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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2005



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



For the transition period from  to



Commission file number: 000-33001



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NATUS MEDICAL INCORPORATED

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0154833                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



1501 Industrial
Road, San Carlos, CA 94070

(Address of principal executive offices) (Zip Code)



(650) 802-0400

(Registrants telephone number, including area code)



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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 and Exchange Act of 1934 during the preceding 12 months (or for 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 ̈No  x



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes ̈No  x



The number of issued and outstanding shares of the registrants Common Stock, $0.001 par value, as of November 3, 2005, was 17,944,175.



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##### Table of Contents

NATUS MEDICAL INCORPORATED



TABLE OF
CONTENTS



|           |  |                                                                                                                                                                          |  |         
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------
|           |  |                                                                                                                                                                          |  | Page No.
|PART I.    |  | FINANCIAL INFORMATION                                                                                                                                                    |  | 3       
|           |  |                                                                                                                                                                         
|Item 1.    |  | Financial Statements                                                                                                                                                     |  | 3       
|           |  |                                                                                                                                                                         
|           |  | Condensed Consolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004                                                                         |  | 3       
|           |  |                                                                                                                                                                         
|           |  | Condensed Consolidated Statements of Operations for the three months ended September 30, 2005 and 2004 and the nine months ended September 30, 2005 and 2004 (unaudited) |  | 4       
|           |  |                                                                                                                                                                         
|           |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (unaudited)                                                        |  | 5       
|           |  |                                                                                                                                                                         
|           |  | Notes to Condensed Consolidated Financial Statements                                                                                                                     |  | 6       
|           |  |                                                                                                                                                                         
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                    |  | 12      
|           |  |                                                                                                                                                                         
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                               |  | 31      
|           |  |                                                                                                                                                                         
|Item 4.    |  | Controls and Procedures                                                                                                                                                  |  | 32      
|           |  |                                                                                                                                                                         
|PART II.   |  | OTHER INFORMATION                                                                                                                                                        |  | 32      
|           |  |                                                                                                                                                                         
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                              |  | 32      
|           |  |                                                                                                                                                                         
|Item 5.    |  | Other Information                                                                                                                                                        |  | 33      
|           |  |                                                                                                                                                                         
|Item 6.    |  | Exhibits                                                                                                                                                                 |  | 33      
|           | 
|Signatures |  | 34                                                                                                                                                                      



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



NATUS MEDICAL INCORPORATED AND SUBSIDIARIES



UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)



|                                                                                                                        |  |                    |         |   |                      |   |         |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | -------------------- | - | ------- | -
|                                                                                                                        |  | September 30, 2005 |         |   | December 31, 2004(1) |  
|ASSETS                                                                                                                  |  |                    |         |   |                      |   |         |  
|Current assets:                                                                                                         |  |                    |         |   |                      |   |         |  
|Cash and cash equivalents                                                                                               |  | $                  | 28,167  |   |                      | $ | 16,239  |  
|Short-term investments                                                                                                  |  |                    | 13,647  |   |                      |   | 19,504  |  
|Accounts receivable, net of allowance for doubtful accounts of $449 and $472                                            |  |                    | 5,879   |   |                      |   | 6,640   |  
|Inventories                                                                                                             |  |                    | 3,888   |   |                      |   | 4,347   |  
|Prepaid expenses and other current assets                                                                               |  |                    | 465     |   |                      |   | 625     |  
|                                                                                                                        |  |                    |         |   |                      |   |         |  
|Total current assets                                                                                                    |  |                    | 52,046  |   |                      |   | 47,355  |  
|                                                                                                                        |  |                   
|Property and equipment, net                                                                                             |  |                    | 2,293   |   |                      |   | 2,503   |  
|Deposits and other assets                                                                                               |  |                    | 29      |   |                      |   | 32      |  
|Intangible assets                                                                                                       |  |                    | 6,328   |   |                      |   | 6,848   |  
|Goodwill                                                                                                                |  |                    | 3,351   |   |                      |   | 2,519   |  
|                                                                                                                        |  |                    |         |   |                      |   |         |  
|Total assets                                                                                                            |  | $                  | 64,047  |   |                      | $ | 59,257  |  
|                                                                                                                        |  |                    |         |   |                      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                    |  |                    |         |   |                      |   |         |  
|Liabilities:                                                                                                            |  |                    |         |   |                      |   |         |  
|Current liabilities:                                                                                                    |  |                    |         |   |                      |   |         |  
|Accounts payable                                                                                                        |  | $                  | 1,677   |   |                      | $ | 1,947   |  
|Accrued liabilities                                                                                                     |  |                    | 4,415   |   |                      |   | 4,303   |  
|Deferred revenue                                                                                                        |  |                    | 317     |   |                      |   | 279     |  
|                                                                                                                        |  |                    |         |   |                      |   |         |  
|Total current liabilities                                                                                               |  |                    | 6,409   |   |                      |   | 6,529   |  
|Long-term liabilities:                                                                                                  |  |                    |         |   |                      |   |         |  
|Deferred income taxes                                                                                                   |  |                    | 840     |   |                      |   |        |  
|                                                                                                                        |  |                    |         |   |                      |   |         |  
|Total liabilities                                                                                                       |  |                    | 7,249   |   |                      |   | 6,529   |  
|                                                                                                                        |  |                    |         |   |                      |   |         |  
|                                                                                                                        |  |                   
|Commitments and contingencies                                                                                           |  |                    |         |   |                      |   |         |  
|                                                                                                                        |  |                   
|Stockholders equity:                                                                                                   |  |                    |         |   |                      |   |         |  
|Common Stock, $0.001 par value, 120,000,000 shares authorized; shares issued and outstanding: 17,309,099 and 17,140,339 |  |                    | 90,136  |   |                      |   | 89,373  |  
|Accumulated deficit                                                                                                     |  |                    | (33,213 | ) |                      |   | (36,902 | )
|Accumulated other comprehensive income (loss)                                                                           |  |                    | (125    | ) |                      |   | 257     |  
|                                                                                                                        |  |                    |         |   |                      |   |         |  
|Total stockholders equity                                                                                              |  |                    | 56,798  |   |                      |   | 52,728  |  
|                                                                                                                        |  |                    |         |   |                      |   |         |  
|Total liabilities and stockholders equity                                                                              |  | $                  | 64,047  |   |                      | $ | 59,257  |  
|                                                                                                                        |  |                    |         |   |                      |   |         |  

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|(1) | Derived from the consolidated audited financial statements at December 31, 2004.
|--- | --------------------------------------------------------------------------------



The accompanying notes are an integral part of these condensed consolidated financial statements.



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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                                                               |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|------------------------------------------------------------------------------ |  | -------------------------------- | ------ | ---- | ------------------------------- | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                                                               |  | Three Months Ended September 30, |        |      | Nine Months Ended September 30, |       
|                                                                               |  | 2005                             |        | 2004 |                                 |        | 2005 |  | 2004 |       
|Revenue                                                                        |  | $                                | 10,551 |      | $                               | 9,011  |      |  | $    | 30,422 |  | $ | 25,980 |  
|Cost of revenue                                                                |  |                                  | 3,645  |      |                                 | 3,864  |      |  |      | 11,435 |  |   | 11,370 |  
|                                                                               |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Gross profit                                                                   |  |                                  | 6,906  |      |                                 | 5,147  |      |  |      | 18,987 |  |   | 14,610 |  
|                                                                               |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Operating expenses:                                                            |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Marketing and selling                                                          |  |                                  | 2,916  |      |                                 | 2,318  |      |  |      | 8,355  |  |   | 8,399  |  
|Research and development                                                       |  |                                  | 1,162  |      |                                 | 670    |      |  |      | 3,233  |  |   | 2,648  |  
|General and administrative                                                     |  |                                  | 1,521  |      |                                 | 1,180  |      |  |      | 4,071  |  |   | 5,204  |  
|Restructuring                                                                  |  |                                  |       |      |                                 |       |      |  |      |       |  |   | 776    |  
|Acquired IPR&D                                                                 |  |                                  |       |      |                                 | 550    |      |  |      |       |  |   | 550    |  
|Total operating expenses                                                       |  |                                  | 5,599  |      |                                 | 4,718  |      |  |      | 15,659 |  |   | 17,577 |  
|                                                                               |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Income (loss) from operations                                                  |  |                                  | 1,307  |      |                                 | 429    |      |  |      | 3,328  |  |   | (2,967 | )
|                                                                               |  |                                  |        |     
|Other income (expense) net                                                     |  |                                  | 319    |      |                                 | 88     |      |  |      | 787    |  |   | 180    |  
|                                                                               |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Income (loss) before provision for income taxes                                |  |                                  | 1,626  |      |                                 | 517    |      |  |      | 4,115  |  |   | (2,787 | )
|                                                                               |  |                                  |        |     
|Provision for income taxes                                                     |  |                                  | 111    |      |                                 | 65     |      |  |      | 426    |  |   | 66     |  
|                                                                               |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Income (loss) from continuing operations                                       |  |                                  | 1,515  |      |                                 | 452    |      |  |      | 3,689  |  |   | (2,853 | )
|                                                                               |  |                                  |        |     
|Discontinued operations                                                        |  |                                  |       |      |                                 | (305   | )    |  |      |       |  |   | (1,072 | )
|                                                                               |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Net income (loss)                                                              |  | $                                | 1,515  |      | $                               | 147    |      |  | $    | 3,689  |  | $ | (3,925 | )
|                                                                               |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Earnings (loss) per share:                                                     |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Basic:                                                                         |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Continuing operations                                                          |  | $                                | 0.09   |      | $                               | 0.03   |      |  | $    | 0.21   |  | $ | (0.17  | )
|Discontinued operations                                                        |  |                                  |       |      |                                 | (0.02  | )    |  |      |       |  |   | (0.06  | )
|                                                                               |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Net income (loss)                                                              |  | $                                | 0.09   |      | $                               | 0.01   |      |  | $    | 0.21   |  | $ | (0.23  | )
|                                                                               |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Diluted:                                                                       |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Continuing operations                                                          |  | $                                | 0.08   |      | $                               | 0.03   |      |  | $    | 0.20   |  | $ | (0.17  | )
|Discontinued operations                                                        |  |                                  |       |      |                                 | (0.02  | )    |  |      |       |  |   | (0.06  | )
|                                                                               |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Net income (loss)                                                              |  | $                                | 0.08   |      | $                               | 0.01   |      |  | $    | 0.20   |  | $ | (0.23  | )
|                                                                               |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Weighted average shares used in the calculation of net income (loss) per share |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Basic                                                                          |  |                                  | 17,292 |      |                                 | 17,011 |      |  |      | 17,224 |  |   | 16,740 |  
|Diluted                                                                        |  |                                  | 18,877 |      |                                 | 17,899 |      |  |      | 18,574 |  |   | 16,740 |  



The accompanying notes
are an integral part of these condensed consolidated financial statements.



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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                         |  |                                 |         |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                         |  | Nine Months Ended September 30, |        
|                                                                                         |  | 2005                            |         |   | 2004 |  
|Operating activities:                                                                    |  |                                 |         |   |      |   |         |  
|Net income (loss)                                                                        |  | $                               | 3,689   |   |      | $ | (3,925  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                 |         |   |      |   |         |  
|Accounts receivable provision                                                            |  |                                 | (22     | ) |      |   | 66      |  
|Inventory provision                                                                      |  |                                 | (278    | ) |      |   | (153    | )
|Depreciation and amortization                                                            |  |                                 | 1,556   |   |      |   | 1,339   |  
|Amortization of deferred stock compensation                                              |  |                                 |        |   |      |   | 383     |  
|Loss on disposal of assets                                                               |  |                                 |        |   |      |   | 632     |  
|Warranty provision                                                                       |  |                                 | (41     | ) |      |   | 95      |  
|Changes in operating assets and liabilities:                                             |  |                                 |         |   |      |   |         |  
|Accounts receivable                                                                      |  |                                 | 783     |   |      |   | (556    | )
|Inventories                                                                              |  |                                 | 737     |   |      |   | 1,562   |  
|Prepaid expenses and other current assets                                                |  |                                 | 160     |   |      |   | 17      |  
|Accounts payable                                                                         |  |                                 | (270    | ) |      |   | (519    | )
|Accrued liabilities                                                                      |  |                                 | 154     |   |      |   | 907     |  
|Deferred revenue                                                                         |  |                                 | 38      |   |      |   | 267     |  
|In process research and development                                                      |  |                                 |        |   |      |   | 550     |  
|                                                                                         |  |                                 |         |   |      |   |         |  
|Net cash provided by operating activities                                                |  |                                 | 6,506   |   |      |   | 665     |  
|                                                                                         |  |                                 |         |   |      |   |         |  
|Investing activities:                                                                    |  |                                 |         |   |      |   |         |  
|Acquisition of business, net of cash acquired                                            |  |                                 |        |   |      |   | (5,232  | )
|Purchase of property and equipment                                                       |  |                                 | (829    | ) |      |   | (1,457  | )
|Deposits and other assets                                                                |  |                                 | 13      |   |      |   | 5       |  
|Purchases of short-term investments                                                      |  |                                 | (24,866 | ) |      |   | (31,976 | )
|Sales of short-term investments                                                          |  |                                 | 30,703  |   |      |   | 37,190  |  
|Redemption of long-term investment                                                       |  |                                 |        |   |      |   | 341     |  
|                                                                                         |  |                                 |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                                      |  |                                 | 5,021   |   |      |   | (1,129  | )
|                                                                                         |  |                                 |         |   |      |   |         |  
|Financing activities:                                                                    |  |                                 |         |   |      |   |         |  
|Issuance of common stock                                                                 |  |                                 | 759     |   |      |   | 2,084   |  
|Purchase of treasury stock                                                               |  |                                 |        |   |      |   | (307    | )
|                                                                                         |  |                                 |         |   |      |   |         |  
|Net cash provided by financing activities                                                |  |                                 | 759     |   |      |   | 1,777   |  
|                                                                                         |  |                                 |         |   |      |   |         |  
|Exchange rate effect on cash and cash equivalents                                        |  |                                 | (358    | ) |      |   | (86     | )
|                                                                                         |  |                                 |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                                |  |                                 | 11,928  |   |      |   | 1,227   |  
|Cash and cash equivalents, beginning of period                                           |  |                                 | 16,239  |   |      |   | 9,435   |  
|                                                                                         |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                 |  | $                               | 28,167  |   |      | $ | 10,662  |  
|                                                                                         |  |                                 |         |   |      |   |         |  
|Supplemental disclosure of cash flow information:                                        |  |                                 |         |   |      |   |         |  
|Cash paid for interest                                                                   |  | $                               |        |   |      | $ | 3       |  
|                                                                                         |  |                                 |         |   |      |   |         |  
|Cash paid for income taxes                                                               |  | $                               | 121     |   |      | $ | 1       |  
|                                                                                         |  |                                 |         |   |      |   |         |  



The accompanying notes
are an integral part of these condensed consolidated financial statements.



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NATUS MEDICAL INCORPORATED



NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



1- Basis of Presentation



The accompanying interim condensed consolidated financial statements of Natus Medical Incorporated (Natus,
we, us, or the Company) have been prepared in accordance with accounting principles generally accepted in the United Sates of America (GAAP). The accounting policies followed in the preparation of the
interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 1 to the consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2004.



Interim financial reports are prepared
in accordance with the rules and regulations of the Securities and Exchange Commission and they do not include all of the information and notes required by GAAP for annual financial statements. The interim financial information is unaudited, but
reflects all normal adjustments that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods presented. Operating results for the three and nine
months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.



The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries; significant
intercompany transactions have been eliminated.



Comprehensive Income (Loss)



The following are
the components of comprehensive income (loss) (in thousands):



|                                                 |  |                                  |       |   |                                 |   |     |      |  |   |       |   |  |   |        |  
|------------------------------------------------ |  | -------------------------------- | ----- | - | ------------------------------- | - | --- | ---- |  | - | ----- | - |  | - | ------ | -
|                                                 |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|                                                 |  | 2005                             |       |   | 2004                            |   |     | 2005 |  |   | 2004  |  
|Income (loss)                                    |  | $                                | 1,515 |   |                                 | $ | 147 |      |  | $ | 3,689 |   |  | $ | (3,925 | )
|Unrealized gain on available-for-sale securities |  |                                  | (24   | ) |                                 |   | 24  |      |  |   | (20   | ) |  |   | 92     |  
|Foreign currency translation adjustment          |  |                                  | 242   |   |                                 |   | (83 | )    |  |   | (360  | ) |  |   | (86    | )
|                                                 |  |                                  |       |   |                                 |   |     |      |  |   |       |   |  |   |        |  
|Comprehensive income (loss)                      |  | $                                | 1,733 |   |                                 | $ | 88  |      |  | $ | 3,319 |   |  | $ | (3,919 | )
|                                                 |  |                                  |       |   |                                 |   |     |      |  |   |       |   |  |   |        |  



2- Inventories



Inventories consisted of (in thousands):



|                                |  |                    |       |                   |   |      
|------------------------------- |  | ------------------ | ----- | ----------------- | - | -----
|                                |  | September 30, 2005 |       | December 31, 2004
|Raw materials and subassemblies |  | $                  | 1,671 |                   | $ | 1,968
|Finished goods                  |  |                    | 2,217 |                   |   | 2,379
|                                |  |                    |       |                   |   |      
|Total                           |  | $                  | 3,888 |                   | $ | 4,347
|                                |  |                    |       |                   |   |      



The balances at
September 30, 2005 and December 31, 2004 reflect valuation reserves of $263,000 and $543,000, respectively, related primarily to specific inventory that has been written down to its net realizable value.



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NATUS MEDICAL INCORPORATED



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)



3- Reserve For Product Warranties



The Company provides a one-year warranty on all medical device products.
The Company also sells extended service agreements on its medical device products. Service for domestic customers is provided by a Company-owned service center that performs all service, repair and calibration services. Service for international
customers is provided by a combination of Company-owned facilities and third-party vendors on a contract basis.



The Company has accrued a warranty reserve, included in accrued liabilities on the accompanying balance sheets, for the expected future costs of servicing
products during the initial one-year warranty period. Amounts are added to the reserve on a per-unit basis by reference to historical experience in honoring warranty obligations. On new products, where the Company does not have historical experience
of the cost to honor warranties, additions to the reserve are based on a combination of factors including the standard cost of the product and other judgments, such as the degree to which the product incorporates new technology. As warranty costs
are incurred, they are relieved from the reserve.



Activity in the warranty
reserve during the three and nine months ended September 30, 2005 and 2004 consisted of (in thousands):



|                                                                     |  |                                  |     |   |                                 |   |     |      |  |   |      |   |  |   |      |  
|-------------------------------------------------------------------- |  | -------------------------------- | --- | - | ------------------------------- | - | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                                     |  | Three Months Ended September 30, |     |   | Nine Months Ended September 30, |  
|                                                                     |  | 2005                             |     |   | 2004                            |   |     | 2005 |  |   | 2004 |  
|Balance - beginning of period                                        |  | $                                | 223 |   |                                 | $ | 200 |      |  | $ | 253  |   |  | $ | 298  |  
|Aggregate changes in accruals related to new warranties              |  |                                  | 44  |   |                                 |   | 42  |      |  |   | 117  |   |  |   | 92   |  
|Aggregate reductions for repairs under warranty                      |  |                                  | (54 | ) |                                 |   | (39 | )    |  |   | (157 | ) |  |   | (124 | )
|Aggregate net changes for accruals related to preexisting warranties |  |                                  |    |   |                                 |   |    |      |  |   |     |   |  |   | (63  | )
|                                                                     |  |                                  |     |   |                                 |   |     |      |  |   |      |   |  |   |      |  
|Balance - end of period                                              |  | $                                | 213 |   |                                 | $ | 203 |      |  | $ | 213  |   |  | $ | 203  |  
|                                                                     |  |                                  |     |   |                                 |   |     |      |  |   |      |   |  |   |      |  



4- Supplemental Income Statement Schedule



Other income (expense) net consisted of (in thousands):



|                                 |  |                                  |     |      |                                 |     |      |  |      |     |  |   |      |  
|-------------------------------- |  | -------------------------------- | --- | ---- | ------------------------------- | --- | ---- |  | ---- | --- |  | - | ---- | -
|                                 |  | Three Months Ended September 30, |     |      | Nine Months Ended September 30, |    
|                                 |  | 2005                             |     | 2004 |                                 |     | 2005 |  | 2004 |    
|Other income (expense) net:      |  |                                  |     |      |                                 |     |      |  |      |     |  |   |      |  
|Investment income                |  | $                                | 314 |      | $                               | 117 |      |  | $    | 750 |  | $ | 310  |  
|Foreign currency gain (loss)     |  |                                  |    |      |                                 |    |      |  |      |    |  |   |     |  
|Other income (expense) net       |  |                                  | 5   |      |                                 | (29 | )    |  |      | 37  |  |   | (130 | )
|                                 |  |                                  |     |      |                                 |     |      |  |      |     |  |   |      |  
|Total other income (expense) net |  | $                                | 319 |      | $                               | 88  |      |  | $    | 787 |  | $ | 180  |  
|                                 |  |                                  |     |      |                                 |     |      |  |      |     |  |   |      |  



5- Basic and Diluted Net Income (Loss) Per Common Share



The Company computes net income (loss) per share in accordance with Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings per Share.Basic net income (loss) per share is based upon the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is based upon the weighted average number of common shares
outstanding and dilutive common stock equivalents outstanding during the period. Common stock equivalents are options under the Companys stock option plans and are calculated under the treasury stock method. Common equivalent shares from
unexercised stock options are excluded from the computation when there is a loss, as their effect is anti-dilutive, or if the exercise price of such options is greater than the average market price of the stock for the period.



7



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##### Table of Contents

NATUS MEDICAL INCORPORATED



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)



Basic and Diluted Net Income (Loss) Per Common Share - continued



For the three and nine months ended September 30, 2005, common stock
equivalents of approximately 1,585,000 shares and 1,349,000 shares, respectively, were included in the weighted average shares outstanding used to calculate diluted income per share. For both the three and nine months ended September 30, 2005,
common stock equivalents of approximately 3,000 shares and 607,000 shares, respectively, outstanding as of September 30, 2005 were excluded from the calculation of diluted income per share because the exercise price of such options was greater
than the average market price of the stock during the periods. For the three months ended September 30, 2004, common stock equivalents of approximately 888,000 shares were included in the weighted average shares outstanding used to calculate
diluted income per share. For the nine months ended September 30, 2004, common stock equivalents of approximately 770,000 shares were not used to calculate diluted net loss per share because of their anti-dilutive effect.



6- Stock-Based Compensation



The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board No. 25, Accounting for Stock Issued to Employees, as interpreted by Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for
Transactions Involving Stock Compensation  an Interpretation of APB Opinion No. 25. The Company accounts for stock-based awards to non-employees in accordance with SFAS No. 123, Accounting for Stock-Based Compensation and
Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.



Under SFAS No. 123, the value of each option is estimated on the date of
grant using an option pricing model, such as Black-Scholes, which was developed for use in estimating the value of freely traded options. Similar to other option pricing models, it requires the input of highly subjective assumptions, including stock
price volatility. Because (1) the Companys employee stock options have characteristics significantly different from those of traded options and (2) changes in the subjective input assumptions can materially affect the estimated fair
value, managements opinion is that existing option pricing models (including Black-Scholes) do not provide a reliable measure of the fair value of the Companys employee stock options.



In December 2004, the FASB issued SFAS No. 123(R), Share-Based
Payment, requiring all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the consolidated financial statements based on their fair values. This standard includes two
transition methods. Upon adoption, the Company will be required to use either the modified prospective or the modified retrospective transition method. Under the modified prospective method, awards that are granted, modified, or settled after the
date of adoption should be measured and accounted for in accordance with SFAS No. 123(R). Unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS No. 123
except that amounts must be recognized in the income statement. Under the modified retrospective approach, the previously-reported amounts are restated (either to the beginning of the year of adoption or for all periods presented) to reflect the
SFAS No. 123(R) amounts in the income statement. The adoption of SFAS No. 123(R) by the Company on January 1, 2006 is expected to have a material impact on our consolidated results of operations. The Company is currently evaluating
the impact of this standard and its transitional alternatives.



8



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##### Table of Contents

NATUS MEDICAL INCORPORATED



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)



6- Stock Based Compensation (continued)



Had compensation expense for the Companys stock
option awards been determined based on the fair value method at grant dates using the Black-Scholes option pricing model, consistent with the fair value method of SFAS No. 123, the Company would have recorded additional compensation expense and
its net income (loss) and earnings (loss) per share would have been equal to the pro forma amounts presented in the following table:



|                                                                                                                |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|                                                                                                                |  | 2005                             |       |   | 2004                            |   |       | 2005 |  |   | 2004   |  
|Net income (loss), as reported                                                                                  |  | $                                | 1,515 |   |                                 | $ | 147   |      |  | $ | 3,689  |   |  | $ | (3,925 | )
|Add: Stock based employee compensation included in reported results, net of related tax effects                 |  |                                  |      |   |                                 |   | 5     |      |  |   |       |   |  |   | 362    |  
|Less: Compensation expense for stock options determined under the fair value method, net of related tax effects |  |                                  | (563  | ) |                                 |   | (558  | )    |  |   | (1,348 | ) |  |   | (1,605 | )
|                                                                                                                |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Pro forma net income (loss)                                                                                     |  | $                                | 952   |   |                                 | $ | (406  | )    |  | $ | 2,341  |   |  | $ | (5,168 | )
|                                                                                                                |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Basic earnings (loss) per share:                                                                                |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|As reported                                                                                                     |  | $                                | 0.09  |   |                                 | $ | 0.01  |      |  | $ | 0.21   |   |  | $ | (0.23  | )
|                                                                                                                |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                       |  | $                                | 0.06  |   |                                 | $ | (0.02 | )    |  | $ | 0.14   |   |  | $ | (0.31  | )
|                                                                                                                |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Diluted earnings (loss) per share:                                                                              |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|As reported                                                                                                     |  | $                                | 0.08  |   |                                 | $ | 0.01  |      |  | $ | 0.20   |   |  | $ | (0.23  | )
|                                                                                                                |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                       |  | $                                | 0.05  |   |                                 | $ | (0.02 | )    |  | $ | 0.13   |   |  | $ | (0.31  | )
|                                                                                                                |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  

7- Segment, Customer and Geographic Information



The Company currently operates in two reportable segments. The Medical
Devices and Related Supplies segment consists of all of the Companys product lines exclusive of the Neometrics newborn screening data management systems product line, which constitutes the Software Systems segment.



With the exception of our Neometrics newborn screening data management
systems, the nature of the Companys products and production processes as well as type of customers and distribution methods are consistent among all product lines. The Neometrics data management systems product line is differentiated from our
other product lines in that it is not a medical device or related supply product and is not currently regulated by the FDA, and its revenue is recognized under the percentage of completion basis. The Company acquired the Neometrics newborn screening
data management systems product line in July 2003.



The
accounting policies of the Companys reportable segments are the same as those presented in Note 1 to the consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2004.The Company allocates resources to, and evaluates the performance of, its segments based on operating income or loss, excluding material items that the Company considers non-recurring to the Companys operations. For the three and nine
months ended September 30, 2004, $550,000 of acquired in-process research and development was excluded from the determination of segment operating income and is described as non-recurring below. In addition, for the nine months
ended September 30, 2004, restructuring charges totaling $776,000 and costs associated with the departure of the Companys former chief executive officer totaling $870,000 were excluded from the determination of segment operating income
and are described as non-recurring below.



Direct revenue and
costs of each segment are allocated to the segment, including depreciation expense and amortization of intangible assets. For management reporting purposes, corporate expenses are charged predominantly to the Medical Devices and Related Supplies
segment. The assets of our segments are directly managed by those segments and include accounts receivable, inventory, certain fixed assets, intangible assets, goodwill and certain other assets. Assets that are not allocated specifically to the
segments primarily include cash and cash equivalents, short-term investments and deferred tax assets. Other than movements between cash and other components of working capital, there were no significant changes in the assets of our reportable
segments during the three and nine months ended September 30, 2005. There are no significant intersegment transactions between the Companys reportable segments.



9



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##### Table of Contents

|                                           |  |                                  |        |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|------------------------------------------ |  | -------------------------------- | ------ | - | ------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                           |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                           |  | 2005                             |        |   | 2004                            |   |       | 2005 |  |   | 2004   |  
|Revenue:                                   |  |                                  |        |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Medical devices and related supplies       |  | $                                | 10,070 |   |                                 | $ | 8,193 |      |  | $ | 28,821 |   |  | $ | 23,684 |  
|Software systems                           |  |                                  | 481    |   |                                 |   | 818   |      |  |   | 1,601  |   |  |   | 2,296  |  
|                                           |  |                                  |        |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Total consolidated revenue                 |  | $                                | 10,551 |   |                                 | $ | 9,011 |      |  | $ | 30,422 |   |  | $ | 25,980 |  
|                                           |  |                                  |        |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Operating income (loss):                   |  |                                  |        |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Medical devices and related supplies       |  | $                                | 1,419  |   |                                 | $ | 923   |      |  | $ | 3,708  |   |  | $ | (233   | )
|Software systems                           |  |                                  | (112   | ) |                                 |   | 56    |      |  |   | (380   | ) |  |   | (538   | )
|                                           |  |                                  |        |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Total segment operating income (loss)      |  |                                  | 1,307  |   |                                 |   | 979   |      |  |   | 3,328  |   |  |   | (771   | )
|Non-recurring charges                      |  |                                  |       |   |                                 |   | (550  | )    |  |   |       |   |  |   | (2,196 | )
|                                           |  |                                  |        |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Total consolidated operating income (loss) |  | $                                | 1,307  |   |                                 | $ | 429   |      |  | $ | 3,328  |   |  | $ | (2,967 | )
|                                           |  |                                  |        |   |                                 |   |       |      |  |   |        |   |  |   |        |  



The following is
revenue and long-lived asset information by geographic region (in thousands):



|                  |  |                                  |        |                                 |   |       |  |      |        |  |   |       
|----------------- |  | -------------------------------- | ------ | ------------------------------- | - | ----- |  | ---- | ------ |  | - | ------
|                  |  | Three Months Ended September 30, |        | Nine Months Ended September 30,
|                  |  | 2005                             |        | 2004                            |   | 2005  |  | 2004
|Revenue:          |  |                                  |        |                                 |   |       |  |      |        |  |   |       
|United States     |  | $                                | 6,661  |                                 | $ | 7,016 |  | $    | 19,162 |  | $ | 19,817
|Foreign Countries |  |                                  | 3,890  |                                 |   | 1,995 |  |      | 11,260 |  |   | 6,163 
|                  |  |                                  |        |                                 |   |       |  |      |        |  |   |       
|Totals            |  | $                                | 10,551 |                                 | $ | 9,011 |  | $    | 30,422 |  | $ | 25,980
|                  |  |                                  |        |                                 |   |       |  |      |        |  |   |       



|                  |  |                    |        |              |   |       
|----------------- |  | ------------------ | ------ | ------------ | - | ------
|                  |  | September 30, 2005 |        | Dec 31, 2004
|Asset Balances:   |  |                    |        |              |   |       
|United States     |  | $                  | 6,296  |              | $ | 6,681 
|Foreign Countries |  |                    | 4,836  |              |   | 5,189 
|                  |  |                    |        |              |   |       
|Totals            |  | $                  | 11,132 |              | $ | 11,870
|                  |  |                    |        |              |   |       



Revenue from sales to
distributors is attributed to the country in which the distributor is domiciled. During the three and nine months ended September 30, 2005, no single customer or foreign country contributed to more than 10% of revenue.



8- Restructuring Reserve



In June 2004, the Company recorded a restructuring charge of $776,000
relating to an operating cost reduction plan that resulted in an immediate reduction of 25 employees and the accrual of associated employee termination-related benefits of $629,000, primarily for severance compensation and salary continuation. The
remainder of the charge was associated with the liquidation of the Companys subsidiary in Japan, which was initiated in June 2004, including the write-down of capital assets, inventory and prepaid expenses of $80,000, facilities-related costs
of $38,000, and accrued professional-service fees related to the liquidation totaling $29,000. Employees involved in the workforce reduction were not required to render additional services to the Company and their employment with the Company ceased
on June 30, 2004. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, these costs were accrued as incurred. The Company did not record any additional restructuring costs in the three
and nine months ended September 30, 2005, and believes it will not record any additional restructuring charges related to the June 2004 cost reduction plan. As of September 30, 2005, substantially all of the obligations related to the
restructuring have been satisfied.



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##### Table of Contents

Following is a reconciliation of the beginning and ending restructuring reserve balances related to the
June 2004 operating cost reduction plan:



|                              |  |                      |     |                  |   |                   |  |   |                            |   |  |   |  
|----------------------------- |  | -------------------- | --- | ---------------- | - | ----------------- |  | - | -------------------------- | - |  | - | -
|                              |  | Balance Dec 31, 2004 |     | Expenses Accrued |   | Paid/ Written Off |  |   | Balance September 30, 2005
|Restructuring Costs:          |  |                      |     |                  |   |                   |  |   |                            |   |  |   |  
|Employee termination benefits |  | $                    | 175 |                  | $ |                  |  | $ | (175                       | ) |  | $ | 
|                              |  |                      |     |                  |   |                   |  |   |                            |   |  |   |  



9- Indemnification



The Company has
entered into an indemnification agreement with each of its directors and officers. The indemnification agreements and our certificate of incorporation and bylaws require us to indemnify our directors and officers to the fullest extent permitted by
Delaware law for certain events or occurrences arising as a result of their serving in such capacities. The Company has a directors and officers liability insurance policy that limits the Companys exposure and enables it to recover
a portion of any amounts paid resulting from the indemnification of its directors and officers. In addition, the Company enters into indemnification agreements with other parties in the ordinary course of business. In some cases the Company has
obtained liability insurance providing coverage that limits its exposure for these other indemnified matters. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. The Company
believes the estimated fair value of these indemnification agreements is minimal and has not recorded a liability for these agreements as of September 30, 2005.



10 - Business Combinations



As previously reported, in September 2004, the Company purchased for $5.7 million in cash, including direct costs of the acquisition, all
the common stock of privately held Fischer-Zoth Diagnosesysteme GmbH and affiliated entities (Fischer-Zoth), as well as intangible assets held individually by the owners of Fischer-Zoth.



The following table summarizes the final fair value of the net assets acquired in the acquisition:



Net assets acquired are as follows (in thousands):



|                                    |  |   |      
|----------------------------------- |  | - | -----
|Cash                                |  | $ | 376  
|Other current assets                |  |   | 789  
|Property, plant and equipment       |  |   | 84   
|Intangible assets                   |  |   | 3,660
|Goodwill                            |  |   | 2,155
|In process research and development |  |   | 470  
|                                    |  |   |      
|Total assets acquired               |  |   | 7,534
|                                    |  |   |      
|Current liabilities                 |  |   | 917  
|Deferred tax liability (long-term)  |  |   | 840  
|                                    |  |   |      
|Total liabilities acquired          |  |   | 840  
|                                    |  |   |      
|Net purchase amount                 |  | $ | 5,777
|                                    |  |   |      



During the three months ended
September 30, 2005, the Company recorded an adjustment to the previously recorded purchase accounting of $840,000 to record a deferred tax liability associated with the acquisition of Fischer-Zoth, with an associated increase in goodwill.



Intangible assets included in the purchase allocation consist of: (1)
developed technology of $2.0 million allocated to the core OAE technology of Fischer-Zoth that has been assigned an economic life of 10 years, (2) U.S. and foreign patents with a value of $1.3 million that have been assigned an economic life of 15
years, and (3) Trademarks valued at $300,000 that have been assigned an economic life of 15 years. A deferred tax liability $840,000 has been recorded because the developed technology and trademarks are amortized for book purposes, while they are
not deductible for German tax purposes. The developed technology and trademarks are being amortized over their economic lives using a graded method of amortization, and the patents are being amortized over their economic lives using the
straight-line method of amortization. It is expected that little of the $1.3 million of goodwill will be deductible for tax purposes. The deferred tax liability will be reduced over the lives of the related intangible assets.



11- Subsequent Events



On October 16, 2005, the Company, Bio-logic Systems Corp.
(Bio-logic) and Summer Acquisition Corporation, a wholly owned subsidiary of the Company (Merger Sub), entered into an Agreement and Plan of Merger, pursuant to which Merger Sub is to merge with and into Bio-logic with
Bio-logic surviving and becoming a wholly owned subsidiary of the Company.



Pursuant to the Agreement and Plan of Merger, each outstanding share of Bio-logic common stock will convert into the right to receive $8.77 in cash. Each outstanding option to acquire Bio-logic common stock will be
cancelled, with the holder of the option receiving, for each share covered by the option, an amount equal to the excess (if any) of $8.77 over the exercise price per share of the option. The acquisition of the shares and options (the
acquisition) is conditioned upon, among other things, approval by Bio-logics stockholders and other customary conditions. The Company currently expects that the acquisition will be consummated in early January 2006. The Company estimates
that the total consideration to be paid in acquiring the common stock and options will be approximately $66 million.



The agreement requires that in certain circumstances one party to the agreement must pay to the other party a termination fee of $2.0 million.



In anticipation of the acquisition, the Company sold 600,000 shares of the
Companys common stock on October 18, 2005 in a private placement for $11.88 per share, the then current trading price for the shares at the time that the Company and the purchasing fund agreed in principle to such sale.



In anticipation of the acquisition, the Company secured from Wells Fargo Bank
a commitment for a $10 million senior secured credit facility. The loan will be fully amortizing over four years and bear interest at LIBOR plus 2.5 percent; however, the loan will have no prepayment penalties. The loan will contain various
financial covenants including minimum liquidity, as well as fixed-charge, debt, and tangible net worth ratios. The Company expects to draw on the commitment when, and if, the acquisition is consummated.



11



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##### Table of Contents

ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Natus®, AABR®, AOAE®, ALGO®, ALGO DataBook®, 70/40®, Cochlea-Scan®, Echo-Screen®, Ear Couplers® Flexicoupler®, Jelly Tab®, Jelly Button®, MiniMuffs® and neoBLUE® are registered trademarks of Natus. Convert2Natus, DataLink, EchoLink, Natus Elite, Neometrics, Web Electronic Birth Page (Web-EBP), and Accuscreen
are non-registered trademarks of Natus. Solutions for Newborn CareSMis a non-registered service mark of Natus.



Overview



The following Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) supplements the MD&A in the Companys Annual Report on Form 10-K for the year ended December 31, 2004, and presumes that readers have read or have access to the discussion and
analysis in the Companys Annual Report. Managements discussion and analysis should be read in conjunction with the Companys condensed consolidated financial statements and accompanying footnotes, the discussion below of certain
risks and uncertainties, and the cautionary forward-looking statements at the end of this section. MD&A includes the following sections:



| |  |  | Our Business. A general description of the Companys business;
| | - |  | --------------------------------------------------------------



| |  |  | 2005 Third Quarter Overview. A summary of key information concerning the financial results for the three and nine months ended September 30, 2005;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Application of Critical Accounting Policies. A discussion of the accounting policies that are most important to the portrayal of the Companys financial condition and
results of operations and require critical judgments and estimates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Results of Operations. An analysis of the Companys results of operations for the periods presented in the financial statements;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | Liquidity and Capital Resources. An analysis of capital resources, sources and uses of cash, investing and financing activities, off-balance sheet arrangements, contractual
obligations and interest rate hedging;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Recently Issued Accounting Pronouncements. A recap of recently issued accounting pronouncements that may have an impact upon the Companys results of operations,
financial position or cash flows; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cautionary Information Regarding Forward-Looking Statements. Cautionary information about forward-looking statements and a description of certain risks and uncertainties that
could cause the Companys actual results to differ materially from the Companys historical results or the Companys current expectations about future periods.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Business



We develop, manufacture and market products for the detection, treatment,
monitoring and tracking of common medical disorders in newborns. Currently, our principal product lines consist of our ALGO screening products for newborn hearing screening, our Echo-Screen OAE device for hearing screening in newborns and hearing
monitoring in young children and adults, our neoBLUE LED line of Phototherapy devices (neoBLUE phototherapy devices) for the treatment of newborn jaundice, our Neometrics newborn screening data management systems (MSDS), our
MiniMuffs Neonatal Noise Attenuators (MiniMuffs) products for the attenuation of noise for newborns, and the Nascor product line of heatshields and oxygen delivery hoods.



Our revenue is generated almost exclusively from the sale of supplies and services, which are generally recurring, and
related devices and systems. Supplies and services revenue results from sales of supplies for our ALGO and Echo-Screen medical devices, the Nascor product line, software maintenance agreements for our Neometrics data management systems, as well
extended service agreements on our medical devices. Devices and systems revenue results from the sale of our ALGO, Echo-Screen and neoBLUE medical devices, and installation of our Neometrics newborn screening data management systems.



12



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##### Table of Contents

We sell our products through a direct sales force in the United States (U.S.) and the United
Kingdom (U.K.), and to distributors who sell our products in over 80 other countries. We intend to continue expansion of our international operations because we believe international markets represent a significant growth opportunity.
International sales made to distributors are characterized by lower gross profits due to the discount from our list prices the distributors receive. International sales accounted for 37% of our sales during the nine months ended September 30,
2005, 24% of our revenue during 2004, 22% of our revenue during 2003, and 15% of our revenue during 2002. We anticipate that international revenue will increase as a percent of revenue in the future.



As of December 31, 2004, we had total federal and state net operating
loss carry forwards of approximately $18.6 million and $6.7 million, respectively, available to reduce future taxable income. If not utilized to offset taxable income in future periods, these net operating loss carryforwards will expire in various
amounts beginning in 2005 and continuing through 2023. If we have net losses in the future, we may not be able to utilize some or all of our net operating loss carryforwards before they expire. In addition, U.S. income tax law imposes limitations on
the amount of net operating loss carry forwards we can use in any given year and on the ability to use net operating loss carry forwards if we experience a more than 50% change in ownership during any three-year period.



2005 Third Quarter Overview



During the three months ended September 30, 2005, Natus recognized
$10.6 million of revenue, an increase of $1.6 million or 17% from $9.0 million in the comparable quarter of the previous year. Revenue from sales outside the U.S. increased 95% to $3.9 million for the 2005 period, compared with $2.0 million in the
third quarter 2004.



Our gross profit improved to 65.4% for the
three months ended September 30, 2005, compared with 57.1% for the third quarter of 2004. For the three months ended September 30, 2005, total operating expenses increased by $881,000, or 18.7%, to $5.6 million, compared with $4.7 million
for the third quarter of 2004.



Net income for the three months
ended September 30, 2005 was $1.5 million, or $0.08 per diluted share, compared to $147,000, or $0.01 per share, reported in the same period in the prior year.



Application of Critical Accounting Policies



We prepare our financial statements in accordance with generally accepted accounting principles (GAAP). In so doing, we must often make
estimates and use assumptions that can be subjective, and consequently our actual results could differ from those estimates. For any given individual estimate or assumption we make, there may also be other estimates or assumptions that are
reasonable.



We believe that the following critical accounting
policies require the use of significant estimates, assumptions, and judgments. The use of different estimates, assumptions, and judgments could have a material affect on the reported amounts of assets, liabilities, revenue, expenses, and related
disclosures as of the date of the financial statements and during the reporting period.



Revenue Recognition



We recognize revenue, net of discounts, from sales of medical devices and supplies, including sales to distributors, when a purchase order has been received, when title transfers (generally upon shipment), when the
selling price is fixed or determinable, and when collection of the resulting receivable is reasonably assured. Terms of sales to distributors are EXW, reflecting that goods are shipped ex works, in which title and risk of loss are
assumed by the distributor at the shipping point. Revenue from our Neometrics newborn screening data management systems, which are generally highly configurable, is recognized on the percentage of completion basis over the development and
implementation period of the associated installation, which typically ranges from six to eighteen months. Revenue from extended service and maintenance agreements, for both medical devices and data management systems, is recognized ratably over the
service period. Advance payments from customers are recorded as deferred revenue and recognized as revenue as otherwise described above. We generally do not provide rights of return on products. We accept trade-ins of our own and competitive medical
devices. Trade-ins are recorded as a reduction of the replacement medical device sale. Provisions are made for initial standard warranty obligations of one year, and post-sale training and customer support at the time the related revenue is
recognized.



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More than 90% of the hospitals in the U.S. are members of group purchasing organizations
(GPOs), which negotiate volume purchase prices for member hospitals, group practices, and other clinics. We have entered into agreements with several GPOs that typically contain preferential terms for the GPO and its members, including
provisions for some, if not all, of the following:



| |  |  | Negotiated pricing for all group members;
| | - |  | -----------------------------------------



| |  |  | Volume discounts and other preferential terms on their members direct purchases from us;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Promotion of Natus products by the GPO to its members;
| | - |  | -------------------------------------------------------



| |  |  | Payment of marketing fees by Natus to the GPO, usually based on purchasing experience of group members; and
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | Non-recourse cancellation provisions.
| | - |  | -------------------------------------



GPOs do not generally purchase products from us. Hospitals, group practices and other clinics that are members of a GPO purchase products directly from us
under the terms negotiated by the GPO. Negotiated pricing and discounts are recognized as a reduction of the selling price of our products rather than an expense. Revenue from sales to members of GPOs is otherwise consistent with our general revenue
recognition policies as previously described.



We must exercise
judgment when assessing the sufficiency of our allowance for estimated uncollectible accounts receivable. Our estimates are based on our historical collection experience within the markets in which we operate as well as assessment of our average
accounts receivable aging days and any other specific information of which we may be aware, such as bankruptcy filings or liquidity problems of our customers. Any future determination that our allowance for estimated uncollectible accounts
receivable is understated could result in increased operating expense and reduce our results of operations.



At September 30, 2005 our deferred revenue under extended service and maintenance agreements, and billings in excess of recognized revenue on
percentage-of-completion contracts was $317,000. Other advance payments from customers were not material at September 30, 2005. Our allowance for estimated uncollectible accounts receivable was $449,000 at September 30, 2005.



Inventory is carried at the lower of cost or market
value



As a medical device manufacturer, we may
be exposed to a number of factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to: technological changes in our markets, competitive pressures
in products and prices, and our own introduction of new product lines.



We regularly evaluate our ability to realize the value of our inventory based on a combination of factors, including historical usage rates, forecasted sales, product life cycles, and market acceptance of new products. When we identify
inventory that is obsolete or in excess of anticipated usage we write it down to realizable salvage value or provide for inventory valuation reserves. The estimates we use in projecting future product demand may prove to be incorrect. Any future
determination that our inventory is overvalued could result in increases to our cost of sales and decreases to our operating margins and results of operations.



At September 30, 2005, we had inventories with a carrying value of $3.9 million.



Carrying value of intangible assets



We amortize intangible assets with finite lives over their useful lives. Any
future changes that would limit their useful lives or any determination that these assets are carried at amounts greater than their fair value could result in additional charges. We carry goodwill and any other intangible assets with indefinite
lives at original cost but do not amortize them. Any future determination that these assets are carried at amounts greater than their fair value could result in additional charges, which could significantly impact our operating results.



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##### Table of Contents

We test our goodwill and indefinite-lived intangible assets for impairment at least annually as of
October 1st of each year; this assessment is also performed whenever there is a change in circumstances that indicates the carrying value of these assets may be impaired. Similarly, we test our definite-lived intangible assets for impairment
whenever changes in circumstances indicate the carrying value of these assets may be impaired. Impairment indicators include, but are not limited to, net book value as compared to market capitalization, significant negative industry and economic
trends, and significant underperformance relative to historical and projected future operating results. Impairment is considered to have occurred when the estimated undiscounted future cash flows related to the asset are less than its carrying
value. Estimates of future cash flows involve consideration of many factors including the marketability of new products, product acceptance and lifecycle, competition, appropriate discount rates, and operating margins. If these estimates or their
related assumptions change in the future, we may be required to record impairment charges, which could significantly impact our operating results.



At September 30, 2005 we had goodwill and other intangible assets with a net carrying value of $8.9 million.



Liability for product warranties



Our medical device products are covered by standard one-year product
warranty plans. A liability has been established for the expected cost of servicing our medical device products during these service periods. We base the liability in part upon our historical experience; however, estimates of the costs to honor our
warranties are often difficult to determine due to uncertainty surrounding the extent to which new products will require servicing and the costs that will be incurred to service those products. Until we have historical experience of the cost to
honor warranties on new products, we base additions to the reserve on a combination of factors including the standard cost of the product, experience with similar products, and other judgments, such as the degree to which the product incorporates
new technology. The estimates we use in projecting future product warranty costs may prove to be incorrect. Any future determination that our product warranty reserves are understated could result in increases to our cost of sales and reductions in
our operating margins and results of operations.



At
September 30, 2005 our reserve for product warranties was $213,000.



Valuation allowance for deferred tax assets



We record a valuation allowance against our deferred tax assets, which result primarily from net operating loss and credit carry forwards that expire over
time, and temporary differences between book and tax results that will reverse in the future. In evaluating whether we would more likely than not recover these deferred tax assets, we have not assumed any future taxable income in the tax
jurisdictions in which we operate. To the extent we establish a valuation allowance, or increase this allowance in a period, we include an offsetting expense within the tax provision in the consolidated statement of operations. Future income
generation in these tax jurisdictions could lead to the reversal of these valuation allowances and additional income recognition.



15



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##### Table of Contents

Results of Operations



The following table sets forth, for the periods indicated, selected consolidated statements of operations data as a percentage of total revenue. Our
historical operating results are not necessarily indicative of the results for any future period.



|                                                |  |                                  |   |  |                                 |   |  |       |   |  |       |   
|----------------------------------------------- |  | -------------------------------- | - |  | ------------------------------- | - |  | ----- | - |  | ----- | --
|                                                |  | Three Months Ended September 30, |   |  | Nine Months Ended September 30, |  
|                                                |  | 2005                             |   |  | 2004                            |   |  | 2005  |   |  | 2004  |   
|Revenue                                         |  | 100.0                            | % |  | 100.0                           | % |  | 100.0 | % |  | 100.0 | % 
|Cost of revenue                                 |  | 34.6                             |   |  | 42.9                            |   |  | 37.6  |   |  | 43.8  |   
|                                                |  |                                  |   |  |                                 |   |  |       |   |  |       |   
|Gross profit                                    |  | 65.4                             |   |  | 57.1                            |   |  | 62.4  |   |  | 56.2  |   
|                                                |  |                                  |   |  |                                 |   |  |       |   |  |       |   
|Operating expenses:                             |  |                                  |   |  |                                 |   |  |       |   |  |       |   
|Marketing and selling                           |  | 27.6                             |   |  | 25.7                            |   |  | 27.5  |   |  | 32.3  |   
|Research and development                        |  | 11.0                             |   |  | 7.5                             |   |  | 10.6  |   |  | 10.2  |   
|General and administrative                      |  | 14.4                             |   |  | 13.1                            |   |  | 13.4  |   |  | 20.0  |   
|Restructuring                                   |  |                                 |   |  |                                |   |  |      |   |  | 3.0   |   
|Acquired IPR & D                                |  |                                 |   |  | 6.1                             |   |  |      |   |  | 2.1   |   
|                                                |  |                                  |   |  |                                 |   |  |       |   |  |       |   
|Total operating expenses                        |  | 53.0                             |   |  | 52.4                            |   |  | 51.5  |   |  | 67.6  |   
|                                                |  |                                  |   |  |                                 |   |  |       |   |  |       |   
|Income (loss) from operations                   |  | 12.4                             |   |  | 4.7                             |   |  | 10.9  |   |  | (11.4 | ) 
|                                                |  |                                  |   | 
|Other income (expense) net                      |  | 3.0                              |   |  | 1.0                             |   |  | 2.6   |   |  | 0.7   |   
|                                                |  |                                  |   |  |                                 |   |  |       |   |  |       |   
|Income (loss) before provision for income taxes |  | 15.4                             |   |  | 5.7                             |   |  | 13.5  |   |  | (10.7 | ) 
|                                                |  |                                  |   | 
|Provision for income taxes                      |  | 1.0                              |   |  | 0.7                             |   |  | 1.4   |   |  | 0.3   |   
|                                                |  |                                  |   |  |                                 |   |  |       |   |  |       |   
|Income (loss) from continuing operations        |  | 14.4                             |   |  | 5.0                             |   |  | 12.1  |   |  | (11.0 | ) 
|                                                |  |                                  |   | 
|Discontinued operations                         |  |                                 |   |  | (3.4                            | ) |  |      |   |  | (4.1  | ) 
|                                                |  |                                  |   |  |                                 |   |  |       |   |  |       |   
|Net income (loss)                               |  | 14.4                             | % |  | 1.6                             | % |  | 12.1  | % |  | (15.1 | )%
|                                                |  |                                  |   |  |                                 |   |  |       |   |  |       |   



Three and Nine Months Ended
September 30, 2005 and 2004



Consolidated Results



Our revenue increased $1.6 million, or 17%, to $10.6
million in the three months ended September 30, 2005 from $9.0 million in the same period in 2004. Our revenue increased $4.4 million, or 17%, to $30.4 million in the nine months ended September 30, 2005 compared to the same period in
2004.



Revenue from devices and systems increased 45% to $4.4
million, and 44% to $13.0 million, in the three and nine months ended September 30, 2005, respectively, compared to the same periods in 2004. In the three and nine-month periods ended September 30, 2005, the increase was primarily
attributable to sales of our Echo-Screen device, which Natus gained through its acquisition of Fischer-Zoth in September 2004, of $1.1 million and $3.7 million, respectively, with the remainder coming from sales of our neoBLUE line of phototherapy
devices, partially offset by a decrease in revenue from installations of our Neometrics metabolic screening database systems, and in the nine-month period by lower sales of our Algo devices and supplies.



Revenue from supplies and services increased to $6.0 million and $17.1
million in the three and nine months ended September 30, 2005, respectively, representing increases of 3% compared to the same periods in 2004. In both periods in 2005 the increase was primarily attributable to sales of disposable supplies used
with our Echo-Screen device. Sales of supplies used with our ALGO hearing-screening devices were flat in the three months ended September 30, 2005 and 2004, and down 3% in the nine-month period of 2005 compared to the comparable period in 2004.



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In the three and nine months ended September 30, 2005, revenue from sales outside the U.S. increased
by 95% to $3.9 million, and 83% to $11.3 million, respectively, compared to the same periods in 2004. Sales of our Echo-Screen device contributed to a significant portion of this revenue increase; however, international sales of our Algo
hearing-screening products and our neoBLUE line of photothereapy devices also increased.



During the three months ended September 30, 2005 and 2004, no sales to a single customer accounted for greater than 10% of revenue.



Cost of revenue includes the cost of materials, personnel expenses, packaging, shipping costs, other manufacturing costs,
warranty expenses, and technology license fees. Our cost of revenue decreased $219,000 to $3.6 million in the three months ended September 30, 2005, from $3.9 million in the same period in 2004. For the three months ended September 30,
2005 and 2004, respectively, cost of revenue as a percent of total revenue was 35% and 43%. For the nine months ended September 30, 2005 and 2004, respectively, cost of revenue was 38% and 44%. The improvement in the cost of revenue in the 2005
periods was attributable to reductions in materials costs, and the cost of revenue as a percent of total revenue was also favorably affected by our spreading of our manufacturing overhead which is largely fixed. In addition, during the three months
ended September 30, 2005, we benefited from a partial recovery from a supplier of costs associated with a cable replacement program we initiated in the second quarter of 2005. The partial recovery reduced our cost of revenue by $180,000 in the
three months ended September 30, 2005, net of additional costs incurred during the quarter, resulting in a reduction of our cost of revenue of 1.7%. We believe that we will incur no additional costs related to the cable replacement program.



For the three months ended September 30, 2005 total
operating expenses increased 19%, or $880,000, to $5.6 million, compared with $4.7 million for the third quarter of 2004. Costs associated with the operations of our Fischer-Zoth subsidiary and ongoing costs of complying with the Sarbanes-Oxley Act,
among other factors contributed to a $1.4 million increase in operating costs. The increase was partially offset by $550,000 of acquired in-process research and development recorded in the third quarter of 2004 that did not recur in 2005. Taken
together, these factors led to an $880,000 increase in operating expenses in the 2005 period.



For the nine months ended September 30, 2005, total operating expenses decreased 11% to $15.7 million, compared with $17.6 million for the comparable period in 2004. In June 2004 the Company initiated an
operating cost reduction plan (2004 operating cost reduction plan) that resulted in the immediate reduction of 25 employees, and we also initiated a plan to liquidate our Japanese subsidiary. The effect of the 2004 operating cost
reduction plan resulted in decreases in our operating costs in the nine-months ended September 30, 2005, compared to the same period in 2004. In addition, we incurrred costs in 2004 that did not recur in 2005 related to the restructuring, the
write-off of acquired in-process research and development, and costs associated with the departure of the Companys former chief executive officer.



Marketing and selling expenses consist primarily of salaries, commissions, travel, promotional, and advertising costs. Marketing and selling expenses
increased $598,000, or 26%, to $2.9 million in the three months ended September 30, 2005, from $2.3 million in the same period in 2004. Marketing and selling expenses decreased $44,000, or 1%, to $8.3 million in the nine months ended
September 30, 2005 from $8.4 million in the same period in 2004. In both the three- and nine-month periods in 2005, compared to the same periods in 2004, we benefited from the 2004 operating cost reduction plan, primarily in reduced salaries,
outside services, and promotional activities. In the three-month period in 2005, these reductions were offset by the marketing and selling costs of our Fischer-Zoth subsidiary.



Research and development expenses consist of engineering costs to develop new products, enhance existing products, and
validate the design of new or enhanced products. Research and development expenses increased $492,000, or 73% to $1.2 million in the three months ended September 30, 2005, compared to $670,000 in the same period in 2004. Research and
development expenses increased $585,000, or 22%, to $3.2 million in the nine months ended September 30, 2005, compared to $2.6 million reported in 2004. The increases in the 2005 periods were primarily attributable to research and development
costs of our Fischer-Zoth subsidiary and ongoing outside service costs associated with a development project for a point-of-care device that we expect to release in 2007. Savings resulting from the 2004 operating cost reduction plan partially offset
these increases.



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General and administrative expenses consist of corporate, finance, information technology, human
resources, administrative, and legal expenses. Our general and administrative expenses increased by $341,000, or 29%, to $1.5 million for the three months ended September 30, 2005, compared to $1.2 million in the same period in 2004. General
and administrative expenses decreased by $1.1 million, or 22%, to $4.1 million for the nine months ended September 30, 2005, compared to $5.2 million reported in the same period in 2004. The increase in the three months ended September 30,
2005 was primarily attributable to costs associated with our Fischer-Zoth subsidiary and ongoing costs of complying with the Sarbanes-Oxley Act. During the nine months ended September 30, 2004, the Company recorded $870,000 of costs associated
the departure of the Companys former chief executive officer; this cost did not recur in the 2005 period, which contributed to the decrease in costs for the nine-month period in 2005.



Other income (expense) net consists of investment income and net capital
gains and losses from our investment portfolio, net currency exchange gains and losses, and other miscellaneous income and expenses. Other income (expense) net was $319,000 in the three months ended September 30, 2005, compared to $88,000 for
the same period in 2004. Other income (expense) net was $787,000 in the nine months ended September 30, 2005, compared to $180,000 for the same period in 2004. The increase in other income (expense) net in the nine-month period in 2005 was
primarily related to higher investment income of $750,000 in the 2005 period, compared to $310,000 in the same period in 2004, which was primarily attributable to higher short-term interest rates in the 2005 period. Foreign currency gains and losses
were not material in either the three or nine month periods in 2005 or 2004. Our foreign currency gains and losses result primarily from fluctuations in local currency equivalents of the U.S. dollar in the U.K. and Europe. Unrealized translation
gains and losses from our consolidated foreign subsidiaries are not included in net income, but are reported as a component of other comprehensive income.



We recorded income tax expense of $111,000 and $426,000 during the three and nine months ended September 30, 2005, respectively, compared to $65,000
and $66,000 for the three and nine months ended September 30, 2004. We have significant U.S. Federal net operating loss carryforwards. However, our tax loss carryforwards do not offset taxable income for purposes of the Federal corporate
alternative minimum tax, for which there is an effective tax rate of 2.5% on our U.S. operating income. Income tax expense related to our international operations was also higher in the 2005 periods.



Segment Results



We currently operate in two reportable segments: our Medical Devices and
Related Supplies segment and our Software Systems segment. Non-recurring costs, if applicable, are excluded from the discussion and analysis of the results of our reportable segments. For the three and nine months ended September 30, 2004,
$550,000 of acquired in-process research and development was excluded from the determination of segment operating income. In addition, for the nine months ended September 30, 2004, restructuring charges totaling $776,000 and costs associated
with the departure of the Companys former chief executive officer totaling $870,000 were excluded from the determination of segment operating income. Those costs have been excluded from the following discussion and analysis. Additional
financial information about our segments is set forth in Note 7  Segment, Customer, and Geographic Information, of our consolidated financial statements contained in this report.



Medical Devices and Related Supplies Segment



Revenue from our Medical Devices and Related Supplies segment increased by
$1.9 million, or 23%, to $10.1 million in the three months ended September 30, 2005, from $8.2 million in the same period in 2004. Revenue from our Medical Devices and Related Supplies segment increased by $5.1 million, or 22%, to $28.8 million
in the nine months ended September 30, 2005, from $23.7 million in the same period in 2004. For the three and nine month periods in 2005, 62% and 72% of the increase, respectively, were attributable to sales of the Echo-Screen OAE device, which
we gained through our acquisition of Fischer-Zoth, with the remainder coming from sales of the Companys neoBLUE line of phototherapy devices for the treatment of newborn jaundice, partially offset by a decrease in sales of the Companys
line of ALGO hearing-screening devices.



The medical device and
related supplies segment reported income from operations of $1.4 million in the three months ended September 30, 2005, including $417,000 of depreciation and amortization costs, compared to a income of $923,000 in the same period in 2004. The
segment reported income from operations of $3.7 million in the nine months ended September 30, 2005, including $1.3 million of depreciation and amortization costs, compared to a loss of $233,000 in the same period in 2004. The results in 2005
were favorably impacted by cost reductions resulting from the restructuring initiatives implemented in mid-2004 and the contribution of Fischer-Zoth, which we acquired in September 2004.



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##### Table of Contents

Software Systems Segment



Revenue from our Software Systems segment decreased by $337,000, or 41%, to $481,000 in the three months ended
September 30, 2005, from $818,000 in 2004. Revenue from the segment decreased by $695,000 or 30%, to $1.6 in the nine months ended September 30, 2005, from $2.3 million in 2004. We derive revenue in our Software Systems segment from
systems installations and maintenance of those installations. Revenue from systems installations represented 26% and 23%, respectively, of total segment revenue in the three and nine months ended September 30, 2005, compared to 28% and 42% in
the comparable periods in 2004. Revenue from systems installations is generally non-recurring and may show more variance from period to period than revenue from maintenance, which is largely recurring.



The Software Systems segment reported a loss from operations of $112,000 in
the three months ended September 30, 2005, including $75,000 of depreciation and amortization costs, compared to a profit from operations of $56,000 in the same period in 2004. The segment reported a loss from operations of $380,000 in the nine
months ended September 30, 2005, including $216,000 of depreciation and amortization costs, compared to a loss from operations of $538,000 in the same period in 2004. Several factors contributed to the unfavorable results in 2004, including the
transitioning of several customers from DOS-based to Windows-based operating systems and development work on several MSDS systems that was not profitable because of contractual obligations. We believe the above-mentioned factors were substantially
resolved as of December 31, 2004. We expect that revenue from installations of our Neometrics newborn screening data management system may fluctuate from quarter to quarter. For the three and nine month periods in 2005, operating results
reflected the current lack of any significant development projects. The reduction in revenue in the nine-month period in 2005 was partially offset by cost control measures implemented in mid-2004, which reduced costs associated with salaries and
outside services in the 2005 period.



Liquidity and Capital
Resources



As of September 30, 2005, we had cash,
cash equivalents, and short-term investments of $41.8 million, stockholders equity of $56.8 million, and working capital of $45.6 million, compared with cash, cash equivalents, and short-term investments of $35.7 million, stockholders
equity of $52.7 million, and working capital of $40.8 million as of December 31, 2004.



Net cash provided by operating activities was $6.5 million for the nine months ended September 30, 2005 and $665,000 for the same period in 2004. Cash provided by operations in the 2005 period was favorably
impacted by our results of operations, as we reported net income of $3.7 million in the 2005 period compared to a loss of $3.9 million in the same period in 2004. Additional cash was provided primarily by reductions in accounts receivable and
inventories of $1.5 million.



Our short-term investments are
primarily available-for-sale securities with maturities of less than one year, and fluctuations between cash equivalents and short-term investments are often attributable to investment decisions. Excluding purchases and sales of short-term
investments and the redemption of a long-term investment in 2004, cash used in investing activities was $816,000 and $6.7 million in the nine months ended September 30, 2005 and 2004, respectively. We purchased property and equipment of
$829,000 and $1.5 million in the nine months ended September 30, 2005 and 2004, respectively. Additionally we acquired Fischer-Zoth in the 2004 period for $5.2 million, net of cash acquired in the acquisition. We had no material capital
expenditure commitments at September 30, 2005.



We
generated cash through financing activities primarily from purchases of our stock pursuant to our stock option plans and our employee stock purchase plan, in the amount of $759,000 and $2.1 million in the nine months ended September 30, 2005
and 2004, respectively. We repurchased $307,000 of Natus stock in the 2004 period under the terms of the transition agreement between the Company and its former chief executive officer.



Our future liquidity and capital requirements will depend on numerous factors, including the:



| |  |  | Amount and timing of revenue;
| | - |  | -----------------------------



| |  |  | Extent to which our existing and new products gain market acceptance;
| | - |  | ---------------------------------------------------------------------



| |  |  | Extent to which we make acquisitions;
| | - |  | -------------------------------------



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| |  |  | Cost and timing of product development efforts and the success of these development efforts;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Cost and timing of marketing and selling activities; and
| | - |  | --------------------------------------------------------



| |  |  | Availability of borrowings under line of credit arrangements and the availability of other means of financing.
| | - |  | --------------------------------------------------------------------------------------------------------------



In the normal course of business, we enter into obligations and commitments
that require future contractual payments. The commitments primarily result from firm, noncancellable purchase orders placed with contract vendors that manufacture some of the components used in our medical devices and related disposable supply
products, as well as commitments for leased office, manufacturing, and warehouse facilities.



On October 16, 2005, the Company and Bio-logic Systems Corp. entered into an Agreement and Plan of Merger, pursuant to which Bio-logic will become a wholly owned subsidiary of the Company. Pursuant to the
Agreement and Plan of Merger, each outstanding share of Bio-logic common stock will convert into the right to receive $8.77 in cash. Each outstanding option to acquire Bio-logic common stock will be cancelled, with the holder of the option
receiving, for each share covered by the option, an amount equal to the excess (if any) of $8.77 over the exercise price per share of the option. We estimate that the total consideration to be paid in acquiring the common stock and options
(the acquisition) will be approximately $66 million and we expect to complete the acquisition in early January 2006. We will fund the acquisition through a combination of our available cash and cash on the Bio-logic balance sheet at the
time of the acquisition. In addition, we expect to draw $10 million on a senior secured credit facility with Wells Fargo Bank. The credit facility will contain various financial covenants including minimum liquidity, as well as fixed-charge, debt,
and tangible net worth ratios. The Company expects to draw on the commitment when, and if, the acquisition is consummated. If we consummate the acquisition, we expect that our liquidity will be adversely impacted and we will be dependent upon our
ability to generate positive cash flow from operations.



Recent Accounting
Pronouncements



In December 2004, the FASB issued SFAS
No. 123(R), Share-Based Payment. On March 29, 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB 107), which provides guidance regarding the adoption of SFAS
No. 123(R) and disclosures in Managements Discussion and Analysis. On April 14, 2005, the SEC issued Release 2005-57, announcing their decision to delay the effective date of SFAS 123(R) from June 30, 2005 to January 1,
2006. SFAS 123(R) will be effective for the first quarter of the Companys fiscal year beginning January 1, 2006.



SFAS No. 123(R) includes two transition methods. Upon adoption, we will be required to use either the modified prospective or the modified
retrospective transition method. Under the modified prospective method, awards that are granted, modified, or settled after the date of adoption should be measured and accounted for in accordance with SFAS No. 123(R). Unvested equity-classified
awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS No. 123 except that amounts must be recognized in the income statement. Under the modified retrospective approach, the
previously-reported amounts are restated (either to the beginning of the year of adoption or for all periods presented) to reflect the SFAS No. 123(R) amounts in the income statement. Our adoption of SFAS No. 123(R) on January 1, 2006
is expected to have a material impact on our consolidated results of operations. We are currently evaluating the impact of this standard and its transitional alternatives.



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Risk Factors



On October 17, 2005 we announced that we had entered into an agreement to acquire Bio-Logic Systems Corp. for cash in a transaction wherein Bio-Logic Systems
would become our wholly owned subsidiary (the acquisition). There are numerous risks associated with our having entered into this agreement



We cannot assure you that all conditions to the acquisition will be completed and the acquisition consummated. The acquisition is subject to the
satisfaction of closing conditions, including the approval of Bio-Logics stockholders, and we cannot assure you that the acquisition will be completed. In the event the acquisition is not completed, we may be subject to many risks, including
the costs related to the proposed acquisition, such as legal, accounting and advisory fees, which must be paid even if the acquisition is not completed, and in certain circumstances, the possible payment to Bio-Logic of a termination fee of $2
million.



The completion of the acquisition may not result in
improved operating results for us, or in our achieving a superior financial condition superior to that which we would have achieved had we not completed the acquisition. The acquisition could fail to produce the benefits that we anticipate, or could
have other adverse effects that we currently do not foresee. In addition, some of the assumptions that we have relied upon, such as the achievement of operating synergies, may not be realized. In this event, the acquisition could result in reduced
earnings of Natus as compared to the per-share earnings that would have been achieved by Natus if the acquisition had not occurred.



We will use virtually all of our existing cash resources to complete the acquisition, and will also incur indebtedness under a new bank facility for a
portion of the purchase price. This usage of cash will have an adverse impact on our liquidity, and will force us to place more reliance on cash flow from operations for our liquidity. If our cash flow from operations is not sufficient for our
needs, our business could be adversely affected. If we are required to seek additional external financing to support our need for cash, we may not have access to financing on terms that are acceptable to us, or at all. Alternatively, we may feel
compelled to access additional financing on terms that are dilutive to existing holders of our common stock or that include covenants that restrict our business, or both.



We will enter into a senior secured borrowing facility to obtain a portion of the funds needed to complete the acquisition.
This loan will cause us to incur interest charges for such time as the loan is outstanding. In addition, the loan will contain various covenants by us that will directly or indirectly restrict our ability to engage in activities that we may
otherwise believe to be in the best interest of the company. The loan will be secured by the assets of the company, and this security interest may also negatively effect our flexibility to engage in financing or other activities in future periods.



If we fail to successfully integrate the operations of Natus
and Bio-Logic, we may not realize the potential benefits of the acquisition. If the acquisition is completed, the integration of the operations of Natus and Bio-Logic will be a time consuming and expensive process and may disrupt our operations if
it is not completed in a timely and efficient manner. Bio-Logics primary offices are located in Mundelein, Illinois and it also has employees and contractors in, among other places, Israel and Poland. The geographical distance between
Bio-Logics and our facilities may further adversely affect our ability to integrate these operations. If this integration effort is not successful, our results of operations could be harmed, employee morale could decline, key employees could
leave, and customers could cancel existing orders or choose not to place new ones. In addition, we may not achieve the synergies or other benefits of the acquisition that we anticipate. We may encounter the following difficulties, costs, and delays
involved in integrating these operations:



| |  |  | Failure to successfully manage relationships with customers and other important business partners;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Failure of customers to continue using the products and services of the combined company;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | The loss of key employees;
| | - |  | --------------------------



| |  |  | Challenges encountered in managing larger, more geographically dispersed operations;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Diversion of the attention of management from other ongoing business concerns; and
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Potential impairment charges incurred to write down the carrying amount of intangible assets generated as a result of the acquisition.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



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We have a history of losses, variable quarterly results, and seasonality in the sale of our products, and may not
maintain profitability in the future



In recent years, and
continuing through the end of 2004, we incurred significant annual net losses and we may incur net losses in the future. As of December 31, 2004, we had accumulated deficits of $36.9 million. Additionally, our revenue and operating results have
varied significantly from quarter to quarter in the past and may continue to fluctuate in the future. The following are among the factors that could cause our revenue, operating results, and margins to fluctuate significantly from quarter to
quarter:



| |  |  | Budgeting cycle of our customers, particularly government entities, in the U.S. and internationally;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Size and timing of specific sales, such as large purchases of our devices and systems or our supplies and services by government agencies or hospital systems;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Maintaining the continuity of our contractual arrangements with GPOs;
| | - |  | ---------------------------------------------------------------------



| |  |  | Trade-in allowances or other concessions in connection with the introduction of new products or improvements to existing products;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Length and unpredictability of our sales cycle, particularly for our Neometrics products which may have sales cycles that are longer or different from the sales cycles of our other
products with which we are more familiar; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Marked changes caused by rapidly evolving technology for our products.
| | - |  | ----------------------------------------------------------------------



In addition, we experience seasonality in our revenue. For example, our sales typically decline from our fourth fiscal quarter to our first fiscal
quarter, due to patterns in the capital budgeting and purchasing cycles of our current and prospective customers, many of which are government agencies. We may also experience declining sales in the third fiscal quarter due to summer holiday and
vacation schedules. We anticipate that we will continue to experience these seasonal fluctuations, which may lead to fluctuations in our quarterly operating results. Many of these factors are beyond our control, and we believe that you should not
rely on our results of operations for interim periods as an indication of our expected results in any future period.



We anticipate that our expenses may increase substantially in the foreseeable future as we:



| |  |  | Continue to invest in research and development to enhance our hearing-screening and phototherapy product lines, and other products and technologies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Develop additional applications for our current technology;
| | - |  | -----------------------------------------------------------



| |  |  | Increase our marketing and selling activities, particularly outside the U.S.;
| | - |  | -----------------------------------------------------------------------------



| |  |  | Continue to increase the size and number of locations of our customer support organization, particularly outside the U.S.; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | Develop additional infrastructure and hire required management and other employees to keep pace with our growth
| | - |  | ---------------------------------------------------------------------------------------------------------------



As a result of these possible increased expenses, we may need to generate
significantly higher revenue to maintain profitability. We cannot be certain that we will be able to sustain profitability in the future.



We have relied, and expect to continue to rely, on sales of our ALGO hearing screening product family for the majority of our revenue, and a decline in sales of these
products could cause our revenue to fall



We expect that
the revenue from our ALGO hearing screening product family will continue to account for a majority of our revenue for at least the next year. Any factors adversely affecting the pricing of our ALGO hearing screening devices and related supplies, or
demand for our ALGO hearing screening products, including physician acceptance or the selection of competing products, could cause our revenue to decline and our business to suffer.



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In the United States, we sell our products in a mature market that is intensely competitive



We face competition from other companies in all of our product lines. Our
competitors range from small privately-held companies to multinational corporations, and their product offerings vary in scope and breadth. We do not believe that any single competitor is dominant in any of our product lines.



We derive a significant portion of our revenue from the sale of disposable
supplies that are used with our screening devices. In the United States, we sell our supply products in a mature market. Because these products can generate high margins, we expect that our products, particularly our hearing screening supply
products, will face increasing competition, including competitors offering lower prices, which could have an adverse affect on our revenue and margins.



We believe that our primary competitive strength relates to the functionality and reliability of our products. Our competitors may have competitive
advantages and they may be able to devote greater resources to the development, promotion and sale of their products. Consequently, we may need to increase our efforts, and related expenses for research and development, to maintain or improve our
position.



We expect recurring sales to our existing customers
to generate a majority of our revenue in the future, and if our existing customers do not continue to purchase products from us, our revenue may decline.



Our business could be harmed if our competitors establish cooperative relationships with large medical device vendors or rapidly acquire market share through industry
consolidation



Large medical device vendors may acquire or
establish cooperative relationships with our current competitors. We expect that the medical device industry will continue to consolidate. New competitors or alliances among competitors may emerge and rapidly acquire significant market share, which
would harm our business and financial prospects.



Our operating results may
decline if we do not succeed in developing, acquiring, and marketing additional products or improving our existing products



We intend to develop and acquire additional products and technologies for the detection, treatment, monitoring and tracking of common medical conditions
in infants and young children. Developing and acquiring new products, and improving our existing products, to meet the needs of our current and future customers requires significant investments in research and development. If we fail to successfully
sell new products and update our existing products, our operating results may decline as our existing products reach the end of their commercial life cycles.



In order to accurately recognize revenue on long-term development and implementation contracts associated with our Neometrics newborn screening data management
systems, we must be able to accurately estimate the total cost of completing a project. In arriving at these estimates, we must make assumptions about future costs that may prove to be inaccurate



We recognize revenue from our Neometrics newborn screening data management
systems, which are generally highly configurable, on the percentage of completion basis over the development and implementation period of the associated installation. The development and implementation period typically ranges from six to 18 months.
In order to determine percentage of completion, we must be able to accurately estimate the total cost of the development and implementation process. If our estimates of the future costs to be incurred are understated, our future gross profit would
be negatively impacted, and the impact could be material to our results of operations.



If we fail in our efforts to educate clinicians, government agency personnel, and third-party payors on the effectiveness of our products we will not achieve future sales growth



It is critical to the success of our sales efforts that we educate a
sufficient number of clinicians, hospital administrators, and government agencies about our products and the costs and benefits of their use. The commercial success of our products depends upon clinician, government agency, and third-party payor
confidence in the economic and clinical benefits of our products as well as their comfort with the efficacy, reliability, sensitivity, and specificity of our products. We believe that clinicians will not use our products unless they determine, based
on published peer-reviewed journal articles and experience, that our products provide an accurate and cost-effective alternative to other



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means of testing or treatment. For instance, there are currently alternative neonatal hearing screening products, which
may be less expensive or may be quicker on a per test basis than our ALGO devices. With respect to our neoBLUE phototherapy product line, initial data from clinical research suggests that the devices may be more effective in treating
hyperbilirubinemia than other currently marketed phototherapy products. We cannot be certain that clinical studies will produce results that are favorable to our neoBLUE products. Clinicians are traditionally slow to adopt new products, testing
practices, and clinical treatments, partly because of perceived liability risks and the uncertainty of third-party reimbursement. If more clinicians, government agencies, and hospital administrators do not adopt our products, we may not maintain
profitability. Factors that may affect the medical communitys acceptance of our products, some of which are beyond our control, include:



| |  |  | Publication of clinical study results that challenge the cost-effectiveness of our ALGO, Echo-Screen, and neoBLUE products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Changing governmental and physician group guidelines;
| | - |  | -----------------------------------------------------



| |  |  | Performance, quality, price, and total cost of ownership of our products relative to other such products;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Our ability to maintain and enhance our existing relationships and to form new relationships with leading physicians, physician organizations, hospitals, state laboratory personnel,
and third-party payors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in state and third-party payor reimbursement policies for our products; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Adoption of federal, state and foreign laws mandating or requiring universal newborn hearing and metabolic screening.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



Our plan to expand our international operations will result in increased costs and is
subject to numerous risks; if our efforts are not successful, this could harm our business



The domestic market for our ALGO hearing-screening products is mature and we plan to expand our international sales and marketing efforts to increase
sales of our products in foreign countries. Following our acquisition of Fischer-Zoth in September 2004, sales of our Echo-Screen OAE device have contributed to a significant portion of our sales outside the U.S. We have only begun over the past
three years to significantly develop our distributor and direct sales force outside the U.S. We currently maintain a direct sales force only in the U.K., and increasing our direct sales presence in the U.K. or elsewhere will require us to incur
higher personnel and operating costs that may not result in additional revenues. A higher percentage of our sales to international distributors could also impair our revenues due to discount prices that we customarily make available to distributors.
We may not realize corresponding growth in revenue from growth in international sales, due to the higher costs of sales outside of the U.S. Even if we are able to successfully expand our international selling efforts, we cannot be certain that we
will be able to create or increase demand for our products outside of the U.S. Our international operations are subject to other risks, which include:



| |  |  | Impact of possible recessions in economies outside the U.S.;
| | - |  | ------------------------------------------------------------



| |  |  | Political and economic instability, including instability related to war and terrorist attacks in the U.S. and abroad;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Contractual provisions governed by foreign law, such as local law rights to sales commissions by terminated distributors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Dependence of demand for our products on health care spending by foreign governments;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Greater difficulty in accounts receivable collection and longer collection periods;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Difficulties of staffing and managing foreign operations;
| | - |  | ---------------------------------------------------------



| |  |  | Reduced protection for intellectual property rights in some countries and potentially conflicting intellectual property rights of third parties under the laws of various foreign
jurisdictions;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Difficulty in obtaining and maintaining foreign regulatory approval; and
| | - |  | ------------------------------------------------------------------------



| |  |  | Attitudes by clinicians, and cost reimbursement policies, towards use of disposable supplies that are potentially unfavorable to our business.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



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If guidelines mandating universal newborn screening do not continue to develop in foreign countries and governments do
not mandate testing of all newborns as we anticipate, or if those guidelines have a long phase-in period, our revenues may not grow



We estimate that approximately 90% to 95% of the children born in the U.S. are currently being tested for hearing prior to discharge from the hospital. To
date, there has been only limited adoption of newborn hearing screening prior to hospital discharge by foreign governments, and the phase-in period varies from several months to several years. The widespread adoption of these guidelines depends, in
part, on our ability to educate foreign government agencies, neonatologists, pediatricians, third-party payors, and hospital administrators about the benefits of universal newborn screening as well as the use of our products to perform the screening
and monitoring. Our revenues may not grow if governments do not require universal newborn screening prior to hospital discharge, or if physicians or hospitals are slow to comply with those guidelines, or if governments provide for a lengthy phase-in
period for compliance.



Because we rely on distributors or sub-distributors
to sell our products in some markets outside of the U.S. and the U.K., our revenue could decline if our existing distributors reduce the volume of purchases from us, or if our relationship with any of these distributors is terminated



We currently rely on our distributors or sub-distributors for a majority
of our sales outside the U.S. Our reliance on international distributors has increased with our decision in 2004 to close our Japanese sales subsidiary and sell through a distributor in Japan, and our acquisition of Fischer-Zoth, which sells its
products through distributors in Europe and Asia. Some distributors also assist us with regulatory approvals and education of physicians and government agencies. We intend to continue our efforts to increase our sales in Europe, Japan and other
developed countries. If we fail to sell our products through our international distributors, we could experience a decline in revenues unless we begin to sell our products directly in those markets. We cannot be certain that we will be able to
attract new international distributors to market our products effectively or provide timely and cost-effective customer support and service. Even if we are successful in selling our products through new distributors, the rate of growth of our
revenue could be harmed if our existing distributors do not continue to sell a large dollar volume of our products. None of our existing distributors are obligated to continue selling our products.



We may be subject to foreign laws governing our relationships with our
international distributors. These laws may require us to make payments to our distributors if we terminate our relationship for any reason, including for cause. Some countries require termination payments under local law or legislation that may
supersede our contractual relationship with the distributor. These payments could be equal to a year or more of gross profit on sales of our products that the distributor would have earned. We have terminated our relationship with certain
distributors for poor performance in the past. To date, we have not been required to make any material termination payments under local laws. Any required payments would adversely affect our operating results.



Our operating results may suffer because of foreign currency exchange rate fluctuations
and may require us to engage in foreign currency hedging



Substantially all of our sales contracts to our U.S. based customers provide for payment in U.S. dollars. In addition, sales to most of our international distributors provide for payment in U.S. dollars. However, our revenue and expenses of
our U.K. and German subsidiaries are denominated in the applicable foreign currency. Our international revenue as a percentage of our total revenue has grown in recent years, and we expect the percentage to increase further. To date we have not
undertaken any foreign currency hedging transactions and, as a result, our future revenue and expenses may be unpredictable due to exchange rate fluctuations that could result in foreign exchange gains and losses associated with the translation of
assets denominated in foreign currencies.



If health care providers are not
adequately reimbursed for procedures conducted with our devices or supplies, or if reimbursement policies change adversely, we may not be successful in marketing and selling new products or technologies



Physicians, hospitals, and government agencies are unlikely to purchase our
products if clinicians are not adequately reimbursed for the procedures conducted with our devices or supplies. Unless a sufficient amount of conclusive, peer-reviewed clinical data about our products has been published, third-party payors,
including insurance companies and government agencies, may refuse to provide reimbursement. Furthermore, even if reimbursement is provided, it may not be adequate to fully compensate the clinicians or hospitals. Some third-party payors may refuse
adequate reimbursement unless the infant has demonstrable risk factors. If health care providers cannot obtain sufficient



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reimbursement from third-party payors for our products or the screenings conducted with our products, it is unlikely that
our products will ever achieve significant market acceptance. Acceptance of our products in international markets will depend upon the availability of adequate reimbursement or funding within prevailing health care payment systems. Reimbursement,
funding and health care payment systems vary significantly by country. Although we intend to seek reimbursement or funding approvals in international markets, we may not obtain these approvals in a timely manner or at all.



Even if third-party payors provide adequate reimbursement for procedures
conducted with our products, adverse changes in reimbursement policies in general could harm our business. We are unable to predict changes in the reimbursement methods used by third-party payors, particularly those in countries and regions
outside the U.S. For example, some payors are moving toward a managed care system in which providers contract to provide comprehensive health care for a fixed cost per person. We cannot assure you that in a managed care system the cost of our
products will be incorporated into the overall payment for childbirth and newborn care or that there will be adequate reimbursement for our products separate from reimbursement for the procedure. Unless the cost of screening or treatment is
reimbursed as a standard component of newborn care, universal screening is unlikely to occur and the number of infants likely to be screened with our products will be substantially reduced.



If we lose our relationship with any supplier of key product components or our
relationship with a supplier deteriorates or key components are not available in sufficient quantities, our manufacturing could be delayed and our business could suffer



We contract with third parties for the supply of some of the components used in our products and the production of our
disposable products. Some of our suppliers are not obligated to continue to supply us. We have relatively few sources of supply for some of the components used in our products and in some cases we rely entirely on sole-source suppliers. In addition,
the lead-time involved in the manufacturing of some of these components can be lengthy and unpredictable. For example, during 2002, we experienced delays on the part of a supplier to provide us with volume production of our Flexicoupler supplies. In
2005 we relied on a single supplier of cables used in our ALGO hearing-screening devices to help us complete a field replacement program of those cables. If these or other suppliers become unwilling or unable to supply us with components meeting our
requirements, it might be difficult to establish additional or replacement suppliers in a timely manner, or at all. This would cause our product sales to be disrupted and our revenue and operating results to suffer.



Replacement or alternative sources might not be readily obtainable due to
regulatory requirements and other factors applicable to our manufacturing operations. Incorporation of components from a new supplier into our products may require a new or supplemental filing with applicable regulatory authorities and clearance or
approval of the filing before we could resume product sales. This process may take a substantial period of time, and we cannot be assured that we would be able to obtain the necessary regulatory clearance or approval. This could create supply
disruptions that would harm our product sales and operating results.



Our
sales efforts through group purchasing organizations and sales to high volume purchasers may reduce our average selling prices, which would reduce our revenue and gross profits from these sales



We have entered, and may in the future enter, into agreements with customers
who purchase high volumes of our products. Our agreements with these customers may contain discounts from our normal selling prices and other special pricing considerations, which could cause our revenue and profit profits to decline. In addition,
we have entered into agreements to sell our products to members of GPOs, which negotiate volume purchase prices for medical devices and supplies for member hospitals, group practices and other clinics. While we make sales directly to GPO members,
the members of these GPOs now receive volume discounts off our normal selling price and may sometimes receive other special pricing considerations from us. Sales to members of one GPO, Novation, LLC, accounted for 20%, 22%, and 29% of our total
revenue in the twelve months ended December 31, 2004, 2003 and 2002 respectively. Sales to members of GPOs accounted for 46%, 39%, and 47% of our total revenue the twelve months ended December 31, 2004, 2003, and 2002 respectively. Other
of our existing customers may be members of GPOs with which we do not have agreements. Our sales efforts through GPOs may conflict with our direct sales efforts to our existing customers. If we enter into agreements with new GPOs and some of our
existing customers begin purchasing our products through those GPOs, our revenue and profit profits could decline.



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If material weaknesses in the adequacy of the Companys internal control over financial reporting are identified
and reported as a result of the assessment required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of the Companys financial statements



As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the
Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the companys internal control over financial reporting in their annual reports on Form 10-K. The Company was not subject to these
requirements for the fiscal year ended December 31, 2004. The Company is currently performing an implementation project in preparation for its first Section 404 reporting requirement that will be effective for the year ending
December 31, 2005. This report must contain an assessment by management of the effectiveness of the Companys internal control over financial reporting. In addition, the independent registered public accounting firm auditing the
Companys financial statements must also attest to and report on managements assessment of the effectiveness of the Companys internal control over financial reporting as well as the operating effectiveness of the Companys
internal controls. While the Company is expending significant resources in developing the necessary documentation and testing procedures required by Section 404, there is a risk that the Company will not comply with all of the requirements
imposed by Section 404. If the Company fails to have an effectively designed and operating system of internal controls, it will be unable to comply with the requirements of Section 404 in a timely manner. If the Company does not
effectively complete its assessment or if its internal controls are not designed or operating effectively, our independent registered public accounting firm may either disclaim an opinion as it relates to managements assessment of the
effectiveness of its internal control over financial reporting or may issue a qualified opinion on the effectiveness of our internal control over financial reporting. This could result in an adverse reaction in the financial markets due to a loss of
confidence in the reliability of the Companys financial statements.



Our failure to obtain necessary FDA clearances or approvals or to comply with FDA regulations could hurt our ability to commercially distribute and market our products in the U.S., and this would harm our business and financial condition



Unless an exemption applies, each medical device that we
wish to market in the U.S. must first receive one of the following types of FDA premarket review authorizations:



| |  |  | Clearance via Section 510(k) of the Food, Drug, and Cosmetics Act of 1938, as amended; or
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Premarket approval via Section 515 of the Food, Drug, and Cosmetics Act if the FDA has determined that the medical device in question poses a greater risk of injury
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



The FDAs 510(k) clearance process usually
takes from three to 12 months, but can take longer. The process of obtaining premarket approval is much more costly, lengthy and uncertain. Premarket approval generally takes from one to three years, but can take even longer. We cannot assure you
that the FDA will ever grant either 510(k) clearance or premarket approval for any product we propose to market. Furthermore, if the FDA concludes that future products using our technology do not meet the requirements to obtain 510(k) clearance, we
would have to seek premarket approval. We cannot assure you that the FDA will not impose the more burdensome premarket approval requirement on modifications to our existing products or future products, which in either case could be costly and cause
us to divert our attention and resources from the development of new products or the enhancement of existing products.



Our business may suffer if we are required to revise our labeling or promotional materials or the FDA takes an enforcement action against us for off-label uses



We may not promote or advertise the ALGO and Echo-Screen
devices, MiniMuffs, or neoBLUE phototherapy device products, or any future cleared or approved devices, for uses not within the scope of our clearances or approvals or make unsupported promotional claims about the benefits of our products. If the
FDA determines that our claims are outside the scope of our clearances or are unsupported it could require us to revise our promotional claims or take enforcement action against us. If we were subject to such an action by the FDA, our sales could be
delayed, our revenue could decline, and our reputation among clinicians could be harmed.



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Our business would be harmed if the FDA determines that we have failed to comply with applicable regulations or we do
not pass an inspection



We are subject to inspection and
market surveillance by the FDA concerning compliance with pertinent regulatory requirements. If the FDA finds that we have failed to comply with these requirements, the Agency can institute a wide variety of enforcement actions, ranging from a
public warning letter to more severe sanctions such as:



| |  |  | Fines, injunctions and civil penalties;
| | - |  | ---------------------------------------



| |  |  | Recall or seizure of our products;
| | - |  | ----------------------------------



| |  |  | Issuance of public notices or warnings;
| | - |  | ---------------------------------------



| |  |  | Imposition of operating restrictions, partial suspension, or total shutdown of production;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Refusal of our requests for 510(k) clearance or premarket approval of new products;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Withdrawal of 510(k) clearance or premarket approvals already granted; or
| | - |  | -------------------------------------------------------------------------



| |  |  | Criminal prosecution
| | - |  | --------------------



If we fail to obtain and maintain necessary foreign regulatory approvals in order to market and sell our products outside of the U.S., we may not be able to sell our products in other countries



Our products that are regulated domestically by the FDA are also regulated
outside the U.S. by foreign governmental agencies similar to the FDA and are subject to regulatory requirements similar to those of the FDA. The time and cost required to obtain market authorization from other countries and the requirements for
licensing a product in another country may differ significantly from the FDA requirements. We may not be able to obtain these approvals without incurring significant expenses or at all, and we may not be able to maintain these approvals once they
have been obtained.



If we, or our suppliers, fail to comply with applicable
regulations, sales of our products could be delayed and our revenue could be harmed



Every manufacturer of a finished medical device, including Natus and some of our contract manufacturers and suppliers, is required to demonstrate and maintain compliance with the FDAs quality system regulation
and comparable regulations of states and other countries. The FDA enforces the quality system regulation through periodic inspections. Although we have passed inspections in the past, we cannot assure you that we, or our contract manufacturers, will
pass any future quality system regulation inspections. If we, or our contract manufacturers, fail one of these inspections in the future, our operations could be disrupted and our manufacturing and sales delayed significantly until we can
demonstrate adequate compliance. If we or our contract manufacturers fail to take adequate corrective action in a timely fashion in response to a quality system regulations inspection, the FDA could shut down our or our contract manufacturers
manufacturing operations and require us, among other things, to recall our products, either of which would harm our business and results of operations.



Governmental, environmental, health and safety regulations could adversely affect our operations



Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and
regulations. While we believe that we have obtained the requisite approvals and permits for our existing operations, and that our business is operated in accordance with applicable laws in all material respects, we remain subject to a varied and
complex body of laws and regulations. Existing laws and regulations may be revised or reinterpreted, or new laws and regulations may become applicable to us, that may have a negative effect on our business and results of operations.



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We may not be successful in integrating the businesses that we acquire, or such businesses may not be accretive to
earnings or perform as projected



We acquired intellectual
property assets and technology patents from Pemstar Pacific Consultants during 2002, we acquired the assets of Neometrics Inc. and affiliated entities during 2003, and we acquired Fischer-Zoth in 2004. On October 16, 2005, the Company and
Bio-logic Systems Corp. entered into an Agreement and Plan of Acquisition, pursuant to which the Company will acquire all the outstanding stock of Bio-logic. We expect to make additional acquisitions of products, technology assets or businesses in
the future as part of our efforts to increase revenue and expand our product offerings. In addition to direct costs, acquisitions pose a number of risks, including:



| |  |  | Inability to effectively integrate acquired products into our business;
| | - |  | -----------------------------------------------------------------------



| |  |  | Loss of key personnel of the acquired company;
| | - |  | ----------------------------------------------



| |  |  | Failure to realize expected synergies;
| | - |  | --------------------------------------



| |  |  | Failure of acquired products to achieve projected sales;
| | - |  | --------------------------------------------------------



| |  |  | Failure to maintain customers of, or other relationships existing with respect to, the acquired business;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Failure to successfully develop the acquired technology into the desired products or enhancements;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Assumption of unknown liabilities;
| | - |  | ----------------------------------



| |  |  | Failure to understand and compete effectively in markets and with products or technologies with which we have limited previous experience; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Write-off of goodwill and intangible assets related to such acquisitions.
| | - |  | -------------------------------------------------------------------------



While we make efforts to analyze potential acquisitions carefully and to value assets and their related future lives appropriately, we cannot be certain
that any completed acquisitions will positively impact our business. If we fail to achieve the anticipated financial, strategic, and other benefits of acquisitions or investments, our operating results may suffer.



Future changes in technology or market conditions could result in adjustments to our
recorded asset balance for intangible assets, resulting in additional charges that could significantly impact our operating results



We currently have significant intangible assets, including goodwill and other acquired intangibles. The determination of related estimated useful lives
and whether these assets are impaired involves significant judgments. Our ability to accurately predict future cash flows related to these intangible assets might be hindered by events over which we have no control. Due to the highly competitive
nature of the medical device industry, new technologies could impair the value of our intangible assets if they create market conditions where our products are no longer competitive. Any future determination that these assets are carried at greater
than their fair value could result in additional charges, which could significantly impact our operating results.



We may not be able to preserve the value of our products intellectual property because we may not be able to protect access to our intellectual property or we
may lose our intellectual property rights due to expiration of our licenses or patents



If we fail to protect our intellectual property rights against infringement by competitors or if our intellectual property rights do not adequately cover the technology we employ, other medical device companies could
sell products with features similar to ours, and this could reduce demand for our products. We protect our intellectual property through a combination of patent, copyright, trade secret and trademark laws.



Despite our efforts to protect our proprietary rights, others may attempt to
copy or otherwise improperly obtain and use our products or technology. Policing unauthorized use of our technology is difficult and expensive, and we cannot be certain that the steps we have taken will prevent misappropriation. Our means of
protecting our proprietary rights may be inadequate. Enforcing our intellectual property rights could be costly and time consuming and may divert our managements attention and resources. Failing to enforce our intellectual property rights
could also result in the loss of those rights.



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Our operating results would suffer if we were subject to a protracted infringement claim or a significant damage award



The medical technology industry has, in the past, been
characterized by a substantial amount of litigation and related administrative proceedings regarding patents and intellectual property rights. We expect that medical screening products may become increasingly subject to third-party infringement
claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Third parties such as individuals, educational institutions or other medical device companies may claim that
we infringe their intellectual property rights. Any claims, with or without merit, could have any of the following negative consequences:



| |  |  | Result in costly litigation and damage awards;
| | - |  | ----------------------------------------------



| |  |  | Divert our managements attention and resources;
| | - |  | ------------------------------------------------



| |  |  | Cause us to redesign our products;
| | - |  | ----------------------------------



| |  |  | Cause product shipment delays or suspensions; or
| | - |  | ------------------------------------------------



| |  |  | Require us to enter into unfavorable royalty or licensing agreements.
| | - |  | ---------------------------------------------------------------------



A successful claim of infringement against us could result in a substantial damage award and materially harm our financial condition. Our failure or
inability to license the infringed or similar technology, or design and build non-infringing products, could prevent us from selling our products and adversely affect our business and financial results.



Product liability suits against us could result in expensive and time consuming
litigation, payment of substantial damages and an increase in our insurance rates



The sale and use of our products could lead to the filing of a product liability claim by someone claiming to have been injured using one of our products or claiming that one of our products failed to perform
properly. A product liability claim could result in substantial damages and be costly and time consuming to defend, either of which could materially harm our business or financial condition. We cannot ensure that our product liability insurance
would protect our assets from the financial impact of defending a product liability claim. Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing any
coverage in the future.



We depend upon key employees in a competitive
market for skilled personnel, and, without additional employees, we cannot grow or achieve and maintain profitability



Our products and technologies are complex, and we depend substantially on the continued service of our senior management team. The loss of any of our key
employees could adversely affect our business and slow our product development process. Our future success also will depend, in part, on the continued service of our key management personnel, software engineers, and other research and development
employees and our ability to identify, hire, and retain additional personnel, including customer service, marketing, and sales staff. Hiring research and development, engineering, sales, marketing and customer service personnel in our industry is
very competitive due to the limited number of people available with the necessary technical skills and understanding of pediatric audiology, neonatal jaundice management, and neonatal metabolic screening. We may be unable to attract and retain
personnel necessary for the development of our business.



We could lose the
ability to use net operating loss carryforwards, which may adversely affect our financial results



As of December 31, 2004, we had a total federal and state net operating loss carryforwards of approximately $18.6 million and $6.7 million,
respectively, available to reduce future taxable income. These net operating loss carryforwards, if not utilized to offset taxable income in future periods, will expire in various amounts beginning in 2005 through 2023 for state and/or federal
income tax purposes. If we continue to have net losses, we may not be able to utilize some or all of our net operating loss carryforwards before they expire.



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In addition, U.S. income tax law imposes limitations on the ability of corporations to use net operating
loss carryforwards if the corporation experiences a more than 50% change in ownership during any three-year period. We cannot assure you that we will not take actions, such as the issuance of additional stock, which would cause an ownership change
to occur. Accordingly, we may be limited to the amount we can use in any given year, so even if we have substantial net income, we may not be able to use our net operating loss carryforwards before they expire. In addition, the net operating loss
carryforwards are subject to examination by the Internal Revenue Service (IRS), and are thus subject to adjustment or disallowance resulting from any such IRS examination. We have not undertaken a study to determine whether such
limitations exist and, if so, the extent of such limitations. However, we believe it is probable that some amounts of our net operating losses will be affected.



If we have taxable income in the future, and we are unable to fully utilize our net operating loss carryforwards, our future tax payments could be
higher and our financial results may suffer.



Our stockholder rights plan
and anti-takeover provisions in our charter documents and under Delaware law may make it more difficult to acquire a large portion of our securities, to initiate a tender offer or a proxy contest, or to acquire us, even though such events may be
beneficial to our stockholders



We maintain a stockholder
rights plan that is designed to deter unsolicited takeover activity with respect to our Company. In addition, provisions of our certificate of incorporation and bylaws may affect the price of our common stock, and could make it more difficult for a
third party to remove our management. Further, these provisions may make it more difficult to acquire a large portion of our securities, to initiate a tender offer or a proxy contest or acquire us, even if doing so would benefit our stockholders.



Forward Looking Statements



This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 about Natus Medical Incorporated (Natus, we, us, or our Company). These statements include,
among other things, statements concerning our expectations, beliefs, plans, intentions, future operations, financial condition and prospects, and business strategies. The words may, will, continue,
estimate, project, intend, believe, expect, anticipate, and other similar expressions generally identify forward-looking statements. Forward-looking statements in this
Item 2 include, but are not limited to, statements regarding the following: the effectiveness and advantages of our products, factors relating to demand for and economic advantages of our products, our plan to develop and acquire additional
technologies, products or businesses, our marketing, technology enhancement, and product development strategies, our intention to enter into agreements with GPOs, our intention to introduce new products and extend existing product lines, our
intention to seek strategic partners, our belief that we bring products to market efficiently, development of technologies into successful products, our estimate of the length of time for patents to issue, identity of our competition and factors for
competition, our compliance with regulatory requirements and laws, our plan to seek approval to sell our products in additional countries, and all statements related to the potential acquisition of Bio-logic Systems.



Forward-looking statements are not guarantees of future performance and
are subject to substantial risks and uncertainties that could cause the actual results predicted in the forward-looking statements as well as our future financial condition and results of operations to differ materially from our historical results
or currently anticipated results. Investors should carefully review the information contained under the caption Risk Factors contained in Managements Discussion and Analysis of Financial Condition and Results of
Operations, for a description of risks and uncertainties. All forward-looking statements are based on information available to us on the date hereof, and we assume no obligation to update forward-looking statements.



ITEM 3. Quantitative and Qualitative Disclosures about Market Risk



We develop products in the U.S. and sell those products primarily in the U.S., Europe, and Asia. As a result, our financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Most of our sales in Europe and Asia are denominated in U.S. dollars. Prior to our acquisition of our distributor in the U.K., our sales in
the U.K. were generally denominated in U.S. dollars. Since that time, our revenue and expenses in the U.K. have been denominated in the applicable foreign currency. With the acquisition of Fischer-Zoth in September 2004, a portion of our sales are
now denominated in the Euro. As our sales in currencies other than the U.S. dollar increase, our exposure to foreign currency fluctuations may increase.



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In addition, changes in exchange rates also may affect the end-user prices of our products compared to
those of our foreign competitors, who may be selling their products based on local currency pricing. These factors may make our products less competitive in some countries.



If the U.S. dollar uniformly increased or decreased in strength by 10% relative to the currencies in which our sales were
denominated, our net loss would have correspondingly increased or decreased by an immaterial amount for the three months ended September 30, 2005.



Our interest income is sensitive to changes in the general level of interest rates in the U.S., particularly since the majority of our investments are in
short-term instruments. However, as substantially all of our short-term investments carry a fixed rate of interest, a hypothetical decrease of 10% in market interest rates would not result in a material decrease in interest income earned on
investments held at September 30, 2005 through the date of maturity on those investments.



The fair value of our available-for-sale securities is also sensitive to changes in the general level of interest rates in the U.S., and the fair value of our portfolio will fall if market interest rates increase.
However, since we generally have the ability to hold these investments to maturity, these declines in fair value may never be realized. If market interest rates were to increase by 10% from levels at September 30, 2005, the fair value of our
portfolio would decline by an immaterial amount.



All of the
potential changes noted above are based on sensitivity analyses performed on our financial position as of September 30, 2005. Actual results may differ as our analysis of the effects of changes in interest rates does not account for, among
other things, sales of securities prior to maturity and repurchase of replacement securities, the change in mix or quality of the investments in the portfolio, and changes in the relationship between short-term and long-term interest rates.



In July and August 2001, we received $58.8 million in
aggregate net proceeds in connection with our initial public offering after deducting underwriting discounts and commissions, but before deducting offering expenses payable by us. We are currently investing net offering proceeds from the offering
pursuant to our investment policy.



We invest our excess cash
in short-term investments that carry relatively short maturities because our intent is to have cash resources available for potential acquisitions of additional technologies, products or businesses, and these acquisitions could be significant.



ITEM 4. Controls and Procedures



Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined
under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and
principal financial officer concluded that our disclosure controls and procedures were effective to ensure that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms.



There was no significant change in our internal control over financial reporting that occurred during the quarter ended September 30, 2005 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



PART II. OTHER INFORMATION



ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds



We completed an initial public offering of 5,000,000 shares of our common stock at $11.00 per share in July 2001 and raised $51.2 million after
underwriting discounts and commissions, but before expenses payable by us. In August 2001, our managing underwriters exercised their right to purchase an additional 750,000 shares of our common stock at $11.00 per share for net proceeds of $7.7
million after underwriting discounts and commissions but before any expenses payable by us.



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During the three months ended September 30, 2005, we used proceeds from our initial public offering
to purchase equipment costing approximately $263,000 and for working capital needs



ITEM 5. Other Information.



On October 16, 2005, the Company, Bio-logic Systems Corp. (Bio-logic) and Summer Acquisition Corporation, a wholly owned subsidiary of the Company (Merger Sub), entered into an Agreement and Plan of Merger
pursuant to which Merger Sub is to merge with and into Bio-logic with Bio-logic surviving and becoming a wholly owned subsidiary of the Company (the Merger). This description of the Agreement and Plan of Merger does not purport to be
complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.



Pursuant to the Agreement and Plan of Merger, each outstanding share of Bio-logic common stock will convert into the right to receive $8.77 in cash.
Each outstanding option to acquire Bio-logic common stock will be cancelled, with the holder of the option receiving, for each share covered by the option, an amount equal to the excess (if any) of $8.77 over the exercise price per share of the
option. The acquisition of the shares and options (the acquisition) is conditioned upon, among other things, the approval of Bio-logics stockholders and other customary conditions. We estimate that the total consideration to be
paid in acquiring the common stock and options will be approximately $66 million. The Company currently expects that the acquisition will be consummated in early January 2006.



In anticipation of the acquisition, the Company sold 600,000 shares of the Companys common stock in a private
placement to the D3 Family Funds for $11.88 per share, the then current trading price for the shares at the time that the Company and the D3 Family Funds agreed in principle to such sale. The Company completed this sale on October 18, 2005. A
copy of the Common Stock Purchase Agreement is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q.



ITEM 6. Exhibits



| | (a) | Exhibits
| | --- | --------



|     |  |                                                                                                                                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Agreement and Plan of Merger dated October 16, 2005, by and among Natus Medical Incorporated, Bio-logic Systems Corp. and Summer Acquisition Corporation (incorporated by reference to
Exhibit 10.1 to the Companys Report on Form 8-K filed with the Securities and Exchange Commission on October 19, 2005).
|     | 
|10.2 |  | Common Stock Purchase Agreement dated October 16, 2005, by and between Natus Medical Incorporated and the D3 Family Funds (incorporated by reference to Exhibit 10.2 to the Companys
Report on Form 8-K filed with the Securities and Exchange Commission on October 19, 2005).                               
|     | 
|31.1 |  | Certification of Principal Executive Officer pursuant Section 302 of Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                               
|     | 
|31.2 |  | Certification of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                            
|     | 
|32.1 |  | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley Act of
2002.                                                                                                                               



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SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                         |  |                            |  |                                                                                      
|------------------------ |  | -------------------------- |  | -------------------------------------------------------------------------------------
|                         |  | NATUS MEDICAL INCORPORATED
|                         |  |                           
|Dated: November 14, 2005 |  | By:                        |  | /S/    JAMES B. HAWKINS                                                              
|                         |  |                            |  | James B. Hawkins President and Chief Executive Officer (Principal Executive Officer) 
|                         |  |                           
|Dated: November 14, 2005 |  | By:                        |  | /S/    STEVEN J. MURPHY                                                              
|                         |  |                            |  | Steven J. Murphy, Vice President Finance (Principal Financial and Accounting Officer)



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NATUS MEDICAL INCORPORATED



INDEX TO EXHIBITS



|            |  |                                                                                                                                                                                                                                                                                                                        
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                        
|            | 
|10.1        |  | Agreement and Plan of Merger dated October 16, 2005, by and among Natus Medical Incorporated, Bio-logic Systems Corp. and Summer Acquisition Corporation (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on October 19, 2005).
|            | 
|10.2        |  | Common Stock Purchase Agreement dated October 16, 2005, by and between Natus Medical Incorporated and the D3 Family Funds (incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K filed with the Securities and Exchange Commission on October 19, 2005).                               
|            | 
|31.1        |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                
|            | 
|31.2        |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                
|            | 
|32.1        |  | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U. S. C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                                



35