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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004

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 3, 2005, 34,244,231 shares of Common Stock ($0.004 par value) were outstanding. This number excludes 1,127,459 shares held by the registrant as treasury shares.

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INDEX

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Condensed Consolidated Balance Sheets (Unaudited)

(In US$ thousands, except share and per 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 (the “Company”) is a Delaware Corporation formed in March 1994 as a holding company for the ResMed Group. Through our subsidiaries, we design, manufacture and market devices for the evaluation and treatment of sleep-disordered breathing, primarily obstructive sleep apnea. Our manufacturing operations are located in Australia, Germany 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.

The accompanying unaudited condensed consolidated financial statements have been prepared 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 of the Securities and Exchange Commission. 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 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, 2004 are not necessarily indicative of the results that may be expected for the year ending June 30, 2005.

The consolidated financial statements for the six months ended December 31, 2004 and 2003 are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended 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 in consolidation.

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

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Notes to Condensed Consolidated Financial Statements

(unaudited)

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

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

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

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.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

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.

We conducted our annual review for goodwill impairment as at June 30, 2004. 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 existed at June 30, 2004.

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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 income in the consolidated balance sheet until such time as the subsidiary is sold or substantially or completely liquidated. Gains and losses on transactions denominated in other than the functional currency of the entity are reflected in operations.

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

We calculate earnings per share in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”). SFAS 128 requires the presentation of “basic” earnings per share and “diluted” earnings per share. Basic earnings per share is computed by dividing the net income available to common shareholders by the weighted average number of shares of common stock outstanding. For purposes of calculating diluted earnings per share, net income is adjusted for the after-tax amount of interest associated with convertible debt, and the denominator includes both the weighted average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options and convertible notes.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

Basic and diluted earnings per share for the periods ended December 31, 2004 and 2003 are calculated as follows:

Stock options of 67,000 and 1,017,000 for the three month periods ended December 31, 2004 and 2003 respectively, and stock options of 568,000 and 1,006,000 for the six month periods ended December 31, 2004 and 2003 respectively, were not included in the computation of diluted earnings per share as the effect of exercising these options would have been anti-dilutive.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

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, 2004 approximates $119.5 million compared with the carrying value of $113.3 million. Foreign currency option contracts are marked to market and therefore reflect their fair value. We do not hold or issue financial instruments for trading purposes.

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

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

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

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

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

We are exposed to credit-related losses in the event of non-performance by counter parties to financial instruments. The credit exposure of foreign exchange options at December 31, 2004 and June 30, 2004 was $3.7 million and $2.0 million respectively, which represents the positive fair value of options held by us and are included in other assets on the consolidated balance sheet.

We held foreign currency option contracts with notional amounts totaling $132.4 million and $140.6 million at December 31, 2004 and June 30, 2004, respectively, to hedge foreign currency items. These contracts mature at various dates prior to July 2007.

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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.

At December 31, 2004 the investments in debt securities were classified on the accompanying consolidated balance sheet as marketable securities available-for-sale. These investments are diversified among high credit quality securities in accordance with our investment policy.

As at December 31, 2004, contractual maturities of marketable securities available-for-sale were (in thousands):

Estimated future warranty costs related to certain products are charged to operations in the period in which the related revenue is recognized.

Changes in the liability for product warranty for the six months ended December 31, 2004 are as follows (in thousands):

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Notes to Condensed Consolidated Financial Statements

(unaudited)

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.

The aggregate carrying amount of our cost-method investments at December 31, 2004 were $5.3 million. At June 30, 2004, we performed our annual impairment analysis of the carrying value of these investments and determined that the fair value of the investments exceeded the carrying values and no unrealized losses existed.

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 $0.9 million and $1.2 million at December 31, 2004 and June 30, 2004 respectively.

We have granted stock options to personnel, including officers and directors, under both our 1995 Option Plan and our 1997 Equity Participation Plan (collectively the “Plans”). These options have expiration dates of ten years from the date of grant and vest over three or four years. We granted these options with the exercise price equal to the market value as determined at the date of grant. We have also offered to our personnel, including officers and directors, the right to purchase shares of our common stock at a discount under our employee share purchase plan (‘ESPP’).

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Notes to Condensed Consolidated Financial Statements

(unaudited)

We apply APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations, in accounting for our equity plans. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant (or within permitted discounted prices as it pertains to the employee stock purchase plan). 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.

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

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Notes to Condensed Consolidated Financial Statements

(unaudited)

The estimated fair value of marketable securities available for sale as of December 31, 2004 and June 30, 2004 are $22.0 million and $12.0 million respectively.

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

Inventories were comprised of the following at December 31, 2004 and June 30, 2004 (in thousands):

Movements in comprehensive income for the six months ended December 31, 2004 are presented below (in thousands):

The Company does not provide for US income taxes on foreign currency translation adjustments since it does not provide for such taxes on undistributed earnings of foreign subsidiaries. Accumulated other comprehensive income at December 31, 2004 and June 30, 2004 consisted of foreign currency translation adjustments with net credit balances of $76.6 million and $41.3 million, respectively and unrealized gains on securities with net credit balance of $1,000 (net of tax of $300) and $6,000 (net of tax of $2,000), respectively.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

Property, plant and equipment is comprised of the following as of December 31, 2004 and June 30, 2004 (in thousands):

Changes in the carrying amount of goodwill for the six months ended December 31, 2004, were as follows:

Other intangible assets amounted to $5.9 million (net of accumulated amortization of $6.4 million) and $4.8 million (net of accumulated amortization of $5.0 million) at December 31, 2004 and June 30, 2004, 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.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

During the six months ended December 31, 2004, and during the year ended June 30, 2004, 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.

As at December 31, 2004, 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 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 paid on the notes on June 20 and December 20 of each year.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

Restructuring expenses incurred during the three months and six months ended December 31, 2004 were $1.0 million ($0.6 million net of tax) and $2.9 million ($1.8 million net of tax), respectively. Restructuring expenses (predominantly one-time termination benefits) are associated with the Company’s decision to integrate the separate operations of ResMed Germany and MAP into a single operating unit. This will involve the relocation of our ResMed Germany operation (currently located in Moenchengladbach) to Munich and integration of the back office functions including customer service, logistics and administration. It will also involve integration of the sales and marketing teams. The total restructure expenses including the expenses recognized in the six months ended December 31, 2004, are estimated to be $4.5 million ($2.7 million net of tax). We expect to incur the balance of the restructure expenses over the course of the 2005 fiscal year.

Following is a summary of the restructuring liabilities related to the restructure and integration of the separate operations of ResMed Germany and MAP into a single operating unit, that were recorded during the six-months ended December 31, 2004 (in thousands):

Substantially all of the accrued obligations are expected to be paid by June 30, 2005. Restructuring expenses incurred are recorded in the consolidated statement of income as restructuring expenses.

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.

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

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Notes to Condensed Consolidated Financial Statements

(unaudited)

We have given guarantees totaling $1.3 million relating to guarantees required by statutory authorities as a pre-requisite to developing our site at Norwest Business Park, near Sydney, Australia, and to guarantees required by contracts with insurance companies transacting with our German subsidiaries.

Six months ended December 31, 2004

On December 1, 2004 we acquired substantially all the assets of Resprecare BV, our Dutch distributor for consideration of $5.8 million in cash. Under the purchase agreement, we may also be required to make up to $1.4 million of additional future payments based on the achievement of certain performance milestones following the acquisition through to December 31, 2005, of which $0.6 million became payable at December 31, 2004, as a result of the successful achievement of a performance milestone. The acquisition has been accounted for as a purchase and accordingly, the results of operations of Resprecare have been included within our consolidated financial statements from December 1, 2004. An amount of $5.3 million, representing the excess of the purchase price over the fair value of preliminary identifiable net assets acquired of $1.1 million (comprising inventory and fixed assets), has currently been recorded as goodwill. We have engaged an independent third party to prepare a valuation of identifiable assets, including intangibles, associated with the Resprecare acquisition. As a result of this valuation, any value assigned to identifiable intangibles will be reclassified from goodwill and will be amortized over their estimated useful life. We expect to complete our review and allocation of the purchase price in the three-month period ending March 31, 2005.

Pro-forma financial information associated with the acquisition of Resprecare are not included as the effects would not be significant to the consolidated financial statements.

Fiscal year ended June 30, 2004

On July 2, 2003, we acquired the assets of Respro Medical Company Limited (“Respro”), our Hong Kong distributor for total consideration of $184,000 in cash. The acquisition has been accounted for 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.

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Management Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following is an overview of the results of the three-month and six-month periods ended December 31, 2004. It should be read together with the detail provided in the individual sections below.

We are a developer, manufacturer, and marketer of medical equipment for the diagnosis, treatment and management of sleep-disordered breathing. We offer a comprehensive range of product in over 60 countries. We derive our revenue primarily from the sale of medical devices and accessories to treat individuals who suffer from sleep-disordered breathing.

During the three-month and six-month periods ended December 31, 2004, our net revenue increased by 26% and 23%, respectively, and gross profit increased by 30% and 25%, respectively, when compared to the three-month and six-month periods ended December 31, 2003. These results were primarily driven by increasing unit sales of our products. Earnings per share for the three-month period ended December 31, 2004 increased to $0.49 per share, up from $0.40 per share in the December 2003 quarter. Earnings per share for the six-month period ended December 31, 2004 increased to $0.89 per share, up from $0.75 per share in the December 2003 quarter. We experienced a favorable product mix due to increased sales of higher margin products during the three-month and six-month periods ended December 31, 2004, and this resulted in improved gross margins compared to the prior year periods. For the three-month and six-month periods ended December 31, 2004, we recognized restructuring expenses of $2.9 million and $0.9 million respectively, associated with the integration of our German operations.

Net Revenue

Net revenue increased for the three months ended December 31, 2004 to $103.9 million from $82.3 million for the three months ended December 31, 2003, an increase of $21.6 million or 26%. For the six months ended December 31, 2004 net revenue increased to $191.6 million from $155.2 million for the six months ended December 31, 2003, an increase of $36.4 million or 23%. Both the three month and six month increases in net revenue are primarily attributable to an increase in unit sales of our flow generators and masks. Sales also benefited from an appreciation of international currencies against the U.S. dollar (increasing sales by approximately $3.7 million and $6.8 million for the three and six month periods respectively).

Net revenue in North and Latin America increased for the three months ended December 31, 2004 to $52.3 million from $41.1 million for the three months ended December 31, 2003, an increase of $11.2 million or 27%. For the six months ended December 31, 2004, North and Latin America net revenue increased to $97.9 million from $75.7 million for the six months ended December 31, 2003, an increase of $22.2 million or 29%. We believe this growth primarily reflects increased public and physician awareness of sleep-disordered breathing.

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Management Discussion and Analysis of Financial Condition and Results of Operations

Net Revenue, Continued

Net revenue in international markets for the three months ended December 31, 2004 increased to $51.6 million from $41.2 million for the three months ended December 31, 2003, an increase of $10.4 million or 25%. For the six months ended December 31, 2004, net revenue in international markets increased to $93.7 million from $79.5 million for the six months ended December 31, 2003, an increase of $14.2 million or 18%. International sales growth for both the three-month and six-month periods ended December 31, 2004 reflect organic growth in the overall sleep-disordered breathing market and appreciation of international currencies against the U.S. dollar.

Revenue from sales of flow generators for the three months ended December 31, 2004 increased by 27% compared to the three months ended December 31, 2003 including increases of 21% in North and Latin America and 32% elsewhere. Revenue from sales of mask systems, motors and other accessories increased by 25% including increases of 32% in North and Latin America and 17% elsewhere, for the three months ended December 31, 2004 compared to the three months ended December 31, 2003. 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, 2004, revenue from sales of flow generators increased by 20% compared to the six months ended December 31, 2003; 20% in North and Latin America and 19% internationally. Revenue from sales of mask systems, motors and other accessories increased by 27%; 37% in North and Latin America and 16% internationally, for the six months ended December 31, 2004 compared to the six months ended December 31, 2003. 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, 2004 to $68.4 million from $52.4 million for the three months ended December 31, 2003, an increase of $16.0 million or 30%. Gross profit as a percentage of net revenue for the three months ended December 31, 2004 was 66%, compared to 64% for the three months ended December 31, 2003, reflecting a more favorable product mix (due to increased sales of higher margin masks and new product introductions) partially 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, 2004 gross profit increased to $124.8 million from $99.6 million in the same period of fiscal 2003, an increase of $25.2 million or 25%. Gross profit as a percentage of net revenue for the six-months ended December 31, 2004 was 65% compared to 64% for the six months ended December 31, 2003. This also reflects a more favorable product mix (due to increased sales of higher margin masks and new product introductions) partially offset by higher manufacturing labor and overhead costs resulting from a stronger Australian dollar against the U.S. dollar, as the majority of manufacturing labor and overhead costs are incurred in Australia.

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Management Discussion and Analysis of Financial Condition and Results of Operations

Selling, General and Administrative Expenses, Continued

Selling, general and administrative expenses increased for the three months ended December 31, 2004 to $33.5 million from $25.8 million for the three months ended December 31, 2003, an increase of $7.7 million or 30%. As a percentage of net revenue, selling, general and administrative expenses for the three months ended December 31, 2004 was 32% compared to 31% for the three months ended December 31, 2003. The increase in selling, general and administrative expenses was primarily due to an increase in the number of sales and administrative personnel and other expenses related to the increase in our sales. The increase in SG&A expenses was also attributable to appreciation of international currencies against the US dollar, which added approximately $1.4 million to our expenses as reported in U.S. dollars.

Selling, general and administrative expenses for the six months ended December 31, 2004 increased to $60.1 million from $48.0 million for the six months ended December 31, 2003, an increase of $12.1 million or 25%. As a percentage of net revenue selling, general and administration expenses of 31% for the six months ended December 31, 2004 was consistent with the six months ended December 31, 2003. The increase in selling, general and administrative expenses was primarily due to an increase in the number of sales and administrative personnel and other expenses related to the increase in our sales. The increase in 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.

Research and Development Expenses

Research and development expenses increased for the three months ended December 31, 2004 to $7.8 million from $6.8 million for the three months ended December 31, 2003, an increase of $1.0 million or 15%. As a percentage of net revenue, research and development expenses were 8% for the three-months ended December 31, 2004, consistent with the three months ended December 31, 2003. The increase in research and development expenses was due to increased salaries associated with an increase in personnel and increased charges for consulting fees, clinical trials and technical assessments incurred to facilitate development of new products. The increase also reflects an appreciation of the Australian dollar against the U.S. dollar, as the majority of research and development costs are incurred in Australian dollars. The appreciation of international currencies against the U.S. dollar added approximately $0.4 million to our research and development expenses as reported in U.S. dollars.

For the six-month period ended December 31, 2004 research and development expenses increased to $14.7 million from $12.8 million for the same period in fiscal 2003, an increase of $1.9 million or 15%. As a percentage of net revenue, research and development expenses were 8% for the six months ended December 31, 2004, consistent with the six-months ended December 31, 2003. 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 U.S. dollar, as the majority of research and development costs are incurred in Australian dollars. For the six months ended December 31, 2004, the appreciation of international currencies against the U.S. dollar added approximately $0.8 million to our research and development expenses as reported in U.S. dollars.

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Management Discussion and Analysis of Financial Condition and Results of Operations

Donations to Foundations

In the three-month period ended December 31, 2004 we committed a donation of $0.5 million to the ResMed Foundations. The foundations were established to promote awareness of and research into the serious medical consequences of untreated sleep disordered breathing.

Restructuring Expenses

Restructuring expenses incurred during the three months ended December 31, 2004 were $1.0 million ($0.6 million net of tax) and consisted of restructuring charges associated with our decision to integrate the separate operations of ResMed Germany and MAP into a single operating unit. This will involve the relocation of our ResMed Germany operation (currently located in Moenchengladbach) to Munich and integration of the back office functions including customer service, logistics and administration. It will also involve integration of the sales and marketing teams. The total restructure expenses including the expenses recognized in the current quarter, are estimated at $4.5 million ($2.7 million net of tax). We expect to incur the balance of the restructure expenses over the course of fiscal year 2005.

Other Income (Expense), Net

Other income, net for the three months ended December 31, 2004 was $0.5 million compared to $1.5 million for the three months ended December 31, 2003. 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. The decrease in other income, net was predominantly attributable to lower foreign currency exchange gains.

Other income, net for the six months ended December 31, 2004 was $0.2 million compared to income of $0.5 million for the six months ended December 31, 2003. The decrease in other income was predominantly attributable to lower net foreign currency exchange gains.

Income Taxes

Our effective income tax rate for the three months ended December 31, 2004 was 33.4% compared to 32.3% for the three months ended December 31, 2003 and for the six-month period ended December 31, 2004 increased to 33.0% from 32.0% for the six-month period ended December 31, 2003. The higher tax rate was primarily attributable to the geographical mix of taxable income, partially offset by the tax benefit associated with our restructuring expenses. We continue to benefit from the Australian corporate tax rate of 30%, as we generate a majority of our taxable income in Australia.

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ResMed Inc. and Subsidiaries

Management Discussion and Analysis of Financial Condition and Results of Operations

Business Acquisitions

On December 1, 2004, we acquired substantially all the assets of Resprecare BV, our Dutch distributor for consideration of $5.8 million in cash. Under the purchase agreement, we may also be required to make up to $1.4 million of additional future payments based on the achievement of certain performance milestones following the acquisition through to December 31, 2005, of which $0.6 million became payable at December 31, 2004 as a result of the successful achievement of a performance milestone. The acquisition has been accounted for as a purchase and accordingly, the results of operations of Resprecare have been included within our consolidated financial statements from December 1, 2004. An amount of $5.3 million, representing the excess of the purchase price over the fair value of preliminary identifiable net assets acquired of $1.1 million (comprising inventory and fixed assets), has currently been recorded as goodwill. We have engaged an independent third party to prepare a valuation of identifiable assets, including intangibles, associated with the Resprecare acquisition. As a result of this valuation, any value assigned to identifiable intangibles will be reclassified from goodwill and will be amortized over their estimated useful life. We expect to complete our review and allocation of the purchase price in the three-month period ending March 31, 2005.

Pro-forma financial information associated with the acquisition of Resprecare are not included as the effects would not be significant to the consolidated financial statements.

Liquidity and Capital Resources

As of December 31, 2004 and June 30, 2004, we had cash and cash equivalents and marketable securities available-for-sale of approximately $165.0 million and $140.9 million, respectively. Working capital was approximately $249.9 million and $217.2 million at December 31, 2004 and June 30, 2004 respectively.

Inventories at December 31, 2004 increased by $8.0 million or 14% to $64.9 million compared to December 31, 2003 inventories of $56.9 million. The percentage increase in inventories was less than the 26% increase in revenues in the three-month period ended December 31, 2004 compared to the three-month period ended December 31, 2003. The lower inventory growth reflects improved inventory management throughout the group with the majority of inventory increases being in raw materials to accommodate our increasing production volumes. Accounts receivable at December 31, 2004 were $76.9 million, an increase of $18.7 million or 32% over the December 31, 2003 accounts balance of $58.2 million. Account receivable days outstanding were 66 days for the quarter ended December 31, 2004, compared to 63 days for the quarter ended December 31, 2003.

During the six-month period ended December 31, 2004, we generated cash of $38.9 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, 2003 approximately $26.0 million of cash was generated from operations.

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RESMED INC AND SUBSIDIARIES

Management Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources, Continued

Capital expenditures for the six months ended December 31, 2004 and 2003 aggregated $16.0 million and $27.0 million, respectively. The majority of the expenditures for the three months ended December 31, 2004 related to the construction of our new sleep center, research and development and office facilities at our Campus in Norwest Business Park in Sydney, Australia, 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 $166.4 million at December 31, 2004 compared to $147.3 million at June 30, 2004.

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. We did not repurchase any convertible subordinated notes during the six-month period ended December 31, 2004 or during the year ended June 30, 2004.

In April 2002, we acquired a 30-acre site at Norwest Business Park, located in the northwest of Sydney, Australia. The site was acquired to develop a campus to accommodate our global manufacturing operations and research and development group as well as a sleep center and administration functions. The first building, our manufacturing facility, was completed in May 2004. We expect to complete our new sleep center in the first half of calendar 2005 and to complete our new research and development and office facilities in the second half of calendar year 2006. We estimate that the additional building costs for the new sleep center, research and development and office facilities will be approximately $52 million.

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, 2004, we repurchased 241,090 shares at a cost of $11.0 million. As at December 31, 2004, we have repurchased a total of 1,127,459 shares at a cost of $41.4 million. We may continue to repurchase shares of our common stock for cash in the open market, or in negotiated or block transactions, from time to time as market and business conditions warrant.

Details of contractual obligations at December 31, 2004 are as follows: