(1) As a result of the recent amendments to our bank agreement discussed below, the weighted annual average interest rate increased to 11% based upon the interest rates prevailing on October 1, 1999.

(2) Earnings before income taxes, net interest expense and re-engineering expenses and merger costs divided by net interest expense.

Long-term debt, including current installments, of $206 million at July 2, 1999 increased approximately $14 million from $192 million at July 3, 1998. The ratio of debt to total capitalization increased to 42% at year-end, compared to 41% at the end of 1998.

We attempt to minimize interest expense while also managing exposure to variable interest rates by employing interest rate exchange agreements, or swaps, periodically to convert our bank borrowings from floating rate into the equivalent of fixed rate debt. However, as a policy we have not used interest rate swaps or any other derivatives that had a level of complexity or risk that, in our judgment, was higher than the hedged exposure. We do not hold or issue such instruments for trading purposes. As of July 2, 1999, we did not have any interest rate swap agreements.

We have used foreign-denominated borrowings from our multi-currency credit facility periodically to hedge against foreign currency balance sheet exposures that would otherwise result from changes in currency values. Total foreign- denominated debt at year-end was $10 million in 1999, $68 million in 1998, and $112 million in 1997.

In 1998, we completed a private placement of $100 million of senior notes, $50 million maturing after seven years and bearing interest at 7.09% with the remaining $50 million maturing after 10 years at an interest rate of 7.25%. The proceeds of this debt issuance were used to reduce the outstanding debt on our unsecured multi-currency credit facility.

Our multi-currency bank credit facility provides for maximum borrowings of $110 million. As of July 2, 1999, we had $94 million outstanding on the credit facility. The agreement was amended in April 1999 and further amended on September 30, 1999 relating to pricing and certain collateral matters. The credit facility required us to comply with certain covenants such as maintenance of leverage ratio, tangible net worth, and interest coverage, and places certain restrictions on acquisitions and payment of dividends. As of July 2, 1999, we were in violation of one of the financial covenants. We have amended the agreement, which permanently waived the covenant violation.

The amended credit agreement reduced the maximum borrowings from $120 million to $110 million and divided the facility into a $70 million unsecured revolving credit facility and a $40 million secured term loan. The term loan is secured by all domestic accounts receivable and is due and payable in a single installment in January 2001. As of October 1, 1999, we had $88 million of borrowings outstanding under the credit facility, consisting of the $40 million term loan and $48 million of revolving credit facility borrowings.

Borrowings under the $70 million credit facility, as amended, are subject to certain revised financial covenants. The agreement places certain restrictions on acquisitions and payment of dividends and provides for a reduction in maximum borrowings on the revolving credit facility to $25 million in July 2000 in increments of $15 million per quarter beginning in January 2000. Additional reductions in maximum borrowings could occur if we generate excess cash flow, as defined, or if we fail to maintain a minimum ratio of debt to EBITDA as of June 30, 2000. The remaining $25 million is due and payable in January 2001.

Operating on a global basis requires a posture of active currency risk management. To finance imports and exports, we utilize a variety of foreign currencies that are constantly shifting in relative value. We engage in hedging activities to reduce potential transaction losses on net cash flows and balances denominated in these currencies. These amounts can arise from cross-border trade flows or intercompany financing transactions. Our financial statements are also affected by foreign currency translation fluctuations. These distort the comparative results of foreign operations when they are translated into U.S. dollars using dissimilar rates.

In contrast to transaction gains or losses, translation adjustments are not the result of a cash exchange of currencies and, therefore, do not give rise to a direct economic gain or loss. In these cases the costs to execute hedges would exceed any consistently realizable tangible benefits. Consequently, we do not commit economic resources to hedge against the potential effect of foreign currency translation fluctuations. We believe that the best long-term protection of stockholder value is to do business in a broad number of currencies.

While provisions of our amended credit facility and senior notes restrict the payment of dividends, our present policy is to use available cash flow for reinvestment in our core businesses, for future acquisitions and for debt reduction rather than to pay a cash dividend. This policy reflects an appraisal by management and the Board of Directors of the attractiveness of our investment opportunities and their confidence in our ability to increase economic value for our stockholders through cash retention and reinvestment. This policy is reviewed periodically as industry conditions change.

Many currently installed computer systems and software products in use around the world today are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. Any failure to make this distinction could result in system failures or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with these year 2000 requirements.

We have created a corporate oversight task force to address year 2000 issues. We have established milestones and detailed plans that are actively being implemented so that our research programs, products and internal computer, financial, manufacturing, research and other infrastructure systems are year 2000 compliant on a timely basis. A team of corporate and divisional staff, including our internal auditors, has performed and is performing independent reviews and evaluations of equipment and systems to verify compliance. Additionally, we are reviewing our customer and supplier relationships to assess and address year 2000 issues.

During 1998, all our information processing operations in the U.S. were consolidated into two year 2000 compliant system platforms from 10 original legacy systems. In Europe, the conversion of all our major manufacturing and distribution operations to a common year 2000 compliant system was completed in July of 1999.

We have undertaken internal reviews to evaluate all products manufactured and sold for year 2000 compliance. Most of our products are not affected due to the mechanical nature and the absence of date-dependent functions. Those products with date functions have been analyzed and tested by our engineering and quality assurance staff and it has been determined that all our products manufactured in the last five years are year 2000 compliant. While we have taken numerous steps to ensure that all products are year 2000 compliant and to make information on the year 2000 readiness of our products available to our customers, there is no way to fully guarantee that we will be completely successful in either case.

Also, we have requested assurances from our major suppliers that they are addressing this issue and that products procured by us will function properly in the year 2000. Some critical suppliers have been unwilling to provide these assurances and do not expect to provide these assurances prior to the year 2000. This is particularly the case outside of the United States where we have significant operations. This could result in manufacturing delays and backlogs. If necessary, and where feasible, substitute vendors will be identified. In addition, many governmental agencies, including agencies which directly or indirectly provide funding for the purchase of products sold by us, and other third parties such as telephone, electricity and other utility companies may not be year 2000 compliant. As a result, it is difficult for us to assess the likelihood, or the impact on our business, of such entities' failure to be year 2000 compliant.

The costs we incurred to date in connection with our year 2000 compliance program have not had a material impact on our financial condition or results of operations except as included in the computer conversion re-engineering expenses in fiscal 1998 as indicated. Based on the information currently available, we estimate that the total cost of completing our year 2000 compliance program will not be material. This estimate is based on information available at this time. New developments that occur could affect our estimate of the amount of time and costs necessary to become year 2000 compliant. We currently expect that the year 2000 issue will not pose significant operational problems. However, delays in our remediation efforts, or a failure to timely identify all year 2000 dependencies in the systems, equipment or processes of Sunrise, our vendors, customers, financial institutions or other third parties could have material adverse consequences, including delays in the manufacture, delivery or sale of products. We are in the process of developing contingency plans along with our remediation efforts for continuing operations in the event these problems arise, but we may not be fully successful in this regard.

The information about our year 2000 status is believed to be accurate, but is presented for information purposes only, and is not a contractual commitment or modification of any contract that may exist between us and any third party.

In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Statement, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Earlier application of the Statement is permitted. Adoption of SFAS 133 is not expected to have a material effect on our financial position or results of operations.

We have made forward-looking statements in this report, including the estimated benefits to be realized from the consolidation of various Sunrise divisions worldwide. These statements are only predictions. Actual events or results may differ materially as a result of risks and uncertainties facing us including:

Government Funding. The worldwide healthcare industry is subject to complex and extensive government regulation and relies heavily upon funding at the federal and state levels. In the U.S., we are a direct Medicaid provider only through our DynaVox subsidiary. We are not a direct provider under Medicare or Medicaid for our rehabilitation or institutional products. However, these products are sold to home medical equipment providers and distributors, nursing homes and hospitals that are providers under these programs and thus depend upon Medicare and/or Medicaid reimbursement for a portion of their revenues. We also depend on government funding available in Europe. Changes in U.S. or European funding practices could adversely impact our revenues and collections and put downward pressure on prices charged for products sold by us. See "Business -- Government Funding and Regulation."

We sell some products directly to the U.S. government, particularly the Department of Veteran's Affairs and General Services Administration. Sales to the U.S. government are subject to pricing and other regulatory requirements. Failure to meet these requirements may disqualify Sunrise from selling to the U.S. government in the future and subject us to fines.

Governmental Regulation. We and our customers and suppliers are subject to extensive federal and state regulation in the U.S., as well as regulation by foreign governments. We cannot predict the extent to which future legislative and regulatory developments concerning our business practices and products for the healthcare industry may affect us. Thus, any failure to comply with these laws, rules and regulations or any changes in the regulatory framework could have a material adverse effect on our business, financial condition, or results of operations. See "Business -- Governmental Funding and Regulation."

Competition. The medical device industry is characterized by intense competition. We encounter significant domestic and foreign competition from a number of established manufacturers in each of our product lines. Many of our competitors have larger market shares and substantially greater financial and other resources than we do and may succeed at utilizing these resources to obtain a temporary or permanent competitive advantage over us. See "Business -- Competition."

Products. Our competitors may succeed in developing or marketing products which are more effective or efficient than those that we may market. These developments may render our products obsolete or noncompetitive. Our future results will depend, in part, on our ability to enhance existing products and to introduce new products on a timely and cost-effective basis that meet evolving customer requirements. Delays in introduction or a disappointing market acceptance could have an adverse effect on our business.

Pricing Pressures. The growth in national chains and buying groups among home medical equipment providers has caused manufacturers, including us, to reduce their effective prices by offering increased volume discounts. The increasing penetration of managed care into the home medical equipment industry is exacerbating this trend. If we are unable to achieve sufficient manufacturing, supply chain and technological efficiencies to offset any future price reductions, our profit margins will be adversely affected.

Materials and Components. We purchase most of our raw materials, components and supplies from a number of different vendors on a non-exclusive basis. There can be no assurance that our vendors will not enter into exclusive arrangements with our competitors, or cease selling materials or products to us at commercially reasonable prices or at all. We procure a few components and materials on a single-source basis. If one of these single-source vendors failed to deliver components as planned, we would be temporarily unable to ship some of our products. Historically, prices paid by us for some raw materials, such as aluminum, foam and wood, have fluctuated widely. When prices have increased, we have not always been able to pass along the full effect of these increases to our customers.

Re-Engineering Program. We have completed our three-year corporate re-engineering program that has consolidated our domestic and European divisions and our U.S. salesforces. In 1998, we invested approximately $27 million in this program, including the costs of new and upgraded management information systems necessary to support the newly consolidated operations. These investments are expected to result in future cost reductions and operating efficiencies but no assurances can be given that such will be the case.

International Operations. A significant portion of our sales in recent years has been derived from our international operations. For the fiscal year ended July 2, 1999, international sales accounted for 43% of our total revenue. Our operations depend upon the economies of the markets in which we operate and therefore are subject to fluctuations in these economies and their corresponding currencies. Furthermore, any changes in foreign government reimbursement policies or regulations could have a material adverse effect on our business.

A number of our agreements are with non-U.S. entities that are governed by the laws of, and are subject to dispute resolution in the courts of the country or region in which the operation is located. We cannot accurately predict whether such forum will provide us with an effective and efficient means of resolving disputes that may arise in the future. Even if we are able to obtain a satisfactory decision through arbitration or a court proceeding, we could have difficulty enforcing any award or judgment on a timely basis.

Product Liability; Claims Exposure. Our products expose us to potential liabilities for end-user injuries or death caused by our products. Although we design and manufacture our products with a high degree of care and concern for safety, our products may fail to operate properly resulting in injury or death. We believe that our current liability insurance is adequate given our claims history, the cost of coverage and industry practice. However, there is a risk that our insurance coverage may not be adequate to satisfy the product liability awards that may arise.

Risks Associated with our Workforce. Of our approximately 4,600 full- time employees, approximately 430 employees at two factories in the U.S. are unionized with collective bargaining agreements that expire in 2002. In Europe, approximately 380 employees are covered by national union arrangements. Although we have never had a strike or work stoppage in our 16 year history, and although we believe that our relations with our employees are good, we cannot assure you that we will be able to negotiate a satisfactory renewal of these collective bargaining agreements or that our employee relations will remain stable. Additionally, we have an extensive sales and distribution network upon which we greatly depend. A loss of a large number of our salesforce could have a material adverse effect on our business.

Future Acquisitions. We intend in the future to pursue acquisitions of companies that would help us achieve our strategic goals, although we have no present commitments with respect to any acquisitions. Future acquisitions by us could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and an increase in amortization expenses related to goodwill and other intangible assets, which could have a material adverse effect upon our business, financial condition and results of operations. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, services and products of the acquired companies and the diversion of management's attention from other business concerns. In the event that any acquisition were to occur, there can be no assurance that our business, financial condition and results of operations would not be materially adversely affected.

Year 2000 Readiness. Failure by us or our suppliers or payors to be year 2000 compliant may have an adverse effect on our operations. We have created a corporate oversight task force to address year 2000 issues. We have established milestones and detailed plans which are actively being implemented so that our research programs, products and internal computer, financial, manufacturing and other infrastructure systems are year 2000 compliant on a timely basis. A team of corporate and divisional staff, including our internal auditors, has performed and is performing independent reviews and evaluations of equipment and systems to verify compliance. We have undertaken internal reviews to assess year 2000 issues related to our products. While we believe that all our products are year 2000 compliant, there is no way for us to fully guarantee that we will be completely successful in this regard.

We have requested assurances from our major suppliers that they are addressing this issue and that products procured by us will be year 2000 compliant. Some critical suppliers have been unwilling to provide these assurances. This is particularly the case outside of the U.S. where we have significant operations. Year 2000 failures on the part of our suppliers could result in manufacturing delays, increased costs or lost revenues. This could result in manufacturing delays and backlogs. In addition, many agencies, including government agencies which directly or indirectly provide funding for the purchase of products sold by us, and other third parties such as telephone, electricity and other utility companies may not be year 2000 compliant which may adversely affect our revenues and cash flow. It is difficult for us to assess the likelihood, or the impact on our business, of these entities' failure to be year 2000 compliant. See "Year 2000 Compliance."

We disclaim any obligation to update any of the above factors that may effect future operating results, to announce publicly the result of any revisions to any of the forward-looking statements contained in this report, or to make corrections to reflect future events or developments.

Our primary financial market risks include fluctuations in interest rates and currency exchange rates. Although the majority of our transactions are in U.S. dollars, some transactions are based in various foreign currencies. We purchase short-term, forward exchange contracts to hedge the impact of foreign currency fluctuations on certain underlying assets, liabilities and commitments for operating costs denominated in foreign currencies. The purpose of entering into these contracts is to protect against economic losses associated with foreign exchange transactions. Gains and losses on the hedges offset a majority of the increases or decreases in our local currency operating costs in the corresponding periods. The contracts have maturity dates that do not normally exceed 12 months. The unrealized gains and losses on these contracts are deferred and recognized in the results of operations in the period in which the hedged transaction impacts earnings. We do not purchase short-term forward exchange contracts for trading purposes. There were no foreign currency forward contracts outstanding as of July 2, 1999.

At July 2, 1999 a hypothetical 10% adverse movement in short-term interest rates on our variable rate debt would have resulted in a reduction of $0.5 million in annual pre-tax income.

The following are included herein:

Report of Management

Independent Auditors' Report

Consolidated balance sheets as of July 2, 1999 and July 3, 1998

Consolidated statements of operations for the years ended July 2, 1999, July 3, 1998 and June 27, 1997

Consolidated statements of stockholders' equity for the years ended July 2, 1999, July 3, 1998 and June 27, 1997

Consolidated statements of cash flows for the years ended July 2, 1999, July 3, 1998 and June 27, 1997

Notes to consolidated financial statements

None.

The management of Sunrise Medical Inc. is responsible for the preparation, integrity and accuracy of the accompanying financial statements and related information. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and include amounts based on our best estimates and informed judgments, as required.

Management maintains a comprehensive system of internal controls supported by formal policies and procedures, management training programs, a written code of business conduct, periodic internal audits and management reviews. Although no cost-effective system will preclude all errors and irregularities, we believe Sunrise Medical has in place a system of internal controls which provides reasonable assurance that assets are safeguarded against material loss from unauthorized use or disposition, transactions are recorded in accordance with our policies, and the financial information presented to our stockholders is reliable.

The Audit Committee of the Board of Directors is comprised solely of outside directors. The Audit Committee meets periodically with the independent auditors, our internal auditors and financial management to ensure that each is carrying out their responsibilities. Both the independent auditors and the internal auditors have free and direct access to the Audit Committee.

Our independent auditors are recommended by the Audit Committee and selected by the Board of Directors. The consolidated financial statements have been audited by KPMG LLP, who have expressed their opinion elsewhere herein with respect to the fairness of the statements. Their audits included a review of the system of internal control and tests of transactions to the extent they considered necessary to render their opinion.

Ted N. Tarbet

Senior vice president and chief financial officer

John M. Radak

Vice president and controller

To the Board of Directors and Stockholders

of Sunrise Medical Inc.:

We have audited the accompanying consolidated balance sheets of Sunrise Medical Inc. and Subsidiaries as of July 2, 1999 and July 3, 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended July 2, 1999. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in Item 14.a (2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sunrise Medical Inc. and Subsidiaries as of July 2, 1999 and July 3, 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended July 2, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

San Diego, California
August 13, 1999, except as to Note 7
which is as of September 30, 1999.

SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)

                                                              July 2,   July 3,
                                                               1999      1998
                                                             --------- ---------
                        ASSETS
Current assets:
  Cash and cash equivalents.................................   $1,485      $931
  Trade receivables, net of allowance for doubtful
    accounts of $4,971 and $8,155, respectively.............  127,374   121,967
  Installment receivables, net..............................   23,068    12,329
  Income tax refunds receivable.............................      523     4,013
  Inventories...............................................   87,941    94,589
  Deferred income taxes.....................................   15,435    19,288
  Other current assets......................................    6,745     3,622
                                                             --------- ---------
      Total current assets..................................  262,571   256,739
Property and equipment, net of accumulated
  depreciation and amortization of $90,511 and $81,753,
  respectively..............................................   83,560    85,804
Goodwill and other intangible assets, net of accumulated
  amortization of $59,280 and $50,691 respectively..........  250,650   266,815
Other assets, net...........................................   10,409     6,947
                                                             --------- ---------
Total assets................................................ $607,190  $616,305
                                                             ========= =========

            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current installments of long-term debt....................  $14,890    $3,753
  Trade accounts payable....................................   57,879    59,639
  Accrued compensation and other liabilities................   68,913    82,974
  Accrued income taxes......................................      802     2,794
                                                             --------- ---------
      Total current liabilities.............................  142,484   149,160

Long-term debt, less current installments...................  190,948   188,029
Deferred income taxes.......................................    6,760     6,456

Stockholders' equity:
  Preferred stock, $1 par. Authorized 5,000 shares;
    none issued.............................................      --        --
  Common stock, $1 par. Authorized 40,000 shares; 22,204
    and 22,151 shares, respectively, issued and outstanding.   22,204    22,151
Additional paid-in capital..................................  203,548   203,346
Retained earnings...........................................   51,492    46,994
Accumulative other comprehensive (loss) income .............  (10,246)      169
                                                             --------- ---------
    Total stockholders' equity..............................  266,998   272,660
                                                             --------- ---------
Total liabilities and stockholders' equity.................. $607,190  $616,305
                                                             ========= =========

(See accompanying notes to consolidated financial statements)

SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amount)

                                                          Years Ended
                                                --------------------------------
                                                 July 2,    July 3,    June 27,
                                                   1999       1998       1997
                                                ---------- ---------- ----------
Net sales......................................  $660,248   $657,169   $670,545
Cost of sales..................................   460,754    451,631    447,806
                                                ---------- ---------- ----------
Gross profit...................................   199,494    205,538    222,739

Marketing, selling and administrative expenses.   147,027    155,998    162,504
Research and development expenses..............    21,075     17,919     17,483
Amortization of goodwill and other intangibles.     8,589      8,440      8,273
Re-engineering expenses and merger costs.......       --      29,016        --
                                                ---------- ---------- ----------
Operating income (loss)........................    22,803     (5,835)    34,479
                                                ---------- ---------- ----------
Other (expense) income:
  Interest expense.............................   (16,486)   (15,222)   (14,774)
  Interest income..............................     4,293      3,659      3,372
  Other income and expense, net................    (2,341)     5,596        400
                                                ---------- ---------- ----------
                                                  (14,534)    (5,967)   (11,002)
                                                ---------- ---------- ----------
Income (loss) before income taxes..............     8,269    (11,802)    23,477
Income tax expense.............................     3,771        208     11,363
                                                ---------- ---------- ----------
Net income (loss)..............................    $4,498   ($12,010)   $12,114
                                                ========== ========== ==========

Basic earnings (loss) per share................     $0.20     ($0.55)     $0.56
                                                ========== ========== ==========

Weighted average number of shares outstanding..    22,195     22,001     21,656
                                                ========== ========== ==========

Diluted earnings (loss) per share..............     $0.20     ($0.55)     $0.55
                                                ========== ========== ==========

Weighted average number of shares
  assuming dilution............................    22,253     22,001     21,933
                                                ========== ========== ==========

(See accompanying notes to consolidated financial statements)

SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)

                                                                   Accumu-
                                                                   lative
                              Common Stock                          Other
                            -----------------                      Compre-    Total
                             Number           Additional           hensive   Stock-
                               of              Paid-in  Retained   (loss)   holders'
                             Shares   Amount   Capital  Earnings   Income    Equity
                            -------- -------- --------- --------- --------- ---------
Balance at June 28, 1996...  21,428  $21,428  $194,571   $46,890      $392  $263,281

 Exercise of stock options,
  including associated
  tax benefits.............      41       41       405       --        --        446
 Issuance of stock for
  acquisition..............     416      416     6,068       --        --      6,484
 Comprehensive income:
   Net income..............      --       --       --     12,114       --        --
   Foreign currency
    translation adjustment.      --       --       --        --      1,367       --
 Total comprehensive
  income...................      --       --       --        --        --     13,481
                            -------- -------- --------- --------- --------- ---------
Balance at June 27, 1997...  21,885   21,885   201,044    59,004     1,759   283,692

 Exercise of stock options,
  including associated
  tax benefits, net........     166      166       846       --        --      1,012
 Issuance of stock for
  acquisitions.............     100      100     1,456       --        --      1,556
 Comprehensive income:
   Net loss................      --       --       --    (12,010)      --        --
   Foreign currency
    translation adjustment.      --       --       --        --     (1,590)      --
 Total comprehensive
  loss.....................      --       --       --        --        --    (13,600)
                            -------- -------- --------- --------- --------- ---------
Balance at July 3, 1998....  22,151   22,151   203,346    46,994       169   272,660

 Exercise of stock options,
  including associated
  tax benefits, net........      53       53       202       --        --        255
 Comprehensive income:
   Net income..............      --       --       --      4,498       --        --
   Foreign currency
    translation adjustment.      --       --       --        --    (10,415)      --
 Total comprehensive
  loss.....................      --       --       --        --        --     (5,917)
                            -------- -------- --------- --------- --------- ---------
Balance at July 2, 1999....  22,204  $22,204  $203,548   $51,492  ($10,246) $266,998
                            ======== ======== ========= ========= ========= =========

(See accompanying notes to consolidated financial statements)

SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share amount)

                                                             Years Ended
                                                    -----------------------------
                                                     July 2,   July 3,  June 27,
                                                      1999      1998      1997
                                                    --------- --------- ---------
Cash flows from operating activities:
  Net income (loss)................................   $4,498  ($12,010)  $12,114
  Depreciation and amortization....................   16,161    15,510    17,987
  Amortization of goodwill and other intangibles...    8,589     8,440     8,273
  Deferred income taxes............................     (708)   (1,492)    6,539
  Other non-cash items.............................      942      (520)       --
  Changes in asset and liabilities, net of
    effect of acquisitions:
     Trade receivables, net........................   (7,255)   (7,145)   (1,112)
     Installment receivables, net..................  (13,545)    1,489    (3,449)
     Inventories...................................    5,332    (5,367)   (9,586)
     Other assets..................................   (2,125)   (6,509)    3,225
     Accrued income taxes..........................    1,695       556       (92)
     Trade accounts payable and other liabilities..  (10,696)   11,820     1,024
                                                    --------- --------- ---------
Net cash provided by operating activities..........    2,888     4,772    34,923
                                                    --------- --------- ---------
Cash flows from investing activities:
  Purchase of property and equipment, net..........  (15,780)  (16,549)  (29,248)
  Proceeds from sale of property...................       --     6,423        --
  Proceeds from sales of business..................       --        --    14,000
  Net cash invested in acquisition of business.....       --      (418)     (856)
                                                    --------- --------- ---------
Net cash used for investing activities.............  (15,780)  (10,544)  (16,104)
                                                    --------- --------- ---------
Cash flows from financing activities:
  Borrowings of long-term debt.....................  159,269   239,283   133,479
  Repayments of long-term debt..................... (142,931) (237,982) (146,986)
  Proceeds from issuance of common stock...........      255     1,012       458
                                                    --------- --------- ---------
Net cash provided by (used for) financing
  activities.......................................   16,593     2,313   (13,049)
                                                    --------- --------- ---------
Effect of exchange rate changes on cash............   (3,147)      167    (3,504)
                                                    --------- --------- ---------
Net increase (decrease) in cash
  and cash equivalents.............................      554    (3,292)    2,266
Cash and cash equivalents at beginning of year.....      931     4,223     1,957
                                                    --------- --------- ---------
Cash and cash equivalents at end of year...........   $1,485      $931    $4,223
                                                    ========= ========= =========

(See accompanying notes to consolidated financial statements)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

Sunrise Medical Inc. designs, manufactures and markets medical products used by the disabled and the elderly. Products include custom, manual and power wheelchairs and related seating systems, home respiratory devices, personal care products, nursing home beds and furnishings, specialized bathing systems and speech devices.

Basis of Consolidation. The consolidated financial statements include domestic and foreign subsidiaries. All significant intercompany balances and transactions have been eliminated. The applicable local currency of each of our foreign subsidiaries is the functional currency. The translation from the foreign currencies is performed using year-end exchange rates for assets and liabilities, and for revenue and expense accounts using a weighted average exchange rate during the year. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in "Accumulated other comprehensive income," which is part of stockholders' equity. As described more fully in Note 4, on April 13, 1998 we merged with Sentient Systems, Inc., now named DynaVox Systems (DynaVox). The merger was accounted for as a pooling of interests. Accordingly, our consolidated financial statements have been restated for all periods prior to the business combination to include the results of DynaVox. The preparation of financial statements in conformity with generally accepted accounting principles requires management estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from management's estimates.

Reclassification. Certain reclassifications have been made to the prior year amounts to conform to the 1999 presentation.

Fiscal Year End. Our fiscal year ends on the Friday closest to June 30, resulting in years of either 52 or 53 weeks. The year ended July 2, 1999 was 52 weeks, the year ended July 3, 1998 was 53 weeks, and the year ended June 27, 1997 was 52 weeks.

Inventories. Certain inventories are stated at the lower of last-in, first-out (LIFO) cost or market value. All other inventories are stated at the lower of first-in, first-out (FIFO) cost or market value.

Property and Equipment. Property and equipment are stated at cost and depreciated over estimated useful lives by the straight-line or declining balance methods. Assets recorded under capital leases and leasehold improvements are amortized over the shorter of their useful lives or the related lease terms by the straight-line method. The estimated useful lives are three to 40 years for buildings and improvements and two to 12 years for machinery and equipment.

Goodwill. The excess of purchase price over the fair value of net assets of acquired businesses (goodwill) is amortized on a straight-line basis over periods of 20 to 40 years, depending on the nature and type of business acquired.

Long-Lived Assets. We evaluate long-lived assets for impairment and record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amount. This loss is measured by the difference between carrying amounts and estimated fair values.

Financial Instruments with Off-Balance Sheet Risk. In the ordinary course of business, we utilize derivative financial instruments to reduce our exposure to market risks from changes in interest rates and foreign exchange rates. We enter into these transactions with major international financial institutions utilizing over-the-counter as opposed to exchange traded instruments. These transactions are entered into only for purposes of market risk management.

We attempt to minimize interest expense while also managing exposure to variable interest rates by periodically employing interest rate agreements, or swaps, to convert bank borrowings from floating rate into the equivalent of fixed rate debt. We have used foreign-denominated borrowings from our multi- currency credit facility to hedge against foreign currency balance sheet exposures that would otherwise result from changes in currency values.

We enter into foreign exchange forward and option contracts with financial institutions primarily to protect against currency exchange risks associated with existing assets and liabilities, and certain firmly committed transactions, as well as probable but not firmly committed transactions. In addition, we have entered into foreign exchange forward contracts to hedge certain intercompany loan transactions between our European divisions. Our foreign exchange risk management policy calls for the company to hedge substantially all material foreign exchange transaction exposures. However, we may not hedge certain foreign exchange transaction exposures that are immaterial either in terms of their minimal U.S. dollar value or in terms of their historically high correlation with the U.S. dollar.

Probable but not firmly committed transactions comprise sales of our products in currencies other than the U.S. dollar. A majority of these non-U.S. dollar- based sales are made through our European subsidiaries. The duration of foreign exchange hedging instruments, whether for firmly committed transactions or for probable but not firmly committed transactions, currently does not exceed one year.

Interest rate and foreign exchange instruments generally qualify as accounting hedges if their maturity dates are the same as the hedged transactions and if the hedged transactions meet certain requirements. Sold interest rate and foreign exchange instruments do not qualify as accounting hedges. Gains and losses on accounting hedges of existing assets or liabilities are generally recorded currently in income or stockholders' equity against the losses and gains on the hedged transactions. Gains and losses related to qualifying accounting hedges of firmly committed or probable but not firmly committed transactions are deferred and recognized in income in the same period as the hedged transactions. Gains and losses on interest rate and foreign exchange contracts that do not qualify as accounting hedges are recorded currently in income. Gains and losses on accounting hedges realized before the settlement date of the related hedged transaction are also generally deferred and recognized in income in the same period as the hedged transactions.

We monitor interest rate and foreign exchange positions based on applicable and commonly used pricing models. The correlation between the changes in the fair value of hedging instruments and the changes in the underlying hedged items is assessed periodically over the life of the hedged instrument. In the event that it is determined that a hedge is ineffective, including if and when the hedged transactions no longer exists, we would recognize in income the change in market value of the instrument beginning on the date it was no longer an effective hedge.

Further information regarding our accounting treatment of financial instruments may be found in Note 8 - "Derivatives."

Revenue Recognition. We recognize revenue from product sales upon shipment and provide an appropriate allowance for estimated returns and adjustments.

Warranty Costs. Certain products are covered by warranties against defects in material and workmanship for periods of up to five years. Components of certain products carry a lifetime warranty. The estimated warranty cost is recorded at the time of sale and is adjusted periodically to reflect actual experience.

Research and Development Costs. Research and development costs relate to both present and future products and are expensed in the year incurred.

Stock-Based Compensation. Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. We have chosen to present required disclosures and to continue to account for stock-based employee compensation using the method prescribed in Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of our stock at the date of grant over the amount an employee must pay to acquire the stock.

Net Income (Loss) per Share. Basic EPS is calculated by dividing net income (loss) by the weighted-average common shares outstanding during the period. Diluted EPS reflects the potential dilution to basic EPS that could occur upon conversion or exercise of securities, options, or other such items, to common shares using the treasury stock method based upon the weighted-average fair value of our common shares during the period.

Comprehensive Income (Loss). We adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) in 1999. SFAS 130 establishes standards for the reporting and display of comprehensive income and its components. Components of comprehensive income (loss) include net income (loss) and foreign currency translation adjustments. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130.

Cash Flow Information. Cash payments for interest were $17,356 in 1999, $14,380 in 1998, and $14,200 in 1997. Cash payments for income taxes were $6,012 in 1999, $5,696 in 1998, and $11,740 in 1997. We received income tax refunds of $4,400 in 1999, $6,131 in 1998, and $9,680 in 1997.

2. FINANCIAL INSTRUMENTS

Cash and Cash Equivalents. Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less. The carrying amount of cash and cash equivalents approximates their fair value.

Installment Receivables. Installment receivables consist of the following:

                                                      July 2,   July 3,
                                                       1999      1998
                                                     --------- ---------
  Current portion...................................  $27,832   $16,198
  Less:
     Unearned interest..............................   (3,055)   (2,185)
     Allowance for doubtful accounts................   (1,709)   (1,684)
                                                     --------- ---------
     Net current portion............................   23,068    12,329
  Due after one year (included in other assets).....    8,509     5,716
                                                     --------- ---------
  Total installment receivables, net................  $31,577   $18,045
                                                     ========= =========

The carrying amount of installment receivables approximates their fair value. The majority of these receivables are due in less than one year, and the related interest rates have not varied significantly over the past two years.

Trade Receivables, Income Tax Refunds Receivable, Trade Accounts Payable and Accrued Expenses. The carrying amounts of these instruments approximate their fair values due to their short term nature.

Long-Term Debt. Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, the carrying amount of long-term debt at July 2, 1999 and July 3, 1998 approximated its fair value.

Foreign Currency Forward Exchange Contracts. We transact business in various foreign currencies, primarily European currencies. We use currency forward contracts and currency options to protect against reductions in value and volatility of future cash flows caused by changes in foreign exchange rates. The maturities of these instruments are generally less than one year. Deferred gains or losses attributable to foreign currency instruments are not material.

Inventories consist of the following:

                                                      July 2,   July 3,
                                                       1999      1998
                                                     --------- ---------
  Raw material......................................  $37,477   $42,634
  Work-in-progress..................................   12,758    12,588
  Finished goods....................................   37,706    39,367
                                                     --------- ---------
  Total inventories.................................  $87,941   $94,589
                                                     ========= =========

If all inventories had been valued at FIFO cost, inventories would have been approximately $89,474 at July 2, 1999 and $95,817 at July 3, 1998.

The components of property and equipment are as follows:

                                                      July 2,   July 3,
                                                       1999      1998
                                                     --------- ---------
  Land..............................................   $4,439    $4,611
  Buildings, machinery and equipment................  164,410   158,096
  Leasehold improvements............................    5,222     4,850
                                                     --------- ---------
                                                      174,071   167,557
  Less accumulated depreciation and amortization....  (90,511)  (81,753)
                                                     --------- ---------
  Property and equipment, net.......................  $83,560   $85,804
                                                     ========= =========

On April 13, 1998 we issued 2.7 million shares of our common stock for all outstanding common stock of DynaVox, a manufacturer of speech augmentation devices. This merge has been accounted for as a pooling of interests and, accordingly, the consolidated financial statements for periods prior to the combination have been restated to include the accounts and results of operations of DynaVox.

On November 20, 1997 we acquired the assets and liabilities of Mechanical Design Applications, Inc. for 100,000 shares of common stock valued at $1.6 million and cash of $0.4 million. The transaction was accounted for as a purchase. Pro forma results of operations giving effect to the acquisition as though it had occurred on June 28, 1997 would not differ materially from amounts reported.

On December 27, 1996 we acquired Kid-Kart, Inc., a manufacturer of pediatric positioning strollers and other dependent mobility products, for 416,000 shares of common stock valued at $6.5 million and cash of $0.5 million. The transaction was accounted for as a purchase. Pro forma results of operations giving effect to the acquisition as though it had occurred on July 1, 1996 would not differ materially from amounts reported.

The excess of the aggregate purchase price over the fair market value of net assets acquired of approximately $2 million in 1998 and $6 million in 1997 was recognized as goodwill and is being amortized over periods ranging from 20 to 40 years. The operating results of all acquisitions are included in the consolidated results of operations from the respective dates of acquisition.

In 1997 we announced the consolidation of our four U.S. rehabilitation divisions into the Home Healthcare Group based in Longmont, Colorado, and a series of consolidations in our European operations. These actions were designed to reduce operating costs and improve manufacturing and marketing efficiencies. Pre-tax charges of $4.7 million, included in selling, general and administrative expenses, were incurred in 1997 in connection with these consolidations.

Approximately $27 million in non-recurring costs were incurred during 1998 to complete these activities, principally to complete our factory consolidations and to implement related information system conversions. In addition, we completed our merger with DynaVox in April 1998. Merger related expenses incurred were approximately $2 million. Of the total charges of $29 million incurred in 1998, approximately $23 million required cash payments and $6 million represented non-cash charges.

We lease office and operating facilities, machinery and equipment and automobiles under operating leases that expire over the next 20 years. Rent expense for operating leases was $12,521 in 1999, $11,900 in 1998, and $10,600 in 1997.

Minimum lease payments under operating leases expiring subsequent to July 2, 1999 are:

                Year Ended                            Amount
---------------------------------------------------- ---------
               2000.................................  $11,002
               2001.................................    8,157
               2002.................................    5,212
               2003.................................    4,172
               2004.................................    3,677
               Thereafter...........................    8,500
                                                     ---------
               Total minimum lease payments.........  $40,720
                                                     =========

                                                      July 2,   July 3,
                                                       1999      1998
                                                     --------- ---------
   Borrowing under multi-currency credit agreement..  $94,000   $73,970

   Senior notes.....................................  100,000   100,000

   Unsecured subordinated notes maturing from 1999
   to 2000, payable in installments with interest
   rates from 6.5% to 8.0% (7.0% to 9.1% in 1998)...    2,425     9,460

   Secured European Coal and Steel Community
   job creation loan due 2002; interest at
   Libor +1% payable semiannually (6.4% at
   July 2, 1999), secured by property...............    3,941     4,148

   Mortgages payable in monthly installments with
   interest at various rates from 5.5% to 6.0%,
   maturing from 2000 through 2008, secured by
   property.........................................    4,651     3,134

   Obligations under capital leases with lease
   periods expiring at various dates through 2005,
   interest at various rates from 6.25% to 14.8%....      821     1,070
                                                     --------- ---------
   Total long-term debt.............................  205,838   191,782

   Less current installments........................  (14,890)   (3,753)
                                                     --------- ---------
   Long-term debt, net of current installments...... $190,948  $188,029
                                                     ========= =========

As of July 2, 1999, aggregate debt maturities were as follows: 2000-- $14,890; 2001--$82,380; 2002 --$4,329; 2003--$391; 2004--$404; and thereafter-- $103,444.

On October 28, 1997, we completed a private placement of $100 million of unsecured senior notes, $50 million maturing after seven years, bearing interest at 7.09% and the remaining $50 million maturing after ten years at an interest rate of 7.25%. The proceeds of this debt issuance were used to reduce the outstanding debt on our multi-currency credit facility.

Our multi-currency bank credit facility provides for maximum borrowings of $110 million. The agreement was amended in April 1999 and further amended on September 30, 1999 relating to pricing and certain collateral matters. The maturity date is January 2001. Interest during the year was at the prime rate plus 2.25% (7.65% at July 2, 1999). We have the option of using interbank offered rates as a basis for interest and can fix the interest rate on the outstanding portion for up to six months. A commitment fee of 0.50% per year, was payable on the unused portion of the line. The credit facility required us to comply with certain covenants such as maintenance of leverage ratio, tangible net worth, and interest coverage, and places certain restrictions on acquisitions and payment of dividends. As of July 2, 1999, we were in violation of one of the financial covenants. We have amended the agreement, which permanently waived the covenant violation.

The amended credit agreement reduced the maximum borrowings from $120 million to $110 million and divided the facility into a $70 million unsecured revolving credit facility and a $40 million secured term loan. The term loan provides us the option of using the London Interbank Offered Rate ("LIBOR") plus 4.50% or the prime rate plus 3.25% for interest. The term loan is secured by all domestic accounts receivable. The term loan is due and payable in a single installment in January 2001.

Borrowings under the $70 million credit facility, as amended, are subject to certain revised financial covenants. The agreement places restrictions on acquisitions and payment of dividends and provides for a reduction in maximum borrowings on the revolving credit facility to $25 million in July 2000 in increments of $15 million per quarter beginning in January 2000. Additional reductions in maximum borrowings could occur if we generate excess cash flow, as defined, or if we fail to maintain a minimum ratio of debt to EBITDA as of June 30, 2000. The revolving credit agreement permits Sunrise to elect one of two variable rate interest options at the time an advance is made. The first option is a rate equal to the prime rate plus 4.00%. The second option is a rate based on LIBOR plus 5.25%. A commitment fee of 1.00% per year is payable on the unused portion of the line. The maturity date is January 2001. At July 2, 1999, the amount of funds available from the credit facility was approximately $16 million.

We manufacture our products in the United States and Europe, but generated approximately 43% of 1999 revenues from sales made outside the U.S. Sales generated by our distribution subsidiaries generally utilize the subsidiary's local currency, thereby exposing us to the risk of foreign currency fluctuations when the subsidiary imports Sunrise manufactured products. Also, as a net borrower, we are exposed to the risk of fluctuating interest rates. We utilize derivative instruments in an effort to mitigate these risks. Our policy is not to speculate in derivative instruments to profit on the foreign currency exchange or interest rate price fluctuation, nor to enter trades for which there are no underlying exposures, nor enter into trades to intentionally increase the underlying exposure. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and are designated as a hedge at the inception of the contract. Accordingly, changes in market values of hedge instruments are highly correlated with changes in market values of underlying hedged items both at the inception of the hedge and over the life of the hedge contract.

Various foreign currency contracts are used to hedge anticipated transactions denominated in foreign currencies and to mitigate the impact of changes in foreign currency exchange rates on our operations. We use forward contracts to hedge transactions between our foreign subsidiaries. The hedge instruments mature at various dates with resulting gains or losses recognized at the maturity date, which approximates the transaction date. The notional values of forward contracts afforded hedge accounting treatment at July 3, 1998 was 19.1 million pounds or $31.8 million. We had no forward contracts outstanding at July 2, 1999.

When we use foreign currency contracts and the hedged currency strengthens against foreign currencies, the decline in the value of future foreign currency cash flows is partially offset by the recognition of gains in the value of the foreign currency contracts designated as hedges of the transactions. Conversely, when the hedged currency weakens, the increase in the value of future foreign currency cash flows is reduced by the recognition of any loss in the value of the forward contracts designated as hedges. Gains and losses on these contracts are recognized in income in the same period that the underlying transactions are settled and generally offset the losses and gains on the underlying transactions.

A significant portion of our receivables are due from home healthcare and medical equipment dealers located throughout the United States, Canada and Europe. Many of these product sales to dealers are ultimately funded through government reimbursement programs such as Medicare and Medicaid. Any changes in these programs could affect dealer liquidity and profitability. This, in turn, could put pressure on prices charged and credit terms offered for our products sold through this channel of distribution. We estimate an allowance for doubtful accounts based on the creditworthiness of our customers as well as general economic conditions.

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

                                                      Years Ended
                                             -----------------------------
                                              July 2,   July 3,  June 27,
                                               1999      1998      1997
                                             --------- --------- ---------
  Current:
      Federal...............................     $971   ($1,470)     $700
      State.................................      276       118       217
      Foreign...............................    2,581     3,097     4,463
                                             --------- --------- ---------
                                                3,828     1,745     5,380
                                             --------- --------- ---------
  Deferred:
      Federal...............................     (587)    2,589     5,935
      State.................................     (186)      (74)      533
      Foreign...............................      716    (4,052)     (485)
                                             --------- --------- ---------
                                                  (57)   (1,537)    5,983
                                             --------- --------- ---------
  Total.....................................   $3,771      $208   $11,363
                                             ========= ========= =========

Foreign income taxes (benefits) are based upon $8,640, $(8,308) and $8,768 of foreign earnings (losses) before income taxes during 1999, 1998 and 1997, respectively. No U.S. income taxes have been provided for cumulative unrepatriated foreign earnings of approximately $66 million as we have no plans or intentions to repatriate foreign earnings or liquidate the related foreign assets. At July 2, 1999, we had foreign tax loss carryforwards of approximately $12,554, consisting of $1,169, which expires in 2000 through 2001, $5,015, which expires in 2002 through 2006, and $6,370, which does not expire. A valuation allowance has been provided for the net operating loss carryforwards that may expire before utilization.

A reconciliation between the federal statutory tax rate and the effective income tax rate follows:

                                                      Years Ended
                                             -----------------------------
                                              July 2,   July 3,  June 27,
                                               1999      1998      1997
                                             --------- --------- ---------
  Statutory federal income tax rate.........     35.0%    -35.0%     35.0%
  Amortization of goodwill..................     16.3%     15.0%      6.8%
  State income taxes, net of federal taxes..      0.6%      2.1%      2.9%
  Taxation of foreign operations............      1.6%     18.7%      4.6%
  Tax credits................................    -3.2%     -0.7%     -0.8%
  Valuation allowance change.................     4.9%      --        --
  Adjustment to estimated income tax accruals    -6.9%      --        --
  Other, net................................     -2.7%      1.7%     -0.1%
                                             --------- --------- ---------
       Effective income tax rate............     45.6%      1.8%     48.4%
                                             ========= ========= =========

Significant components of deferred income tax assets and liabilities are shown below:

                                                        July 2,   July 3,
                                                         1999      1998
                                                       --------- ---------
  Deferred income tax assets:
      Allowance for doubtful accounts.................    ($908)    ($730)
      Inventories.....................................    4,496     4,393
      Accrued expenses................................   11,539    13,111
      Net operating losses............................    4,684     5,638
      State and local taxes...........................      374       116
                                                       --------- ---------
      Total deferred income tax assets................   20,185    22,528
      Less: Valuation allowance.......................     (402)      --
                                                       --------- ---------
      Net deferred income tax assets..................   19,783    22,528

  Deferred income tax liabilities:
      Depreciation and amortization and other.........   11,108     9,696
                                                       --------- ---------
  Net deferred income taxes...........................   $8,675   $12,832
                                                       ========= =========

Management believes that realization of the tax benefit of net deferred income tax assets is more likely than not.

We have 401(k) profit sharing/savings plan covering most U.S. employees ("Associates"). Under the profit sharing portion of the plan, we will contribute to Associates' accounts a percentage of their salary for the fiscal year ranging from 4 to 6 percent. The percentage amount is based upon attainment of certain earnings targets by the company as a whole in the case of corporate office Associates, or by the subsidiary where the Associate works. The plan is discretionary with the amounts determined by the Board of Directors. During 1999, 1998 and 1997, $2,839, $2,534 and $2,533, respectively, were accrued for this plan. Under the savings feature of the plan, individual Associates may make contributions to the plan, which are matched by the company in an amount determined by the Board of Directors. During 1999, 1998, and 1997, $622, $655, and $767, respectively, of Associate contributions were matched.

Common Stock Purchase Rights. In April 1990 our Board of Directors declared a dividend of one common share purchase right ("Right") for each outstanding share of common stock. Pursuant to the stockholder Rights Agreement as amended in May 1997, an exercisable Right will, under certain conditions, entitle the holder to purchase from the company one-half of one share of common stock at the exercise price of $60.00 per whole share, subject to adjustment, until May 16, 2007. The Rights will become exercisable ten days after a person (an "Acquiring Person") acquires 15% or more of the common stock or ten days after a person announces a tender offer which would result in such person acquiring 15% or more of the common stock. The Rights may be redeemed by the Board of Directors for $.01 per Right at any time until ten days following the public announcement that a person has become an Acquiring Person. Under certain circumstances after a person becomes an Acquiring Person, or after a merger or other business combination, an exercisable Right will entitle its holder (other than the Acquiring Person) to purchase shares of common stock (or shares of an acquiring company) having a market value of two times the exercise price of one Right.

Stock Option Plans. The 1983 Stock Option Plan as amended ("the 83 Plan") provided for the grant of options to purchase up to 1,800,000 shares of common stock to officers, key Associates and outside directors in the form of incentive stock options or non-qualified stock options. The 83 Plan expired in August 1995.

In August 1993 we adopted the 1993 Stock Option Plan ("the 93 Plan") providing for the grant of options to purchase up to 4,000,000 shares of common stock to officers, outside directors and key Associates in the form of incentive stock options or non-qualified stock options. At the time of adoption, 300,000 unissued shares of common stock were reserved for future grants under the 93 Plan. The number of unissued shares of common stock reserved for future grants under the 93 Plan increases annually by a number equal to 1.5% of the number of shares of common stock issued and outstanding as of the last day of each fiscal year. The 93 Plan expires in August 2003.

As a result of the DynaVox merger in April 1998, Sunrise acquired another stock option plan. DynaVox originally adopted this stock option plan on March 12, 1993. The plan originally covered 100,000 shares. On April 28, 1998, the plan was amended and restated by the Board of Directors. As a result the number of options that were outstanding under the plan and the number of options that could be granted in the future will now be exercised for shares of Sunrise stock in the merger ratio of 2.27 to 1.

Under all plans, the option price (exercise price) is equal to the closing market price on the day prior to the grant date. Options become exercisable in four equal annual amounts, beginning one year after the grant date. Unexercised options expire up to ten years and one day after the date of grant. As of July 2, 1999 there were 178,705 unissued common stock options reserved for future grants under the 93 Plan.

Shares subject to option under both plans are summarized as follows:

                                          Years ended
                     -----------------------------------------------------------
                       July 2, 1999        July 3, 1998        June 27, 1997
                     ------------------- ------------------- -------------------
                                Weighted            Weighted            Weighted
                                Average             Average             Average
                                Exercise            Exercise            Exercise
                       Shares    Price     Shares    Price     Shares    Price
                     ---------- -------- ---------- -------- ---------- --------
Outstanding at
 beginning of year.. 1,697,196   $15.60  1,665,545   $15.48  1,465,275   $16.23
 Granted............   668,550     9.81    504,860    13.94    440,145    12.44
 Exercised..........   (52,800)    4.35   (166,373)    4.25    (41,850)   10.05
 Canceled...........  (294,725)   15.99   (306,836)   18.38   (198,025)   18.80
                     ----------          ----------          ----------
Outstanding at end
 of year............ 2,018,221   $13.91  1,697,196   $15.60  1,665,545   $15.48
                     ==========          ==========          ==========

Exercisable at end
 of year............   968,452   $16.35    917,305   $16.13    944,074   $14.38
                     ==========          ==========          ==========

Weighted average
 fair value of
 options granted
 during the year....              $3.98               $6.14               $6.29
                                ========            ========            ========

The following table summarizes information about stock options outstanding at July 2, 1999:

                           Options Outstanding         Options Exercisable
                    --------------------------------- ---------------------

                                 Weighted
                                  Average   Weighted              Weighted
                                 Remaining   Average               Average
    Range of          Number    Contractual Exercise    Number    Exercise
   Exercise Prices  Outstanding    Life       Price   Exercisable   Price
------------------- ----------- ----------- --------- ----------- ---------
  $0.70 to  $12.00     797,270         8.0     $9.17     156,020     $6.86
 $12.38 to  $15.88     818,076         7.0     14.43     422,782     14.28
 $17.25 to  $21.88     230,025         3.6     19.61     216,800     19.73
 $23.50 to  $34.50     172,850         5.1     25.76     172,850     25.76
                    -----------                       -----------
                     2,018,221         6.8    $13.91     968,452    $16.35
                    ===========                       ===========

We apply APB 25 and related interpretations in accounting for grants to employees under our stock option plans. Because the exercise price of the options equals the market price of the underlying stock on the date of grant, no compensation cost has been recognized in our financial statements. Pro forma disclosures assuming compensation cost had been determined based on the fair value of stock options at the grant dates consistent with the method of SFAS 123 are as follows:

                                                 Years Ended
                                        -----------------------------
                                         July 2,   July 3,  June 27,
                                          1999      1998      1997
                                        --------- --------- ---------
  Net income (loss):
    As reported........................   $4,498  ($12,010)  $12,114
    Pro forma..........................   $3,459  ($13,594)  $11,232

  Earnings (loss) per share:
    As reported........................    $0.20    ($0.55)    $0.55
    Pro forma..........................    $0.16    ($0.62)    $0.51

The fair value of options granted has been estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants: expected volatility of 50% for 1999, and 43% for 1998 and 1997 (based on daily closing stock prices for the preceding four years); risk-free interest rates of 5.8% for 1999, 5.5% for 1998 and 6.4% for 1997; expected lives of 4.8 years and no dividend yield for 1999, 1998 and 1997. For purposes of the pro forma disclosures, the estimated fair value of the options has been amortized to expense over the vesting period of the options. The pro forma disclosures apply only to those options granted after June 28, 1995.

The following is a reconciliation of the denominators of the basic and diluted EPS computations.

                                                 Years Ended
                                       --------------------------------
                                        July 2,    July 3,    June 27,
                                          1999       1998       1997
                                       ---------- ---------- ----------

Weighted average number of shares
   outstanding........................    22,195     22,001     21,656

Effect of dilutive stock options (1)..        58        --         277
                                       ---------- ---------- ----------
Weighted average number of shares
   assuming dilution..................    22,253     22,001     21,933
                                       ========== ========== ==========

                               U.S.       Europe
                             Rehabili-   Rehabili-  Institu-
                              tation      tation     tional
                             Products    Products   Products    Other     Total
                            ----------- ----------- --------- --------- ---------
1999
Revenues...................   $363,577    $219,063   $77,608     $ --   $660,248
Operating income (loss)....     15,015      13,384    (4,314)   (1,282)   22,803
Total assets...............    334,648     179,979    89,418     3,145   607,190
Capital expenditures, net..      6,545       5,776     1,789     1,670    15,780
Depreciation and
  amortization.............    $12,029      $8,820    $3,958      ($57)  $24,750



1998
Revenues...................   $359,830    $217,790   $79,549     $ --   $657,169
Operating income (loss)....     17,584       5,196       670      (269)   23,181
Total assets...............    320,482     193,596    96,550     5,677   616,305
Capital expenditures, net..      5,926       5,877     4,949      (203)   16,549
Depreciation and
  amortization.............    $11,184      $8,037    $4,549      $180   $23,950



1997
Revenues...................   $342,879    $230,061   $83,821   $13,784  $670,545
Operating income (loss)....     19,383      16,115      (917)     (102)   34,479
Total assets...............    312,036     204,672   100,218    (1,195)  615,731
Capital expenditures, net..      6,902      18,592     1,803     1,951    29,248
Depreciation and
  amortization.............    $12,142      $8,618    $4,920      $580   $26,260

   Operating income for reportable segments... $23,181
   Unallocated re-engineering expenses........ (29,016)
                                              ---------
   Consolidated operating loss................ ($5,835)
                                              =========

                                          % of Revenues
                                    -----------------------------
                                      1999      1998      1997
                                    --------- --------- ---------
Wheelchairs....................           43%       42%       40%
Home respiratory products......           18%       19%       19%
Personal care products.........           21%       21%       24%
Beds and bathing systems.......           15%       16%       15%
Speech devices.................            3%        2%        2%

                                             Years Ended
                                    -----------------------------
                                     July 2,   July 3,  June 27,
                                      1999      1998      1997
                                    --------- --------- ---------
Revenues: (a)
  United States..................   $376,638  $375,942  $379,090
  United Kingdom.................     80,545    78,963    74,180
  Other foreign countries........    203,065   202,264   217,275
                                    --------- --------- ---------
  Total..........................   $660,248  $657,169  $670,545
                                    ========= ========= =========

Long-lived assets: (b)
  United States..................   $170,078  $177,022  $177,806
  United Kingdom.................     80,855    85,256    93,334
  France.........................     39,445    43,664    46,183
  Other foreign countries........     43,832    46,677    48,620
                                    --------- --------- ---------
  Total..........................   $334,210  $352,619  $365,943
                                    ========= ========= =========

                          First    Second     Third     Fourth      Fiscal
                         Quarter   Quarter   Quarter    Quarter      Year
                        --------- --------- --------- ------------ ---------
         1999
Net sales.............  $164,795  $163,460  $169,715  $162,278     $660,248
Gross profit..........    51,577    50,904    49,748    47,265      199,494
Net income (loss).....     3,557     1,816     1,779    (2,654)       4,498
Basic income (loss)
 per share............     $0.16     $0.08     $0.08    ($0.12)       $0.20
Diluted income
 (loss)per share......     $0.16     $0.08     $0.08    ($0.12)       $0.20


         1998
Net sales.............  $155,032  $169,089  $164,415  $168,633     $657,169
Gross profit..........    50,959    53,127    52,313    49,139      205,538
Re-engineering
 expenses and
 merger costs.........     4,635     7,043     5,307    12,031       29,016
Net income (loss).....       869       928       (98)  (13,709)(1)  (12,010)
Basic income (loss)
 per share............     $0.04     $0.04     $0.00    ($0.62)(1)   ($0.55)
Diluted income
 (loss)per share......     $0.04     $0.04     $0.00    ($0.62)(1)   ($0.55)

                                           Additions
                                    ---------------------
                           Balance   Charged  Charged                  Balance
                             at     to costs     to                      at
                          beginning    and     other                   end of
       Description        of period expenses  accounts    Deductions   period
------------------------- --------- --------- ----------- ----------- ---------
1997
----
Allowance for doubtful
    receivables..........  $11,523     1,954   (3,302)(1)  (5,100)(2)   $5,075
Allowance for installment
    receivables..........   $1,756     1,586      125 (1)  (1,233)(2)   $2,234
Allowance for inventory
    obsolescence.........  $13,664     4,598   (1,033)(1)  (3,486)(3)  $13,743

1998
----
Allowance for doubtful
    receivables..........   $5,075     5,342      (52)(1)  (2,210)(2)   $8,155
Allowance for installment
    receivables..........   $2,234       898      --       (1,448)(2)   $1,684
Allowance for inventory
    obsolescence.........  $13,743     3,106      514      (2,384)(3)  $14,979

1999
----
Allowance for doubtful
    receivables..........   $8,155        44     (153)(1)  (3,075)(2)   $4,971
Allowance for installment
    receivables..........   $1,684     1,692      --       (1,667)(2)   $1,709
Allowance for inventory
    obsolescence.........  $14,979     1,968      276 (1)  (1,862)(3)  $15,361

 ---------------

          Signature                             Title
-----------------------------  ----------------------------------------
/s/ Murray H. Hutchison        Chairman, president and chief executive
-------------------------      officer (principal executive officer)
    Murray H. Hutchison


/s/ Ted N. Tarbet              Senior vice president and chief financial
-------------------------      officer (principal financial officer)
    Ted N. Tarbet


/s/ John M. Radak              Vice president and controller
-------------------------      (principal accounting officer)
    John M. Radak


/s/ J. R. Woodhull             Director
-------------------------
    J. R. Woodhull


/s/ Joseph Stemler             Director
-------------------------
    Joseph Stemler


/s/ Lee A. Ault III            Director
-------------------------
    Lee A. Ault III


/s/ Michael N. Hammes          Director
-------------------------
    Michael N. Hammes


/s/ William L. Pierpoint       Director
-------------------------
    William L. Pierpoint

Exhibit
Number                            Description
------- ----------------------------------------------------------------
  3.1   Certificate of Incorporation of the company and amendments
        thereto. (a)

  3.2   Amendment to Certificate of Incorporation of we as set forth
        under the caption "Article III - Liability of Director to the
        Corporation." (b)

  3.3   Second Amended and Restated Bylaws of the company.(o)

  3.4   Amendment to Certificate of Incorporation of we as to the number
        of authorized shares. (c)

  4.1   Amended and Restated Shareholders' Rights Agreement dated May 16,
        1997. (j)

  4.2   Amendment to Amended and Restated Shareholders' Rights Agreement. (o)

  10.1  Amended and Restated Stock Option Plan for Key Associates. (d)

  10.2  1993 Stock Option Plan. (e)

  10.3  Special Bonus Plan (f)

  10.4  Agreement for the Purchase of Certain Stock of Homecare
        Holdings, Inc. dated as of June 29, 1993 among Sunrise Medical
        Inc., Homecare Holdings, Inc., and the selling shareholders
        listed therein. (g)

  10.5  Asset Purchase Agreement for the Purchase of Certain Assets of
        Jay Medical, Ltd. (h)

  10.6  Agreement for the Purchase of Shares of S.E.P.A.C., Corona
        S.A., Tecktona Bois S.A., Tecktona Sante S.A., and Sci La
        Planche by Homecare Holdings France S.A. (i)

  10.7  Form of Change in Control Agreements dated June 27, 1997
        between Sunrise Medical Inc. and certain employees.(k)

  10.8  Third Amended and Restated Credit Agreement and Waiver dated as
        of August 28, 1997 among Sunrise Medical, Inc. and certain
        subsidiary borrowers and guarantors, Bank of America as agent
        and other lenders.(l)

  10.9  Note Purchase Agreement dated as of October 1, 1997 for $50
        million 7.09% Series A Senior Notes Due October 28, 2004 and
        for $50 million 7.25% Series B Notes Due October 28, 2007.(l)

  10.10 1998 Management Incentive Bonus Plan. (m)

  10.11 Amended and Restated Sentient/Sunrise Stock Option Plan. (m)

  10.12 Supplemental Executive Retirement Plan. (m)

  10.13 Second Amendment to the Third Amended and Restated Credit
        Agreement and Waiver dated as of August 28, 1997 among Sunrise
        Medical, Inc. and certain subsidiary borrowers and guarantors,
        Bank of America as agent and other lenders. (n)

  10.14 Second Amended and Restated 1993 Stock Option Plan. (p)

  10.15 Third Amendment to the Third Amended and Restated Credit
        Agreement and Waiver dated as of August 28, 1997 among Sunrise
        Medical, Inc. and certain subsidiary borrowers and guarantors,
        Bank of America as agent and other lenders.

  10.16 Fourth Amendment to the Third Amended and Restated Credit
        Agreement and Waiver dated as of August 28, 1997 among Sunrise
        Medical, Inc. and certain subsidiary borrowers and guarantors,
        Bank of America as agent and other lenders.

  10.17 Fifth Amendment to the Third Amended and Restated Credit
        Agreement and Waiver dated as of August 28, 1997 among Sunrise
        Medical, Inc. and certain subsidiary borrowers and guarantors,
        Bank of America as agent and other lenders.

  21    List of Subsidiaries.

  23    Consent of Independent Auditors.

  27    1999 Financial Data Schedule.