted Statement of Financial Accounting
Standards Number 115 "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). SFAS 115 requires that all such investment securities be
classified into one of three categories: held-to-maturity, available-for-sale,
or trading. Implementation of SFAS 115 did not have a material effect on
Nellcor's financial position or results of operations.

The Company's marketable securities, generally, are in high-quality government,
municipal and corporate obligations with original maturities of up to two years.
The Company has established guidelines relative to investment quality,
diversification and maturities to maintain appropriate levels of safety and
liquidity.


   7

At July 2, 1995, the Company had marketable securities totaling $65.0 million,
of which $60.2 million were classified as held-to-maturity. These
held-to-maturity securities, which the Company has the positive intent and
ability to hold to maturity, are stated at cost, which approximates amortized
cost. Realized gains and losses resulting from the sale of marketable securities
during the period and unrealized gains and losses at July 2, 1995, were
immaterial.

As of July 2, 1995, the Company's available-for-sale investments, which the
Company does not intend to hold to maturity, totaled $4.8 million. No sales of
available-for-sale marketable securities, or transfers between hold-to-maturity
and available-for-sale marketable securities, were made during the year. The
difference between the carrying value of the Company's available-for-sale
securities and the market value as shown below was immaterial as of July 2,
1995.

Marketable securities classified as held-to-maturity and available-for-sale at
July 2, 1995 are summarized below (in thousands). Fair value of marketable
securities is based upon quoted market prices.



                                                                             Gross        Gross
                                                                           Unrealized   Unrealized
Security Type                                                  Cost          Gains        Losses       Fair Value
- -------------                                                 -------      ----------   ----------     ----------
                                                                                                 
Current assets:
Marketable securities
       HELD-TO-MATURITY:
       Debt issued by the U.S. Treasury and other             $22,958         $17         $  (8)         $22,967
          U.S. government corporations and agencies

       Debt securities issued by the states of the             37,236          47          (185)          37,098
          United States and political subdivisions of
          the states

       AVAILABLE-FOR-SALE:
       Mortgage backed securities                               4,845          17           (93)           4,769
                                                              -------         ---         -----          -------
Marketable securities                                         $65,039         $81         $(286)         $64,834
                                                              =======         ===         =====          =======


CONCENTRATION OF CREDIT RISK.

The Company provides credit in the form of trade accounts receivable to
hospitals, private and governmental institutions and health care agencies,
medical equipment distributors and rental companies, and doctors' offices. The
Company does not generally require collateral to support customer receivables.
The Company performs ongoing credit evaluations of its customers and maintains
allowances which management believes are adequate for potential credit losses.
The credit risk associated with the Company's trade receivables is further
limited due to dispersion of the receivables over a large number of customers in
many geographic areas.

Payment of certain accounts receivable is made by the national health care
systems of several member countries of the European Economic Community. Although
the Company does not currently anticipate credit problems associated with these
receivables, payment is contingent upon the economic stability of these
countries.

The Company limits credit risk exposure to foreign exchange contracts by
periodically reviewing the credit worthiness of the counterparties to the
transactions.

   8

NOTE 3

ACQUISITION

ACQUISITION OF PIERRE MEDICAL.

On May 3, 1995, the Company's EdenTec subsidiary acquired Pierre Medical, a
privately-held French manufacturer of respiratory products used in the home, for
$21.5 million in cash. In the event that certain performance milestones are
achieved subsequent to the acquisition, additional compensation totaling 30
million French Francs ($6.2 million as of July 2, 1995) would be payable to the
former principal stockholders of Pierre who continue to manage the company. Such
amounts will be expensed when, and if, earned. Pierre Medical manufactures and
markets noninvasive ventilators, sleep apnea therapy systems, oxygen
concentrators and related respiratory products in Western Europe, primarily in
France.

The acquisition of Pierre Medical has been accounted for as a purchase and,
accordingly, Pierre Medical's results are included in Nellcor's financial
statements subsequent to the acquisition date. Identifiable net assets acquired
consisted of approximately $4.0 million of working capital. The excess of cost
over identifiable net assets of $18.1 million, including acquisition related
costs, is being amortized over 15 years, the period of the estimated future
benefit. The final allocation of the purchase price to other identifiable
intangible assets, including determining or reevaluating the likelihood of the
future recoverability of these intangible assets, is dependent upon the outcome
of the Company's merger with Puritan-Bennett Corporation (see Note 11) and any
resulting effect the merger might have upon the operations of Pierre Medical.

In connection with the acquisition, supplemental cash flow information is as
follows (in thousands):

                                                                                         
Fair value of assets acquired, except for cash and cash equivalents                    $ 26,999
Liabilities assumed                                                                      (5,584)
                                                                                       ========
Cash paid to acquire Pierre Medical, net of cash and cash equivalents acquired         $ 21,415
                                                                                       ========



The following pro forma combined financial results of Nellcor and Pierre Medical
for Fiscal 1995 and Fiscal 1994 have been prepared assuming that the acquisition
of Pierre Medical occurred at the beginning of each such period. In preparing
the pro forma information, adjustments have been made for the amortization of
goodwill, utilization of the Company's cash and marketable securities to
purchase Pierre Medical, and income taxes.



- -----------------------------------------------------------------------------------
Pro Forma Information (Unaudited)               July 2, 1995          July 3, 1994
- -----------------------------------------------------------------------------------
                                           (in thousands, except per share amounts)
                                                                     
Net revenues                                      $275,015              $244,138
Net income                                          37,729                20,199
Net earnings per share                            $   2.23              $   1.20
                                                  ========              ========


   9

NOTE 4

INTANGIBLES AND OTHER ASSETS

Intangibles and other assets consist of:



(in thousands)                                           July 2, 1995      July 3, 1994
- --------------------------------------------------------------------------------------- 
                                                                            
Cost:
Excess of cost over net assets acquired (Note 3)           $ 30,142          $ 11,325
Other intangibles from acquisitions, and purchased            9,965            11,040
   technologies and rights (Note 3)
Other                                                        11,621             5,844
                                                           --------          --------
Total cost                                                   51,728            28,209
                                                           --------          --------
Total accumulated amortization                              (16,439)          (12,643)
                                                           --------          --------
Intangibles and other assets, net                          $ 35,289          $ 15,566
                                                           ========          ========


NOTE 5

RESTRUCTURING CHARGE

The Company incurred a restructuring charge of $500,000 before taxes during the
first quarter of fiscal 1994 associated with the consolidation of the Company's
Instruments and Monitoring Systems divisions. The charge was recorded as an
operating expense in the first quarter of fiscal 1994.

NOTE 6

PROVISION FOR INCOME TAXES

The provision for income taxes consists of the following (in thousands):



          Years ended                July 2, 1995     July 3, 1994    July 4, 1993
          ------------------------------------------------------------------------
                                                                    
          Federal:
               Current                 $ 18,701         $ 10,796         $10,934
               Deferred                    (260)          (1,050)          1,203
                                       --------         --------         -------
                                         18,441            9,746          12,137
                                       --------         --------         -------
          State:
               Current                    3,355            2.683           2,976
               Deferred                     (56)            (404)            215
                                       --------         --------         -------
                                          3,299            2,279           3,191
                                       --------         --------         -------
          Foreign:
               Current                    1,294              416             398
               Deferred                    (252)             ---             ---
                                       --------         --------         -------
                                          1,042              416             398
                                       --------         --------         -------
                                       $ 22,782         $ 12,441         $15,726
                                       ========         ========         =======


Pretax income from foreign operations used to determine related tax liabilities
amounted to $2.3 million, $1.3 million and $0.9 million for fiscal 1995, 1994,
and 1993, respectively.

The most significant components of the Company's deferred tax assets and
liabilities at July 2, 1995 and July 3, 1994 are as follows (in thousands):

   10



                                                     July 2, 1995                                July 3, 1994
                                           ----------------------------------        -----------------------------------
                                           Deferred Tax          Deferred Tax        Deferred Tax           Deferred Tax
                                                 Assets           Liabilities              Assets            Liabilities
                                           ------------          ------------        ------------           ------------
                                                                                                
Inventory and product                            $2,899                                   $ 2,110
   allowances
Property, plant and equipment                                          $1,046                                     $  453
Intangible Assets                                   832                                     1,852
Compensated absences                                753                                       607
State income tax accrual                          1,392                                       979
Accounts receivable                                 642                                       693
Tax/book year-end difference                                            1,504                                      1,516
Other Accruals                                    2,550                 1,588               1,151                  1,061
                                                 ------                ------             -------                 ------
                                                  9,068                 4,137               7,392                  3,030
Less: Valuation Allowance                          (900)                                   (1,233)
                                                 ------                ------             -------                 ------
Deferred Income Taxes                            $8,168                $4,138             $ 6,159                 $3,030
                                                 ======                ======             =======                 ======


As of July 2, 1995, the Company had net operating loss carry forwards resulting
from the acquisition of EdenTec, which expire beginning in fiscal year 2000 and
ending in fiscal year 2006. A deferred tax asset has been recorded for the tax
benefit of these net operating loss carry forwards, with a corresponding
valuation allowance of $0.9 million provided for the net operating loss carry
forwards which may not be realized. Net operating loss carry forwards realized
during fiscal 1995 resulted in a $0.3 million decrease in the valuation
allowance and a corresponding reduction in the remaining net book value of the
EdenTec goodwill. Tax benefits resulting from future net operating loss carry
forwards will first be applied to reduce the remaining goodwill, and then to any
other intangible assets associated with the acquisition of EdenTec.

Deferred tax assets and liabilities at July 2, 1995 and July 3, 1994, are
comprised of (in thousands):



                                     July 2, 1995                                       July 3, 1994
                       --------------------------------------------    -----------------------------------------------
                          Tax                 Tax                                Tax                Tax
                       Assets         Liabilities               Net           Assets        Liabilities            Net
                       ------        ------------            ------    -------------        ------------        ------
                                                                                                 
Current                $7,244             $(2,346)           $4,898           $5,459            $(1,878)        $3,581
Long-term                 924              (1,792)             (868)             700             (1,152)          (452)
                       ------             -------            ------     -------------           -------         ------
Total                  $8,168             $(4,138)           $4,030           $6,159            $(3,030)        $3,129
                       ======             =======            ======     =============           =======         ======


The difference between the Company's effective income tax rate and the United
States federal statutory income tax rate is summarized as follows:



Years ended                                  July 2, 1995  July 3, 1994  July 4, 1993
- -------------------------------------------------------------------------------------
                                                                     
Federal statutory rate                          35.0%         35.0%         34.0%
State income taxes, net of federal               3.6           4.5           5.2
benefit
Research and experimental credits               (1.0)         (1.5)          ---
Tax legislation changes                                       (2.2)          ---
Other                                             .4           1.9          (0.7)
                                                ----          ----          ----
Effective tax rate                              38.0%         37.7%         38.5%
                                                ====          ====          ====


The Company paid income taxes of approximately $18.2 million, $13.3 million, and
$11.8 million in fiscal 1995, 1994, and 1993, respectively.

   11

NOTE 7

STOCKHOLDERS' EQUITY

COMMON STOCK.

As of July 2, 1995, an aggregate of 4,773,785 shares of authorized but unissued
common stock remained reserved for issuance under the 1994 Equity Incentive Plan
(the "1994 Plan"), the 1991 Equity Incentive Plan, as amended (the "1991 Plan"),
the 1988 Stock Option Plan for Non-Employee Directors, as amended (the "1988
Plan"), and the 1986 Employee Stock Participation Plan, as amended (the "ESPP").

STOCK OPTION PLANS.

1994 and 1991 Plans  The Company maintains two employee stock option plans, the
1994 Plan and the 1991 Plan. In October, 1994, the Company obtained stockholder
approval of the 1994 Plan, which authorizes the issuance of up to 1,500,000
shares of common stock to executive officers, other key employees and
consultants in the form of incentive and nonqualified stock options, stock
bonuses and restricted stock. The 1994 Plan satisfies the performance-based
compensation requirements of The Omnibus Budget Reconciliation Act of 1993.

The Company obtained shareholder approval of the 1991 Plan in October, 1991.
Upon stockholder approval of the 1991 Plan, the Company's 1982 Incentive Stock
Option Plan (the "1982 Plan") and the 1985 Equity Incentive Plan (the "1985
Plan") were terminated; however, shares available for issuance under these plans
at the time of termination, including shares underlying outstanding options,
that later expire or are canceled, were pooled with the 750,000 additional
shares reserved for issuance under the 1991 Plan. In October 1992, the Company
obtained stockholder approval to an amendment to the 1991 Plan increasing the
number of shares authorized for issuance under the 1991 Plan by an additional
1,500,000 shares.

Options granted under the 1994 and 1991 Plans generally vest on a quarterly
basis over a period of four years from the date of grant. A one-year waiting
period is required before vesting in the case of initial grants. The 1994 and
1991 Plans authorize the grant of incentive stock options at exercise prices
equal to the fair market value of the Company's common stock on the date of
grant and permit the grant of nonqualified stock options at exercise prices not
less than 85 percent of fair market value on the date of grant. To date, only
nonqualified stock options with exercise prices equal to the fair market value
of the underlying common stock on the date of grant have been granted under both
Plans. No stock bonus or restricted stock grants have been made under the 1994
or 1991 Plans.

As of July 2, 1995, options representing 946,130 shares, including options
issued under the 1994 and 1991 Plans and the terminated 1982 and 1985 Plans,
were outstanding and exercisable at an aggregate exercise price of approximately
$22.8 million, and the Company, as of such date, had 2,201,041 shares available
for issuance under the 1991 and 1994 Plans.

Certain options issued under the 1994 and 1991 Plans permit exercise prior to
vesting. As to these options, if the optionee's relationship with the Company is
terminated prior to the complete vesting of the options, the Company has the
right to repurchase unvested shares at the exercise price plus interest. As of
July 2, 1995, no shares were subject to repurchase by the Company under these
options.

   12

The following is a summary of option activity under the 1994 and 1991 Plans:



                                                                                                             Range of Exercise
                                                                 Options Outstanding                         Prices (Per Share)
                                                    ----------------------------------------------        -----------------------
                                                                                         Aggregate
                                                                                          Exercise
                                                    Available                            Price (in
                                                    for Grant           Number          thousands)           High             Low
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                             
BALANCE AT JULY 5, 1992                               648,958        2,260,813            $ 39,565         $32.00          $ 7.88
Increase in options available for grant             1,500,000
     Granted                                         (683,710)         683,710              19,922          34.13           24.00
     Exercised                                                        (476,739)             (6,550)         31.75            7.88
     Canceled                                         235,769         (235,769)             (5,085)         32.00            9.38
                                                    ---------        ---------            --------         
BALANCE AT JULY 4, 1993                             1,701,017        2,232,015              47,852          34.13            7.88
     Granted                                         (668,405)         668,405              15,674          28.50           20.00
     Exercised                                                        (463,672)             (6,306)         26.75            9.25
     Canceled                                         301,050         (301,050)             (7,294)         32.00           10.00
                                                    ---------        ---------            --------         
BALANCE AT JULY 3, 1994                             1,333,662        2,135,698              49,926          32.00            9.25
Increase in options available for grant             1,500,000
     Granted                                         (836,220)         836,220              25,628          46.25           27.00
     Exercised                                                        (661,292)            (14,012)         34.13           10.00
     Canceled                                         203,599         (203,599)             (5,110)         34.13           10.63
                                                    ---------        ---------            --------         
BALANCE AT JULY 2, 1995                             2,201,041        2,107,027              56,432          46.25           10.00
                                                    =========        =========            ========         


1988 Plan  In October, 1988, the Company obtained stockholder approval of the
1988 Plan which authorized the non-discretionary grant of options to
non-employee Directors. Under the 1988 Plan, non-employee Directors
automatically receive stock option grants upon joining the Board of Directors
and annually thereafter. Until amended in May of 1994, the 1988 Plan provided
for an initial grant of an option to purchase 20,000 shares of common stock upon
a Director joining the Board and an annual grant of an option to purchase 10,000
shares of stock. On May 14, 1994, the Board of Directors amended the 1988 Plan
to reduce the number of shares issuable to non-employee Directors in the form of
options to an initial grant of 10,000 shares and annual grants of 5,000 shares.
Options issued to non-employee Directors under the 1988 Plan are nonqualified
stock options having a five-year term and an exercise price equal to the fair
market value of the Company's common stock on the date of grant and vesting over
a four year period in the case of initial option grants and over the succeeding
fiscal year in the case of annual grants.

In October, 1994, the Company obtained stockholder approval to amend the 1988
Plan to increase the number of shares authorized for issuance by 75,000 shares
and the term of options to be issued under the plan from five to ten years.

As of July 2, 1995, options representing 162,500 shares were outstanding and
exercisable under the 1988 Plan at exercise prices ranging from $13.63 to $26.50
for an aggregate exercise price of $3.7million, and the Company, as of such
date, had 130,000 shares available for issuance under the 1988 Plan.

The Board of Directors adopted and, on August 24, 1995, the Company's
stockholders approved, the 1995 Merger Stock Incentive Plan (the "1995 Plan"),
which authorized the issuance of up to 779,000 shares of Company common stock in
the form of stock options. The purpose of the 1995 Plan is to allow the Company
to comply with its obligations in the Agreement and Plan of Merger with
Puritan-Bennett Corporation whereby the Company would issue options to purchase
Company common stock to holders of unexercised options to purchase
Puritan-Bennett stock as of the effective date of the merger.

STOCK PURCHASE PLANS.

Under the ESPP, qualified employees, not including members of the Board of
Directors and executive officers, may purchase semi-annually up to a specified
maximum amount of shares of Nellcor common stock through payroll deductions at a
price equal to 85% of the fair market value of the stock at the beginning or end
of the six month plan period, whichever is less. In October, 1994, the Company
obtained stockholder approval to increase the number of shares available for
purchase under the ESPP by 250,000 shares. As of July 2, 1995, 726,783 shares of
common stock had been purchased under the ESPP since inception and 173,217
shares remained available for purchase by employees.


   13

STOCK REPURCHASE PROGRAMS.

During the fourth quarter of fiscal 1993, the Board of Directors approved a
Limited Stock Repurchase Program ("the Limited Program") which commenced early
in fiscal 1994. The objective of the Limited Program is to utilize a portion of
available cash balances to repurchase on the open market shares of the Company's
common stock, to mitigate the dilutive effects of the issuance of shares under
the 1994 Plan, 1991 Plan, 1988 Plan, and ESPP. Repurchases made under the
Limited Program are made on a recurring basis to the extent that stock options
are exercised during the year and totaled $20.9 million (625,500 shares) and
$13.6 million (522,500 shares) during the fiscal years ended July 2, 1995 and
July 3, 1994, respectively.

In addition to the Limited Program, the Board of Directors approved a General
Stock Repurchase Program (the "General Program") during the second quarter of
fiscal 1994 to repurchase and retire up to 1 million shares of the Company's
common stock. The object of this General Program is to more effectively utilize
an additional portion of available cash balances. No repurchases under the
General Program were made in fiscal 1995; 210,000 shares were repurchased and
retired during fiscal 1994, totaling $5.9 million.

STOCK RIGHTS--SERIES A JUNIOR PARTICIPATING PREFERRED STOCK.

During fiscal 1991, the Board of Directors declared a dividend distribution of
one purchase right for each outstanding share of common stock. Each right
entitles the holder to purchase from the Company one one-hundredth of a share of
Series A Junior participating preferred stock, par value $.001, at a price of
$90 per one-hundredth of a preferred share. Each one one-hundredth of a share of
new preferred stock is substantially the economic equivalent of one share of
common stock. In the event that a third party acquires 15 percent or more of the
Company's common stock or announces an offer which would result in such party's
owning 15 percent or more of the Company's common stock, the rights will become
exercisable. The rights expire on June 26, 2001, and subject to certain
conditions, may be redeemed by the Board of Directors at a price of $.001 per
right.

COMPENSATION TO RADIANT STOCKHOLDERS.

As part of the acquisition of Radiant Systems, Inc, (Radiant) in fiscal 1990,
Nellcor issued to escrow on behalf of the majority stockholders of Radiant, who
were also Radiant employees, approximately 115,000 shares of Nellcor's common
stock. The common stock was expected to be released over a three-year period
beginning in fiscal 1991. As of the end of fiscal 1992, the majority
stockholders of Radiant had terminated their employment with Radiant, and the
Company released all of the remaining shares held in escrow in fiscal 1993.

NOTE 8

COMMITMENTS

The Company leases its facilities under agreements that expire at various dates
through June 2006, which include options to renew through June 2016. Rental
expenses were approximately $4.7 million, $4.5 million, and $4.0 million in
fiscal years 1995, 1994, and 1993, respectively.

Aggregate minimum annual rental commitments under long-term operating leases are
as follows (in thousands):



Fiscal years
- -------------------------------------------------------------------------
                                                                   
1996                                                               $4,117
1997                                                                4,290
1998                                                                3,939
1999                                                                3,856
2000                                                                3,454
After 2000                                                         14,433
                                                                  -------
         Total rental commitments                                 $34,089
                                                                  =======


   14

NOTE 9

INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION

The Company operates in a single-industry segment: the design, engineering,
manufacture, marketing and servicing of high-performance monitoring, measurement
and therapeutic instruments and related sensors and airway adapters, and
detectors for the hospital, prehospital and home care markets. The principal
methods of distribution are direct sales, corporate accounts and independent
distributors.

Geographic information with respect to the Company's operations is as follows
(in thousands):



Years ended                          July 2, 1995      July 3, 1994       July 4, 1993
- --------------------------------------------------------------------------------------
                                                                        
Net revenue:
    United States domestic             $ 221,295         $ 205,352         $ 193,524
    Unites States export                  16,030            11,208             9,381
    Europe                                43,825            31,008            28,737
    Intersegment eliminations            (17,110)          (12,596)          (13,456)
                                       ---------         ---------         ---------
         Total net revenue             $ 264,040         $ 234,972         $ 218,186
                                       =========         =========         =========

Income (loss) from operations:
    United States                      $  50,023         $  41,434         $  38,795
    Europe                                 4,647               604            (1,105)
    Corporate and eliminations              (325)              813               147
                                       ---------         ---------         ---------
         Total operating income        $  54,345         $  42,851         $  37,837
                                       =========         =========         =========

Identifiable assets:
    United States                      $ 125,774         $ 135,336         $ 128,474
    Europe                                53,853            21,892            24,363
    Corporate and other                  154,657           119,173           110,774
    Eliminations                         (39,815)          (38,253)          (38,005)
                                       ---------         ---------         ---------
         Total assets                  $ 294,469         $ 238,148         $ 225,606
                                       =========         =========         =========


Transfers between geographic areas are generally recorded at amounts above cost
and in accordance with the rules and regulations of the governing tax
authorities. Operating income is total revenue less cost of sales and operating
expenses and does not include either interest income, other income (expense),
net, or income taxes. Identifiable assets of geographic areas are those assets
used in Nellcor's operations in each area. Identifiable corporate assets consist
primarily of cash and cash equivalents, marketable securities and other assets.

NOTE 10

LITIGATION

From time to time the Company has received, and in the future may receive,
notice of claims against it, which in some instances have developed, or may
develop, into lawsuits. The claims may involve such matters, among others, as
product liability, patent infringement, and employment-related claims. In
management's opinion, the ultimate resolution of claims currently pending will
not have a material adverse effect on the Company's financial position or
results of operations.

On July 11, 1995, the U.S. Federal District Court in Delaware issued a decision
in favor of the Company, ruling that four key oximeter and sensor technology
patents are valid and would be infringed by Ohmeda Inc., a subsidiary of BOC
Health Care Inc., if Ohmeda sold either its adult or neonatal OxyTip sensors for
use with non-Ohmeda monitors. BOC Health Care has filed a notice to appeal the
decision of the U.S. Federal District Court in Delaware. BOC Health Care had
filed a suit against the Company in December 1992, seeking a declaratory
judgment that Nellcor's patents were invalid and would not be infringed.


   15

In a related matter, in the third quarter of fiscal 1994, the Company agreed to
settle trade secrets and patent litigation with BOC Health Care, Inc. and its
Ohmeda, Inc. subsidiary, and Square One Technology. Under the terms of the
agreement, the patent in issue was assigned to the Company. The Company also
received a pretax $2 million payment and will receive ongoing royalties. The $2
million payment was recorded as non-operating income.

In the fourth quarter of fiscal 1994, the Company agreed to settle its patent
litigation with Camino Laboratories, Inc. ("Camino") of San Diego, CA. Under the
terms of the settlement, Camino agreed not to sue the Company or its current or
future customers relating to the use or sale of the Company's sensors and
monitors intended for use with such sensors. A cash payment of $15 million was
made by the Company to Camino and was recorded as a non-operating expense. This
settlement neither recognizes the validity nor acknowledges infringement of the
Camino patent at issue.

NOTE 11

MERGER WITH PURITAN-BENNETT.

On May 22, 1995, Nellcor and Puritan-Bennett Corporation (Puritan-Bennett)
announced that their Boards of Directors had approved a definitive agreement to
merge the two companies. The issuance of Nellcor common stock in connection with
the Agreement and Plan of Merger was approved by shareholders at special
shareholder meetings held by each company on August 24, 1995. Under the terms of
the agreement, shareholders of Puritan-Bennett will receive 0.88 of a share of
Nellcor common stock for each Puritan-Bennett share. Puritan-Bennett, founded in
1913, operates 11 manufacturing and research plants worldwide and is a world
leader in products related to respiration used in multiple health care settings
and on aircraft. Puritan-Bennett develops, manufactures and markets ventilators,
respiratory monitoring instruments, and certain complementary products such as
medical gases, gas-related equipment, and spirometers. Puritan-Bennett reported
revenue of $336.0 million and net income of $8.4 million for its most recent
fiscal year ended January 31, 1995.

The new company, Nellcor Puritan Bennett Incorporated (Nellcor Puritan Bennett),
will be headquartered in Pleasanton, California, site of Nellcor's current
headquarters. The Board of Directors of Nellcor Puritan Bennett will have nine
members: six from Nellcor, two from Puritan-Bennett and one to be selected by
both companies.

The merger is intended to qualify as a tax-free reorganization and will be
accounted for as a pooling of interests. Pro forma combined financial results
for the two companies, assuming that the merger had occurred on July 6, 1992,
would be as follows (in thousands, except per share amounts):



- ----------------------------------------------------------------------------------
Pro Forma Information             July 2, 1995      July 3, 1994      July 4, 1993
(Unaudited)
- ----------------------------------------------------------------------------------
                                                                    
Net revenues                        $600,066         $ 544,227          $518,246
Net income                            49,463            (6,422)           39,715
Net earnings per share              $   1.77         $   (0.23)         $   1.46


The pro forma financial results combine Nellcor's financial data for each of the
three fiscal years ended July 2, 1995, with Puritan-Bennett's financial data for
each of the three fiscal years ended January 31, 1995. The only pro forma
adjustment impacting net income was an adjustment to reduce Puritan-Bennett's
valuation allowance provided for its deferred tax assets based on the combined
income from operations before tax of Nellcor and Puritan-Bennett as required by
Statement of Financial Accounting Standards Number 109, "Accounting for Income
Taxes" (SFAS 109). Intercompany transactions between the two companies for the
periods presented were not material.

Subsequent to the merger, Nellcor expects to incur a charge in the quarter ended
October 1, 1995, currently estimated to be in the range of $50 million to $70
million, to reflect the combination of the two companies, including costs
relating to severance, the elimination of duplicate systems and facilities,
other integration costs, and transaction fees. Charges relating to goodwill
arising from the companies' prior acquisitions may also be taken in the first
quarter as a result of the merger. This amount is a preliminary estimate only
and is therefore subject to change. In addition, there can be no assurance that
Nellcor will not incur additional charges in subsequent quarters to reflect
costs associated with the merger.


   16

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

RESULTS OF OPERATIONS:

Nellcor's net income for fiscal 1995 was $37.2 million, or $2.20 per share,
compared to $20.6 million, or $1.22 per share, for fiscal 1994. Fiscal 1994 net
income includes the effect of a net $13.0 million pretax charge ($8.0 million or
$0.48 per share after tax) for trade secrets and patent litigation settlements.
Excluding the after-tax effect of these settlements, fiscal 1995 net income
increased 30 percent over net income of $28.6 million, or $1.70 per share, for
fiscal 1994.

The Company's net revenue for fiscal 1995 increased 12 percent to $264.0 million
from $235.0 million in fiscal 1994. The increase in net revenue principally
resulted from higher sales of oximetry products across the Company's domestic
and international markets, increased sales of EdenTec apnea monitoring and
recording products, and the favorable effect foreign currency exchange rates had
upon revenue. The Company's oximetry products include oximetry instruments,
sensors, and OEM modules.

The Company's principal oximetry instruments include the N-20 portable pulse
oximeter, the N-180, N-185, N-200, and N-250 standalone pulse oximeters, and the
N-3000 pulse oximeter, a module of the NELLCOR SYMPHONY (TM) monitoring system.
Oximetry instrument revenue for fiscal 1995 increased slightly as higher unit
sales of the N-3000 pulse oximeter and the N-20 portable pulse oximeter were
partially offset by lower average selling prices.

Oximetry sensors include adhesive, reusable, and recycled sensor product lines.
Revenue from oximetry sensors increased moderately during fiscal 1995 primarily
due to continued growth in the installed base of the Company's monitors and
products of the Company's licensees and OEM customers that use the Company's
sensors. Higher unit sales were partially offset by slightly lower average
selling prices for adhesive and recycled sensors.

OEM oximetry module revenue increased significantly in fiscal 1995 as higher
unit shipments were partially offset by moderately lower average selling prices.
At the end of fiscal 1995, the Company had OEM or licensing agreements in place
with 40 medical systems and monitor manufacturers worldwide.

The principal apnea monitoring and recording products sold by EdenTec
Corporation into the home health care market include the ASSURANCE 2000 heart
and respiration monitor, the ASSURANCE 3000 heart and respiration monitor, and
the EdenTrace II and EdenTrace II Plus (TM) multi-channel recording systems, and
related products. During the fourth quarter of fiscal 1995, EdenTec acquired
Pierre Medical, a privately held French manufacturer of respiratory products
used in the home. Pierre Medical markets the O'nyx(TM) non-invasive ventilation
system, the O'mega(TM) oxygen concentrator, and the Morphee(TM) and Morphee
Plus(TM) sleep apnea therapy systems in Western Europe, primarily in France.
Revenue from these home health care products significantly increased during
fiscal 1995 primarily due to higher sales of the EdenTrace II Plus and the
ASSURANCE 3000 as well as sales from Pierre Medical included in EdenTec's
results subsequent to the acquisition, which was consummated May 3, 1995.

International revenue increased 42 percent to $59.9 million in fiscal 1995 from
$42.1 million in fiscal 1994. International revenue increased significantly
across all markets principally due to higher sales of oximetry sensors, the
N-3000 pulse oximeter, and OEM oximetry modules. Favorable foreign currency
exchange rates accounted for 10 percentage points of the international revenue
growth during fiscal 1995.

Sales of the HEALTHQUIZ (TM) system, a patient-driven automated medical history
system that electronically captures patient information, have been limited since
the product was introduced in the fourth quarter of fiscal 1994. The Company
regularly reviews its net investment in HEALTHQUIZ system assets and the related
market opportunities.


   17



Nellcor's net revenue increased 8 percent to $235.0 million in fiscal 1994 from
$218.2 million in fiscal 1993. The increase in net revenue principally resulted
from higher sales of adhesive and reusable sensors, as well as increased sales
of apnea and oximetry products by EdenTec Corporation into the home health care
market. Sales of adhesive and reusable sensors increased primarily due to
continued growth in the installed base of the Company's monitors and the
products of the Company's licensees and OEM customers that use the Company's
sensors.

Oximetry instrument revenue decreased slightly in fiscal 1994 primarily due to
lower average selling prices and a continued shift to lower-priced, portable
pulse oximeters such as the N-20. Unit sales of oximetry instruments decreased
slightly in fiscal 1994.

OEM oximetry module revenue increased in fiscal 1994 principally due to
significantly higher unit shipments, partially offset by lower average selling
prices. Selling prices for certain OEM modules were reduced beginning in the
third quarter of fiscal 1993.

International revenue increased 11 percent to $42.1 million in fiscal 1994
principally due to higher sales of adhesive and reusable sensors, the ULTRA CAP
and the E-300, a multi-parameter monitoring system sold exclusively in Europe.
International growth occurred principally in the Asia Pacific and European
regions. Fiscal 1994 international revenue would have been approximately 6
percent higher had foreign currency exchange rates remained the same as those in
effect in the comparable periods in fiscal 1993.

The following sets forth, for the indicated periods, the relationship that
certain items bear to net revenue:



Years Ended                                 July 2, 1995  July 3, 1994  July 4, 1993
- ------------------------------------------------------------------------------------
                                                                     
Net revenue                                      100%          100%          100%
Gross Margin                                      61            60            59
Operating expenses:
    Research and development                      10            10            10
    Selling, general and administrative           30            32            32
Total operating expenses                          40            42            42
Income from operations                            21            18            17
Litigation settlements, net                       --             6            --
Income before income taxes                        23            14            19
Net income                                        14             9            12


Gross margin increased to 61 percent in fiscal 1995 from 60 percent in fiscal
1994 primarily due to improved margins at EdenTec and the favorable effect which
foreign currency exchange rates had upon revenue, partially offset by a slight
shift in mix to lower margin instruments.

Gross margin increased to 60 percent in fiscal 1994 from 59 percent in fiscal
1993. This increase was primarily due to a slight shift in mix to higher margin
sensors and lower manufacturing and service costs, partially offset by lower
oximetry instrument pricing and the unfavorable impact which foreign currency
exchange rates had upon revenue.

Research and development expenses at 10 percent of net revenue in fiscal 1995
were comparable to the prior year. Research and development expenses increased
in absolute dollars due primarily to costs incurred related to the development
of additional modules of the NELLCOR SYMPHONY monitoring system, increased sleep
product development work at EdenTec and higher patent filing fees and legal
costs. The Company expects to continue to invest in the research and development
of new products and to defend its patents.


   18

Research and development expenses at 10 percent of net revenue in fiscal 1994
were comparable to the prior year. Research and development expenses increased
in absolute dollars due primarily to costs incurred related to the development
of the HEALTHQUIZ(TM) PRESCREEN(TM) automated preanesthetic medical history
system.

Selling, general, and administrative expenses in fiscal 1995 decreased to 30
percent of net revenue from 32 percent of net revenue in fiscal 1994. Selling,
general and administrative expenses increased in absolute dollars due primarily
to the unfavorable effect foreign currency exchange rates had upon international
operating expenses, the inclusion of operating expenses from Pierre Medical
subsequent to its acquisition, and increased funding of the Company's profit
sharing and bonus plans, partially offset by lower patent litigation expenses.

In comparison to fiscal 1993, fiscal 1994 selling, general and administrative
expenses remained unchanged at 32 percent of net revenue. Selling, general and
administrative expenses increased in absolute dollars due primarily to higher
patent litigation expenses.

During the first quarter of fiscal 1994, a $.5 million restructuring charge was
recorded. Under the restructuring, two of the Company's divisions were
consolidated into a single business unit.

During the third quarter of fiscal 1994, the Company agreed to settle trade
secrets and patent litigation with BOC Health Care, Inc., and its Ohmeda, Inc.
subsidiary, and Square One Technology. Under the terms of the agreement, the
patent in issue was assigned to the Company. The Company also received a $2
million payment and will receive ongoing royalties. The $2 million payment was
recorded as nonoperating income in the third quarter of fiscal 1994.

During the fourth quarter of fiscal 1994, the Company announced that it had
agreed to settle its patent litigation with Camino Laboratories Inc. ("Camino")
of San Diego, CA. Under the terms of the settlement, Camino agreed not to sue
the Company or its current or future customers relating to the use or sale of
the Company's sensors and monitors intended for use with such sensors. A cash
payment of $15 million was subsequently made by the Company to Camino. The
payment was recorded as a nonoperating expense in the fourth quarter of fiscal
1994.

In July, 1995, the Company announced that the U.S. Federal District Court in
Delaware had issued a decision in favor of Nellcor in the Company's patent
litigation with Ohmeda and BOC Health Care, Inc. The Court ruled that Nellcor
oximeter and sensor technology patents are valid and would be infringed if
Ohmeda, a subsidiary of BOC Health Care, Inc., sold its adult or neonatal Oxy
Tip sensors for use with non-Ohmeda monitors. BOC Health Care has filed a notice
to appeal the decision of the U.S. Federal District Court in Delaware.

BUSINESS FACTORS:

ACQUISITIONS. During the fourth quarter of fiscal 1995, EdenTec acquired Pierre
Medical, a privately-held French manufacturer of respiratory products used in
the home for $21.5 million in cash. In the event that certain profitability
targets are achieved or certain of Pierre Medical's products receive FDA
approval subsequent to the acquisition, additional compensation totaling 30
million French Francs ($6.2 million as of July 2, 1995) would be payable to the
former principal stockholders of Pierre Medical who will continue to manage the
company. Pierre Medical manufactures and markets noninvasive ventilators, sleep
apnea therapy systems, oxygen concentrators and related respiratory products in
Western Europe, primarily France. Pierre Medical reported revenue of
approximately $10.0 million for its most recent fiscal year ended September 30,
1994.

The acquisition was accounted for under the purchase method and is intended to
broaden the Company's product offerings and to provide opportunities to expand
sales into the home health and emergency care market segments. The final
allocation of the purchase price to other identifiable intangible assets,
including determining or reevaluating the likelihood of the future
recoverability of these intangible assets, is dependent upon the outcome of the
Company's merger with Puritan-Bennett Corporation (see Note 11) and any
resulting effects the merger has upon the operations of Pierre Medical.


   19

MERGER WITH PURITAN-BENNETT. During the fourth quarter of fiscal 1995, Nellcor
and Puritan-Bennett Corporation (Puritan-Bennett) announced that their Boards of
Directors had approved a definitive agreement to merge the two companies. The
issuance of Nellcor common stock in connection with the Agreement and Plan of
Merger was approved by shareholders at special shareholder meetings held by both
companies on August 24, 1995. Under the terms of the agreement, shareholders of
Puritan-Bennett will receive 0.88 of a share of Nellcor common stock for each
Puritan-Bennett share. Puritan-Bennett, founded in 1913, operates 11
manufacturing and research plants worldwide and is a world leader in products
related to respiration used in multiple health care settings and on aircraft.
Puritan-Bennett develops, manufactures and markets ventilators, respiratory
monitoring instruments, and certain complementary products such as medical
gases, gas-related equipment, and spirometers. Puritan-Bennett reported revenue
of $336.0 million and net income of $8.4 million for its most recent fiscal year
ended January 31, 1995.

The merger will combine companies who are worldwide leaders in two complementary
areas, patient safety monitoring and respiratory therapy. In addition, the
merger will allow the new company to potentially realize synergies in research
and development, manufacturing, and operations. Subsequent to the merger,
Nellcor expects to incur a charge in the quarter ended October 1, 1995,
currently estimated to be in the range of $50 million to $70 million, to reflect
the combination of the two companies, including costs relating to severance, the
elimination of duplicate systems and facilities, other integration costs, and
transaction fees. Charges relating to goodwill arising from the companies' prior
acquisitions may also be taken in the first quarter as a result of the merger.
This amount is a preliminary estimate only and is therefore subject to change.
In addition, there can be no assurance that Nellcor will not incur additional
charges in subsequent quarters to reflect costs associated with the merger.

The new company, Nellcor Puritan Bennett, will be headquartered in Pleasanton,
California, site of Nellcor's current headquarters. The Board of Directors of
Nellcor Puritan Bennett will have nine members: six from Nellcor, two from
Puritan-Bennett and one to be selected by both companies. The merger is intended
to qualify as a tax-free reorganization and will be accounted for as a pooling
of interests.

PRODUCTS. In the second quarter of fiscal 1995, the Company received marketing
clearance from the U.S. Food and Drug Administration (FDA) for the Pedi-CAP
pediatric end-tidal CO2 detector. This disposable device, in combination with
the EASY CAP(R) CO2 detector, will allow customers to verify and monitor correct
endotracheal tube placement in a full range of patients, from infants to adults.
Both the Pedi-CAP and EASY CAP CO2 detectors were designed to be used in
transport and emergency settings as well as areas where capnography is not
available.

In the fourth quarter of fiscal 1995, the Company received marketing clearance
from the FDA for the N-3000 pulse oximeter and the N-3100 noninvasive blood
pressure monitor. The N-3000, the first module of a planned monitoring system
for use on the hospital general care floor and in mobile environments, was
shipped to international markets beginning in the third quarter of fiscal 1994.
International shipments of the N-3100 noninvasive blood pressure monitor, the
second module of the NELLCOR SYMPHONY monitoring system, began in the first
quarter of fiscal 1995. Commercial shipment of both products in the U.S. market
commenced late in the fourth quarter of fiscal 1995. The N-3000 and the N-3100
can be used as standalone monitors or as part of the NELLCOR SYMPHONY system.

Nellcor began limited shipments of the N-400 fetal pulse oximeter in Europe in
the second quarter of fiscal 1995. The N-400 is used to measure fetal oxygen
levels during labor and delivery, and is expected to aid obstetricians in
evaluating fetal well-being. In the first quarter of fiscal 1994, the FDA
notified the Company that the N-400 fetal oximeter must be submitted under the
Pre-Market Approval (PMA) Application Regulations. The PMA process, as compared
to the 510(k) procedures, requires more laboratory and clinical testing data,
and more detailed design and manufacturing information. This process in turn
takes the manufacturer longer to gather data and prepare the PMA application.
Historically, the time elapsed between submission of a PMA application and
receipt of premarket approval is significantly longer than for the clearance to
market granted under the 510(k) process. In June 1995, the Company filed an
application for an Investigational Device Exemption with the FDA. Clinical
trials of the product are expected to begin by the end of the second quarter of
fiscal 1996.

The Company is continuing to develop new products to address existing and new
markets. The introduction of new products may be prevented or delayed by
engineering obstacles, regulatory procedures, clinical trials, production
difficulties, and other factors. In addition, the costs of producing, promoting,
and servicing new products are generally greater than in the case of mature,
higher volume products. New product introductions can also temporarily reduce
revenues by interfering with sales of existing products.


   20

As Nellcor's existing products reach life cycle maturity, the Company's ability
to develop or acquire new products and technologies increases in importance. The
Company has and will continue to pursue technology, new product, and business
acquisition opportunities intended to broaden the Company's product offerings.
Examples of such activities include the acquisition of Pierre Medical in fiscal
1995, and the pending merger of Nellcor and Puritan-Bennett. Such activities may
result in increased expenses which could have an adverse impact on the Company's
net income.

MARKET CONDITIONS. As health care increasingly becomes managed care, patient
care is shifting to lower cost areas of the hospital and alternate care sites
outside the hospital, including subacute care centers, skilled nursing
facilities and the home. Additionally, in an effort to create larger, more
cost-effective entities capable of competing for managed care contracts, health
care providers are consolidating and vertically integrating, and hospitals are
joining local or regional multiple hospital systems in greater numbers. As a
result of these ongoing changes in the delivery of health care, the Company
expects that a greater proportion of its future revenue will come from sales of
its products to a smaller customer base, primarily comprised of larger,
consolidated health care providers and buying groups, and from sales of its
products into the growing alternate care markets.

In the current health care business environment, hospitals, which are the
Company's principal customers, face increasing pressure to control costs. These
pressures may in the future lead to a decrease in the average selling price for
a number of the Company's products, which could adversely affect the Company's
gross margin.

During fiscal 1995 and fiscal 1994, the Company offered a number of promotional
programs in an effort to increase the installed base of Nellcor oximetry
instruments and OEM modules. These programs also had the effect of reducing
pulse oximetry pricing. Competition in fiscal 1995 caused further price
reductions for oximeters and multi-function monitors. The Company is continually
seeking manufacturing cost reductions; however, these reductions may not offset
the impact of future price declines.

INTERNATIONAL MARKETS. The Company has devoted significant resources to
development of its European markets and administrative infrastructure. Over the
past five years, the Company has experienced growth in European revenues and
continues to expand sales, service, and distribution operations in this market.
Through its acquisition of Pierre Medical, the Company has broadened its product
offerings in the European home care market.

During fiscal 1995, sales to the Asia/Pacific region increased significantly.
Additionally, in July of fiscal 1995, Nellcor increased its ownership interest
in the Company's Tokyo-based joint venture, NCI, to 50 percent. The Company's
investment in the joint venture, which it accounts for under the equity method,
was immaterial at July 2, 1995. With a greater level of investment in the
venture, and increased management involvement and marketing resources, the
Company plans to more aggressively pursue opportunities for Nellcor and EdenTec
products in Japan.

The Company received ISO 9001 certification for all of its facilities in March,
1995. This certification signifies that the Company has met a rigorous set of
international standards for product design, installation, and service. ISO 9001
certification is the first step necessary to be able to affix the CE
(Conformitee European) mark to Nellcor products and requires the implementation
of a company-wide quality system. The Company believes ISO 9001 certification
provides a significant competitive advantage in global markets.

The Company believes that the continued growth in international revenue and
market share will be a key factor in its overall long-term performance and
accordingly intends to continue to invest in its international operations.

TIMING OF ORDERS AND SHIPMENTS. Historically, orders in the first quarter have
been lower than in the second, third and fourth quarters.

Of the monitor orders received by the Company in any quarter, a
disproportionately large percentage has typically been received and shipped
toward the end of the quarter. Accordingly, monitor backlog has historically
been modest and not an accurate predictor of future revenues, and results for a
given quarter can be adversely affected if there is a substantial order
shortfall in that quarter. Backlog at the end of fiscal 1995 was approximately
$9.8 million compared to $10.7 million at the end of fiscal 1994. The decrease
in backlog in fiscal 1995 was primarily due to increased shipments of the N-3000
at the end of the fiscal year.


   21

LIQUIDITY AND CAPITAL RESOURCES

During fiscal 1995, the Company generated a net increase in cash and cash
equivalents and marketable securities of $19.1 million. At July 2, 1995, the
Company had cash, cash equivalents and marketable securities amounting to
approximately $140.7 million compared to $121.6 million at the end of fiscal
1994.

The Company has met its liquidity requirements from internally generated cash.
The Company's operating activities provided positive cash flows of $55.7 million
during fiscal 1995. Depreciation expense and amortization expense were
significant non-cash operating activities for all years presented. Purchases of
marketable securities and fixed assets, principally manufacturing equipment, and
the acquisition of Pierre Medical were the principal uses of cash from investing
activities.

Shares of Nellcor common stock issued due to the exercise of stock options under
one of the Company's stock option plans were significant sources of cash from
financing activities in fiscal 1994. Shares of common stock repurchased in
fiscal 1995 under the Company's Limited Stock Repurchase Program were
significant uses of cash from financing activities. Shares repurchased under the
Limited Stock Repurchase Program are repurchased to offset the dilutive effects
of the Company's stock plans. No repurchases of shares under the General Stock
Repurchase Program, which authorizes the repurchase and retirement of up to one
million shares of common stock from time to time in the open market, were made
in fiscal 1995.

During the second quarter of fiscal 1995, the Company secured a $50 million
credit facility with a syndicate of 4 banks led by ABN AMRO Bank N.V. The credit
facility was obtained to provide Nellcor with additional financial resources and
flexibility to take advantage of strategic business opportunities. Under the
terms of the credit facility, a commitment fee of 0.25% is paid quarterly and at
the end of November, 1996, outstanding borrowings are convertible into four year
term loans. As of July 2, 1995, the Company had not drawn against this credit
facility.

The Company anticipates that current capital resources combined with cash
generated from operating activities will be sufficient to meet its liquidity and
capital expenditure requirements at least through the end of fiscal 1996. When
the Company's merger with Puritan-Bennett is consummated, it is expected that
costs associated with the merger as well as other merger-related cash outlays,
will lead to a net reduction in the Company's cash and cash equivalents during
fiscal 1996. The Company may consider using debt to fund certain capital and
other strategic opportunities when deemed necessary and financially
advantageous.


   22

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF NELLCOR INCORPORATED

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Nellcor
Incorporated and its subsidiaries at July 2, 1995 and July 3, 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended July 2, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

San Francisco, California
July 26, 1995, except as to Note 11, which is as of August 24, 1995


   23


SELECTED QUARTERLY DATA

Unaudited (in thousands, except per share amounts)



Year ended July 2, 1995                  1st quarter        2nd quarter         3rd quarter        4th quarter
- --------------------------------------------------------------------------------------------------------------
                                                                                               
Net revenue                                  $55,714            $64,017             $71,035            $73,274
Gross profit                                  32,878             38,690              43,119             46,172
Income from operations                         8,380             12,390              15,967             17,608
Net Income                                     5,859              8,483              11,058             11,765
Net income per share                            0.35               0.50                0.65               0.69


- --------------------------------------------------------------------------------------------------------------
Year ended July 3, 1994                  1st quarter        2nd quarter         3rd quarter        4th quarter
- --------------------------------------------------------------------------------------------------------------
                                                                                               
Net revenue                                  $50,148            $58,113             $61,646            $65,065
Gross profit                                  29,222             34,695              37,648             39,701
Income from operations                         6,638             10,543              12,373             13,297
Litigation settlements                           ---                ---               2,000            (15,000)
Net Income                                     4,859              6,856               9,352               (510)
Net income per share                            0.29               0.41                0.55              (0.03)

EX-27

 

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