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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003

FOR THE TRANSITION PERIOD FROM              TO             

0-26038

Commission file number

ResMed Inc.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

98-0152841

(IRS Employer Identification No)

14040 Danielson St

Poway CA 92064-6857

United States Of America

(Address of principal executive offices)

(858) 746 2400

(Registrant’s telephone number including area code)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)    Yes  x    No  ¨

As of February 6, 2004, 33,607,791 shares of Common Stock ($0.004 par value) were outstanding. This number excludes 886,369 shares held by the registrant as treasury shares.

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INDEX

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Condensed Consolidated Balance Sheets

(in US$ thousands, except share data)

See accompanying notes to unaudited condensed consolidated financial statements.

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Condensed Consolidated Statements of Income (Unaudited)

(in US$ thousands, except per share data)

See accompanying notes to unaudited condensed consolidated financial statements.

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Unaudited Condensed Consolidated Statements of Cash Flows

(in US$ thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

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

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of our management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended December 31, 2003 are not necessarily indicative of the results that may be expected for the year ending June 30, 2004.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company transactions and balances have been eliminated on consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from management’s estimates.

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

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Notes to Condensed Consolidated Financial Statements

(unaudited)

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

Cash equivalents include certificates of deposit, commercial paper, and other highly liquid investments are stated at cost, which approximates market. Investments with original maturities of 90 days or less are considered to be cash equivalents for purposes of the consolidated statements of cash flows.

Inventories are stated at the lower of cost, determined principally by the first-in, first-out method, or net realizable value. We review and provide for any product obsolescence in our manufacturing and distribution operations with assessments of individual products and components (based on estimated future usage and sales) being performed throughout the year.

Property, plant and equipment, including rental equipment, is recorded at cost. Depreciation expense is computed using the straight–line method over the estimated useful lives of the assets, generally two to ten years except for buildings which are depreciated over an estimated useful life of 40 years. Straight–line and accelerated methods of depreciation are used for tax purposes. Maintenance and repairs are charged to expense as incurred.

The registration costs for new patents are capitalized and amortized over the estimated useful life of the patent, generally five years. In the event of a patent being superseded, the unamortized costs are written off immediately.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 142, Goodwill and Other Intangible Assets. As allowed under the Standard, we adopted SFAS 142 effective July 1, 2001. SFAS 142 requires goodwill and intangible assets with indefinite useful lives to no longer be amortized, but instead be tested for impairment at least annually.

With the adoption of SFAS 142, we reassessed the useful lives and residual values of all acquired intangible assets to make any necessary amortization period adjustments. Based on that assessment only, goodwill was determined to have an indefinite useful life and no adjustments were made to the amortization period or residual values of other intangible assets.

We conducted our annual review for goodwill impairment in July 2003. In conducting our review of goodwill impairment, we identified reporting units, being components of our operating segment, as each of the entities acquired and giving rise to the goodwill. The fair value for each reporting unit was determined based on discounted cash flows and involved a two step process as follows:

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

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Notes to Condensed Consolidated Financial Statements

(unaudited)

The consolidated financial statements of our non–U.S. subsidiaries, whose functional currencies are other than U.S. dollars, are translated into U.S. dollars for financial reporting purposes. Assets and liabilities of non–U.S. subsidiaries whose functional currencies are other than the U.S. dollar are translated at period end exchange rates, and revenue and expense transactions are translated at average exchange rates for the period. Cumulative translation adjustments are recognized as part of comprehensive income, as described in Note 5, and are included in accumulated other comprehensive loss in the consolidated balance sheet until such time as the subsidiary is sold or substantially or completely liquidated. Gains and losses on transactions denominated in other than the functional currency of the entity are reflected in operations.

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

The weighted average shares used to calculate basic earnings per share was 33,663,000 and 32,994,000 for the three month periods ended December 31, 2003 and 2002, respectively and 33,658,000 and 32,939,000 for the six month periods ended December 31, 2003 and 2002. The difference between basic earnings per share and diluted earnings per share is attributable to the impact of outstanding stock options during the periods presented. Stock options had the effect of increasing the number of shares used in the calculation (by application of the treasury stock method) by 1,381,000 and 1,352,000 for the three-month periods ended December 31, 2003 and 2002, respectively and by 1,411,000 and 1,295,000 for the six month periods ended December 31, 2003 and 2002. Options to purchase 1,017,000 and 1,495,000 shares for the three month period ended December 31, 2003 and 2002 respectively, and 1,006,000 and 1,516,000 for the six month periods ended December 31, 2003 and 2002, respectively, were not included in the computation of diluted earnings per share as the effect of exercising these options would have been anti-dilutive.

The carrying value of financial instruments, such as cash and cash equivalents, marketable securities available-for-sale, accounts receivable and accounts payable approximate their fair value because of their short-term nature. The estimated fair value of the Company’s long-term debt at December 31, 2003 approximates $117.1 million compared with the carrying value of $113.3 million.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

Foreign currency option contracts are marked to market and therefore reflect their fair value. We do not hold or issue financial instruments for trading purposes.

The fair value of financial instruments is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties.

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

The purpose of our foreign currency hedging activities is to protect us from adverse exchange rate fluctuations with respect to net cash movements resulting from the sales of products to foreign customers and Australian manufacturing activities. We enter into foreign currency option contracts to hedge anticipated sales and manufacturing costs, principally denominated in Australian dollars and Euros. The terms of such foreign currency option contracts generally do not exceed three years.

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

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

We are exposed to credit-related losses in the event of non-performance by counter parties to financial instruments. The credit exposure of foreign exchange options at December 31, 2003 and June 30, 2003 was $4.7 million and $2.6 million respectively, which represents the positive fair value of options held by us.

We held foreign currency option contracts with notional amounts totaling $137.4 million and $124.5 million at December 31, 2003 and June 30, 2003 respectively to hedge foreign currency items. These contracts mature at various dates prior to July 2006.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Management determines the appropriate classification of our investments in debt and equity securities at the time of purchase and re-evaluates such determination at each balance sheet date. Debt securities for which we do not have the intent or ability to hold to maturity are classified as available-for-sale. Securities available-for-sale are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income (loss).

At December 31, 2003 and June 30, 2003, our investments in debt securities were classified on the accompanying consolidated balance sheet as marketable securities available-for-sale. These investments are diversified among high credit quality securities in accordance with our investment policy.

As at December 31, 2003, contractual maturities of marketable securities available-for-sale were (in thousands):

Estimated future warranty obligations related to certain products are provided by charges to operations in the period in which the related revenue is recognized.

We periodically evaluate the carrying value of long-lived assets to be held and used, including certain identifiable intangible assets, when events and circumstances indicate that the carrying amount of an asset may not be recovered. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

Software development costs have been capitalized and will be amortized to the cost of product revenues over the estimated economic lives (generally three to five years) of the products that include such software. Total net capitalized software production costs were $1,451,000 and $1,557,000 at December 31, 2003 and June 30, 2003 respectively.

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

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

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Notes to Condensed Consolidated Financial Statements

(unaudited)

The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: weighted average risk-free interest rates of 2.4% and 3.3% for the six months ended December 31, 2003 and 2002 respectively; no dividend yield; expected option lives of 4.0 years and 3.3 years for the six months ended December 31, 2003 and 2002, respectively and volatility of 60.1% for the six months ended December 31, 2003 and 2002.

The following table illustrates the fair value of compensation costs as determined under the provisions of SFAS 123 by year of option grant (in thousands, except per share data):

In May 2003, the Financial Accounting Standards Board (“FASB”) issued statement of financial accounting standard (“SFAS”) 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We adopted SFAS 150 effective July 1, 2003. The adoption of SFAS 150 did not have a material impact on our consolidated financial position or results of operation.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS 149 did not have a material impact on our results of operations, financial position or liquidity.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, which addresses the consolidation of certain entities (“variable interest entities”) in which an enterprise has a controlling financial interest through other than voting interests. FIN No. 46 requires that a variable interest entity be consolidated by the holder of the majority of the expected risks and rewards associated with the activities of the variable interest entity. FIN 46 was effective for VIE’s entered into prior to February 1, 2003 in periods beginning after June 15, 2003. The adoption of FIN 46 did not have a material impact on our financial condition or results of operation. In January 2004, the FASB issued a revision to FIN 46, to clarify some requirements and add new scope exceptions. The revised guidance is effective for the first reporting period beginning after December 15, 2003. The adoption of the provisions of FIN 46R is not expected to have a material impact on our financial condition or results of operations.

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure, which amends SFAS 123, Accounting for Stock-Based Compensation. SFAS 148 amends the disclosure requirements in SFAS 123 for stock-based compensation for annual periods ending after December 15, 2002 and for interim periods beginning after December 15, 2002. SFAS 148 amends SFAS 123 to provide alternative methods of transition for an entity that voluntarily changes to fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS 148 amends Accounting Principles Board (“APB”) Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. We have adopted the amended disclosure provisions of SFAS 148.

In November 2002, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables”. EITF Issue No. 00-21 addresses how to determine whether a revenue arrangement involving multiple deliverable contains more than one unit of accounting for the purposes of revenue recognition and how the revenue arrangement consideration should be measured and allocated to the separate units of accounting. EITF Issue No. 00-21 applies to revenue arrangements entered into after June 15, 2003. The adoption of this statement did not have a material impact on our financial condition or results of operations.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

In July 2002, the FASB issued SFAS 146, Accounting for Restructuring Costs. SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts, and relocating plant facilities or personnel. Under SFAS 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value.

SFAS 146 requires a company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed.

SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002. Under SFAS 146, a company may not restate its previously issued financial statements and SFAS 146 grandfathers the accounting for liabilities that a company had previously recorded under Emerging Issues Task Force Issue 94-3. The adoption of SFAS 146 did not have a material impact on our results of operations, financial position or liquidity.

Inventories were comprised of the following at December 31, 2003 and June 30, 2003:

The table below presents other comprehensive income:

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Notes to Condensed Consolidated Financial Statements

(unaudited)

The Company does not provide for US income taxes on foreign currency translation adjustments since it does not provide for such taxes on undistributed earnings of foreign subsidiaries. Accumulated other comprehensive loss at December 31, 2003 and June 30, 2003 consisted of foreign currency translation adjustments with net credit balances of $57.1 million and $29.9 million, respectively and unrealized gains on securities with net credit balance of $11,000 (net of tax $6,000) and $9,000 (net of tax $5,000), respectively.

Changes in the carrying amount of goodwill for the six months ended December 31, 2003, were as follows:

Other intangible assets amounted to $4.8 million (net of accumulated amortization of $4.5 million) and $3.7 million (net of accumulated amortization of $3.4 million) at December 31, 2003 and June 30, 2003, respectively. These intangible assets consist of patents and are amortized over the estimated useful life of the patent, generally five years. There are no expected residual values related to these intangible assets.

On June 20, 2001 we issued $150.0 million of 4% convertible subordinated notes that are due to mature on June 20, 2006. On July 3, 2001, we received an additional $30.0 million in over allotments. This increased the total amount of convertible subordinated notes issued to $180.0 million.

During the six months ended December 31, 2003, we did not repurchase any of our convertible subordinated notes.

During the year ended June 30, 2003, we repurchased $10.0 million face value of our convertible subordinated notes. The total purchase price of the notes was $9.4 million, including $0.2 million in accrued interest. We recognized a gain of $0.3 million, net of tax of $0.2 million, on these transactions.

During the year ended June 30, 2002, we repurchased $56.8 million face value of our convertible subordinated notes. The total purchase price of the notes was $49.1 million, including $0.6 million in accrued interest. We recognized a gain of $4.0 million, net of tax of $2.5 million on these transactions.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

As at December 31, 2003, we had convertible subordinated notes outstanding of $113.3 million.

The notes are convertible, at the option of the holder, at any time on or prior to maturity, into shares of common stock of ResMed Inc. The notes are currently convertible at a conversion price of $60.60 per share, which is equal to a conversion rate of 16.5017 shares per $1,000 principal amount of notes, subject to adjustment.

We may redeem some or all of the notes at any time before June 20, 2004 at a redemption price of $1,000 per $1,000 principal amount of notes, plus accrued and unpaid interest, if any, to the redemption date, if the closing price of our common stock has exceeded 150% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day before the date of mailing of the provisional redemption notice. Upon any such provisional redemption, we will make an additional payment in cash equal to $166.67 per $1,000 principal amount of notes, less the amount of any interest actually paid on the notes before the provisional redemption date.

We may also redeem some or all of the notes at any time on or after June 22, 2004, but prior to June 20, 2005, at a redemption price equal to 101.6% of the principal amount of notes redeemed, and at any time after June 19, 2005, at a redemption price of 100.8% of the principal amount of notes, plus in any case accrued and unpaid interest, if any, to the redemption date, if the closing price of our common stock has exceeded 130% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day before the date of mailing of the optional redemption notice.

The notes are general unsecured obligations and are subordinated to all of our existing and future senior indebtedness and will be effectively subordinated to all of the indebtedness and liabilities of our subsidiaries. The indenture governing the notes does not limit us or our subsidiaries from incurring senior indebtedness or other indebtedness.

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

We were engaged in litigation relating to the enforcement and defense of certain of our patents during the six months ended December 31, 2003.

1995 Litigation with Respironics. In January 1995, our subsidiary, ResMed Limited, filed a complaint in the United States District Court for the Southern District of California seeking monetary damages from and injunctive relief against Respironics, Inc. for alleged infringement of three of its patents. In February 1995, Respironics filed a complaint in the U.S. District Court for the Western District of Pennsylvania against ResMed Limited, seeking a declaratory judgment that Respironics, Inc. did not infringe claims of these patents and that ResMed Limited’s patents were invalid and unenforceable.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

On September 5, 2003, ResMed and Respironics agreed to settle this action. Both ResMed and Respironics have dismissed all claims in the action with prejudice.

2002 Litigation with Fisher & Paykel Healthcare. On August 26, 2002, ResMed Inc., ResMed Corp. and ResMed Limited filed a lawsuit in U.S. District Court for the Southern District of California against Fisher & Paykel Healthcare Inc and Fisher & Paykel Healthcare Limited (“Fisher & Paykel Healthcare”). ResMed’s amended complaint sought a judgment that selected Fisher & Paykel Healthcare mask products infringed patents held by ResMed. The complaint further charged the defendants with copying ResMed’s proprietary mask technology and alleged violations of the Lanham Act, trademark and trade dress infringement and common law violations relating to the appearance of ResMed’s mask products.

On May 6, 2003, ResMed and Fisher & Paykel Healthcare agreed to settle this lawsuit. In accordance with the settlement, Fisher & Paykel introduced a new design of its mask in the United States on or before August 1, 2003. ResMed has agreed not assert intellectual property claims against the new mask. In addition, Fisher & Paykel has agreed not to sell the previous design of its masks anywhere in the world after October 1, 2003. ResMed has dismissed the lawsuit with prejudice.

2002 Litigation with Respironics. On October 11, 2002, ResMed Inc, ResMed Corp, and ResMed Limited filed a lawsuit in U.S. District Court for the Southern District of California, in San Diego against Respironics, Inc. ResMed’s suit sought a judgment that certain of Respironics’ mask products (Contour Deluxe, Comfort Classic, Comfort Select, and Image3 masks) infringed patents held by ResMed. The complaint further charged Respironics with copying ResMed’s proprietary mask technology, and alleged violation of the Lanham Act, trademark and trade dress infringement, and common law violations relating to the appearance of ResMed’s mask products. ResMed sought an injunction and damages.

On October 16, 2002 Respironics, Inc. filed a lawsuit in U.S. District Court for the Western District of Pennsylvania against ResMed Limited seeking a declaratory judgment that Respironics, Inc. did not infringe the patents that were the subject of ResMed’s October 11, 2002 complaint, that such patents were invalid and unenforceable, and that Respironics had not committed any other trademark, trade dress or common law violations.

On September 5, 2003, ResMed and Respironics agreed to settle these actions. ResMed and Respironics have dismissed all claims in the actions with prejudice.

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

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Notes to Condensed Consolidated Financial Statements

(unaudited)

Six months ended December 31, 2003

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

Fiscal year ended June 30, 2003

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

MAP

On acquisition of MAP Medizin-Technologie GmbH (MAP) in February 2001, we recognized as an expense a charge of $17.7 million with respect to five in-process research and development programs under active development by MAP at date of acquisition. The five projects were:

The status of each project is as noted below:

The nasal cushion under development by MAP on acquisition was originally due for release in October 2001. Delays in the design and manufacturing process delayed the release for seven months, until April 2002. The delay in release of the product was not significant over its expected life cycle, and has made no significant impact on the net return assumptions used in the initial in-process research and development model. Since release, the product (now referred to as the Papillon) has met or exceeded all sales forecasts.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

The new headgear product line was withheld to coincide with the release of the Papillon mask system in April 2002 and so was also seven months behind schedule in projected release dates. Since release, the new headgear system has exceeded original sales projections and continues to meet or exceed initial expectations.

Due to other priorities and to the introduction of integrated humidification flow generator devices by a number of competitors during fiscal 2002, we have delayed the standalone humidifier project.

Given the relatively small revenue forecast of the product line in the in-process research and development model, the financial impact of this project is not material to ResMed or the net return of the MAP acquisition.

The main product development effort of MAP since acquisition has been on the completion of the Autotitration CPAP flow generator specified in the initial in-process research and development charge, now referred to as the Magellan. This project experienced some delays due to the complexity of the software algorithm development process and associated electronics resulting in the product being released in November 2002. Since release, sales have grown each quarter and are now approaching our original sales projections.

MAP’s new diagnostic screening device, now called the microMESAM, is expected to be released to the market in the third quarter of fiscal 2004. We remain confident in the capacity of the device to enhance the diagnostic process, and remain confident in the potential of the product to significantly impact the treatment and diagnosis of obstructive sleep apnea in the German market.

As at December 31, 2003, three of the five programs have been completed with the release of the Papillon mask system, upgraded headgear and Magellan automated flow generator CPAP device.

Given the successful completion of the above research programs and performance of the associated product lines, we remain confident in the assumptions used to determine the in-process research and development charge and as a result the net return of the MAP acquisition.

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Management Discussion and Analysis of Financial Conditions and Results of Operations

Overview

The following is an overview of the results of the quarter ended December 31, 2003. It should be read together with the detail provided in the individual sections below.

During the quarter, our net revenue increased by 26%, and gross profit increased by 25%, when compared to the quarter ended December 31, 2002. These results were primarily driven by increasing unit sales of our products. Earnings per share increased by 33%, to $0.40 per share, over the same time period. We experienced a favorable product mix during the quarter, but this was offset by the impact of a stronger Australian dollar, which increased manufacturing and research and development costs. We recognized other income of $1.5 million, primarily reflecting net foreign currency exchange gains. Our selling, general and administrative expenses, as a percentage of net revenue, were 31%, compared to 32% in the second quarter of fiscal year 2003. We committed a donation of $0.5 million to the ResMed Foundation.

Net Revenue

Net revenue increased for the three months ended December 31, 2003 to $82.3 million from $65.3 million for the three months ended December 31, 2002, an increase of $17 million or 26%. For the six months ended December 31, 2003 net revenue increased to $155.2 million from $123.9 million for the six months ended December 31, 2002, an increase of $31.3 million or 25%. Both the three month and six month increases in net revenue is primarily attributable to an increase in unit sales of our flow generators and accessories. Sales also benefited from an appreciation of international currencies against the US dollar (increasing sales by approximately $5.8 million and $9.8 million for the three and six month periods respectively).

Net revenue in North and Latin America increased for the three months ended December 31, 2003 to $41.1 million from $32.3 million for the three months ended December 31, 2002, an increase of $8.8 million or 27%. For the six months ended December 31, 2003, North and Latin America net revenue increased to $75.7 million from $60.6 million for the six months ended December 31, 2002, an increase of $15.1 million or 25%. This growth primarily reflects increased public and physician awareness of sleep-disordered breathing partially offset by the cessation, in the second quarter of fiscal 2003, of our domestic diagnostic distribution business (which contributed revenue of $0.4 million and $1.3 million for the three-month and six-month periods ended December 31, 2002, respectively).

Net revenue in international markets for the three months ended December 31, 2003 increased to $41.2 million from $33.0 million for the three months ended December 31, 2002, an increase of $8.2 million or 25%. For the six months ended December 31, 2003, net revenue in international markets increased to $79.5 million from $63.3 million for the six months ended December 31, 2002, an increase of $16.2 million or 26%. International sales growth for both the three-month and six-month periods ended December 31, 2003 reflect organic growth in the overall sleep-disordered breathing market and appreciation of international currencies against the U.S. dollar.

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Net Revenue, Continued

Sales of flow generators for the three months ended December 31, 2003 increased by 20% compared to the three months ended December 31, 2002 including increases of 18% in North and Latin America and 21% elsewhere. Sales of mask systems, motors and other accessories increased by 33% including increases of 35% in North and Latin America and 30% elsewhere, for the three months ended December 31, 2003 compared to the three months ended December 31, 2002. These increases primarily reflect growth in the overall sleep-disordered breathing market and appreciation of international currencies against the U.S. dollar.

For the six months ended December 31, 2003, sales of flow generators increased by 20% compared to the six months ended December 31, 2002; 20% in North and Latin America and 21% internationally. Sales of mask systems, motors and other accessories increased by 31%; 29% in North and Latin America and 33% internationally, for the six months ended December 31, 2003 compared to the six months ended December 31, 2002. These increases primarily reflect growth in the overall sleep-disordered breathing market and appreciation of international currencies against the U.S. dollar.

Gross Profit

Gross profit increased for the three months ended December 31, 2003 to $52.4 million from $41.8 million for the three months ended December 31, 2002, an increase of $10.6 million or 25%. Gross profit as a percentage of net revenue for the three months ended December 31, 2003 was 64%, consistent with the margin for the three months ended December 31, 2002, and reflecting a more favorable product mix largely offset by the impact of higher manufacturing costs in our Australian manufacturing facility resulting from a stronger Australian dollar against the U.S. dollar, as the majority of manufacturing labor and overhead costs are incurred in Australia.

For the six-months ended December 31, 2003 gross profit increased to $99.6 million from $79.5 million in the same period of fiscal 2002, an increase of $20.1 million or 25%. Gross profit as a percentage of net revenue for the six-months ended December 31, 2003 was 64% consistent with the margin for the six months ended December 31, 2002. This also reflects a more favorable product mix offset by higher manufacturing costs resulting from a stronger Australian dollar against the U.S. dollar, as the majority of manufacturing costs are incurred in Australia.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the three months ended December 31, 2003 to $25.8 million from $20.9 million for the three months ended December 31, 2002, an increase of $4.9 million or 23%. As a percentage of net revenue, selling, general and administrative expenses for the three months ended December 31, 2003 was 31% compared to 32% for the three months ended December 31, 2002. The increase in selling, general and administrative expenses was primarily due to an increase in the number of sales and administrative personnel and other expenses related to the increase in our sales. The increase in SG&A expenses was also attributable to appreciation of international currencies against the US dollar, which added approximately $2.6 million to our expenses as reported in U.S. dollars.

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Selling, General and Administrative Expenses, Continued

Selling, general and administrative expenses for the six months ended December 31, 2003 increased to $48.0 million from $38.7 million for the six months ended December 31, 2002, an increase of $9.3 million or 24%. As a percentage of net revenue selling, general and administration expenses of 31% for the six months ended December 31, 2003 was consistent with the six months ended December 31, 2002.

Donation to Research Foundation

For the three-months ended December 31, 2003 we committed to $0.5 million as a donation to the ResMed Sleep Disordered Breathing Foundation. The Foundation’s overall mission is to educate both the public and physicians about the inherent dangers of untreated SDB/OSA, particularly as it relates to cerebrovascular and cardiovascular disease.

Research and Development Expenses

Research and development expenses increased for the three months ended December 31, 2003 to $6.8 million from $4.8 million for the three months ended December 31, 2002, an increase of $1.9 million or 40%. As a percentage of net revenue, research and development expenses of 8.2% for the three-months ended December 31, 2003 was higher compared to the 7.4% for the three months ended December 31, 2002. The increase in research and development expenses was due to increased salary costs associated with an increase in personnel and increased charges for consulting fees, clinical trials and technical assessments incurred to facilitate development of new products. To a large extent, it also reflects the appreciation of the Australian dollar against the US dollar, as the majority of research and development costs are incurred in Australian dollars. In constant currency terms, research and development expenses for the three months ended December 31, 2003 increased by $0.7 million or 14%, compared to the three months ended December 31, 2002. We expect to continue to spend approximately 8% of our revenues on research and development during the rest of the fiscal year.

For the six-month period ended December 31, 2003 research and development expenses increased to $12.8 million from $9.2 million for the same period in fiscal 2002, an increase of $3.6 million or 39%. As a percentage of net revenue, research and development expenses were 8.2% for the six months ended December 31, 2003 compared to 7.5% for the six months ended December 31, 2002. The increase in research and development expenses was due to increased salary costs associated with an increase in personnel and increased charges for consulting fees, clinical trials and technical assessments incurred to facilitate development of new products. To a large extent, it also reflects an appreciation of the Australian dollar against the US dollar, as the majority of research and development costs are incurred in Australian dollars. In constant currency terms, research and development expenses for the six months ended December 31, 2003 increased by $1.4 million or 15%, compared to the six months ended December 31, 2002.

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Other Income (Expense), Net

Other income (expense), net for the three months ended December 31, 2003 increased to net income of $1.5 million compared to net expense of $0.9 million for the three months ended December 31, 2002. Other income, net primarily reflects gains on foreign exchange and interest income from cash and marketable securities, partially offset by interest expense associated with our convertible subordinated notes.

Other income (expense), net increased for the six months ended December 31, 2003 to net income of $0.5 million from net expense of $2.4 million for the six months ended December 31, 2002. The increase in other income was attributable to increased net foreign currency exchange gains and lower interest expense, reflecting the reduction in the balance of our convertible subordinated notes over this period.

Income Taxes

Our effective income tax rate increased to approximately 32.3% for the three months ended December 31, 2003 from approximately 31.7% for the three months ended December 31, 2002 and for the six-month period ended December 31, 2003 increased to 32.0% from 31.7% for the six-month period ended December 31, 2002. The higher tax rate was primarily due to the geographical mix of taxable income, with a greater proportion of our income being generated in higher tax rate jurisdictions. We continue to benefit from the Australian corporate tax rate of 30%, as we generate a majority of our taxable income in Australia.

Liquidity and Capital Resources

As of December 31, 2003 and June 30, 2003, we had cash and cash equivalents and marketable securities available-for-sale of approximately $117.2 million and $121.0 million, respectively. Working capital was approximately $197.4 million and $191.3 million at December 31, 2003 and June 30, 2003 respectively.

Inventories at December 31, 2003 increased by $11.5 million or 25% to $56.9 million compared to December 31, 2002 inventories of $45.4 million. The percentage increase in inventories was consistent with the 26% increase in revenues in the three-month period ended December 31, 2003 compared to the three-month period ended December 31, 2002. The inventory build in absolute terms reflects higher sales volumes, stronger international currencies (increasing the value of inventory in U.S. dollar terms) and, commencing in the September quarter, an inventory build to buffer stock before we relocate our Australian manufacturing facility. The move is expected to occur in the third and fourth quarter of this fiscal year. Accounts receivable at December 31, 2003 were $58.2 million, an increase of $9 million or 18% over the December 31, 2002 accounts receivable balance of $49.2 million. This increase was lower than the 26% increase in revenues for the three month period ended December 31, 2003 compared to the three month period ended December 31, 2002, reflecting improved collections. Accounts receivable days outstanding improved to 63 days for the quarter ended December 31, 2003, compared to 68 days for the quarter ended December 31, 2002.

During the six-month period ended December 31, 2003, we generated cash of $26.0 million from operations, primarily as a result of increased profit partially offset by higher working capital, particularly in respect of inventories. During the six-month period ended December 31, 2002 approximately $20.2 million of cash was generated by operations.

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Liquidity and Capital Resources, Continued

Capital expenditures for the six months ended December 31, 2003 and 2002 aggregated $27 million and $10.6 million respectively. The majority of the expenditures for both periods related to the construction of our new manufacturing facility, acquisition of computer hardware and software and purchase of production tooling and equipment. As a result of these capital expenditures, our balance sheet reflects net property, plant and equipment of approximately $134.2 million at December 31, 2003 compared to $104.7 million at June 30, 2003.

During the year ended June 30, 2003 we repurchased $10.0 million face value of our outstanding convertible subordinated notes. The total purchase price of the notes was $9.4 million, including $0.2 million in accrued interest. We recognized a gain of $0.3 million, net of tax of $0.2 million, on these transactions. We did not repurchase any convertible subordinated notes during the six month period ended December 31, 2003. At December 31, 2003, we had convertible subordinated notes outstanding of $113.3 million.

We may from time to time seek to retire our convertible subordinated notes through cash purchases and/or exchanges for equity securities in open market purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, and our current or future contractual obligations, if any, that may directly or indirectly apply to such transactions.

On April 26, 2002, we settled our purchase of a 30-acre site at Norwest Business Park, located northwest of Sydney, Australia. The acquisition cost was $23.6 million, including deferred payments of $5.7 million paid in October 2002 and $5.7 million paid in April 2003. We expect the first building, a manufacturing facility, to be operational on this site in the first half of calendar 2004. New research and development and office facilities are expected to be completed in 2005. We estimate that the building costs for the manufacturing facility will be approximately $45.0 million.

On May 8, 2002, we completed a sale and leaseback transaction of our Australian facility located at North Ryde in Sydney, Australia. The property was sold for $18.5 million with a three-year leaseback and a further one-year option. The profit before tax on sale of the property of $5.5 million will be amortized over the lease period. The cash made available from the sale has been utilized for the construction of our new facilities at Norwest Business Park also located in Sydney, Australia.

On June 6, 2002, the Board of Directors authorized us to repurchase up to 4.0 million shares of our outstanding common stock. For the six-month period ended December 31, 2003, we repurchased 471,004 at a cost of $19.0 million. As at December 31, 2003, we have repurchased a total of 886,369 shares at a cost of $30.4 million. We may continue to repurchase shares of our common stock for cash in the open market, or in negotiated or block transactions, from time to time as market and business conditions warrant.

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Liquidity and Capital Resources, Continued

Details of contractual obligations at December 31, 2003 are as follows:

Details of other commercial commitments at June 30, 2003 are as follows:

The results of our international operations are affected by changes in exchange rates between currencies. Changes in exchange rates may negatively affect our consolidated net revenue and gross profit margins from international operations. We are exposed to the risk that the dollar value equivalent of anticipated cash flows would be adversely affected by changes in foreign currency exchange rates. We manage this risk through foreign currency option contracts.

We expect to satisfy all of our short term and long-term liquidity requirements through a combination of cash on hand, cash generated from operations and a $15.0 million undrawn revolving line of credit with Union Bank of California.

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In-Process Research and Development Charge

On acquisition of MAP in February 2001, we recognized as an expense a charge of $17.7 million with respect to five in-process research and development programs under active development by MAP at date of acquisition. The five projects were:

The nasal cushion under development by MAP on acquisition was originally due for release in October 2001. Delays in the design and manufacturing process delayed the release for seven months, until April 2002. The delay in release of the product was not significant over its expected life cycle, and has made no significant impact on the net return assumptions used in the initial in-process research and development model. Since release, the product (now referred to as the Papillon) has met or exceeded all sales forecasts.

The new headgear product line was withheld to coincide with the release of the Papillon mask system in April 2002 and so was also seven months behind schedule in projected release dates. Since release, the new headgear system has exceeded original sales projections and continues to meet or exceed initial expectations.

Due to other priorities and to the introduction of integrated humidification flow generator devices by a number of competitors during fiscal 2002, we have delayed the standalone humidifier project.

The main product development effort of MAP since acquisition has been on the completion of the Autotitration CPAP flow generator specified in the initial in-process research and development charge, now referred to as the Magellan. This project experienced some delays due to the complexity of the software algorithm development process and associated electronics resulting in the product being released in November 2002. Since release, sales have grown each quarter and are now approaching our original sales projections.

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