<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-Q


    [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000.


                                       OR


 [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO _______.


                         COMMISSION FILE NO. 000-23767

                            SYMPHONIX DEVICES, INC.
             (Exact name of registrant as specified in its charter)


                DELAWARE                                    77-0376250
      (State or other jurisdiction of                    (I.R.S. Employer
     incorporation or organization)                     Identification No.)


                                2331 Zanker Road
                        SAN JOSE,  CALIFORNIA 95131-1107
          (Address of principal executive offices, including zip code)

                                 (408) 232-0710
              (Registrant's telephone number, including area code)


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

 As of March 31, 2000, 13,368,373 shares of the Registrant's Common Stock were
 outstanding.
<PAGE>

                            SYMPHONIX DEVICES, INC.

                               TABLE OF CONTENTS
<TABLE>


<S>              <C>                                                                                            <C>
PART I.          FINANCIAL INFORMATION

Item 1.          Financial Statements (unaudited)


                 Condensed Consolidated Balance Sheets as of March 31, 2000 and December 31,
                 1999.........................................................................................    1

                 Condensed Consolidated Statements of Operations for the three months ended
                 March 31, 2000 and 1999......................................................................    2

                 Condensed Consolidated Statements of Comprehensive Loss for the three months ended
                 March 31, 2000 and 1999......................................................................    3

                 Condensed Consolidated Statements of Cash Flows for the three months ended
                 March 31, 2000 and 1999......................................................................    4


                 Notes to Condensed Consolidated Financial Statements.........................................    5

Item 2           Management's Discussion and Analysis of Financial Condition and Results of
                 Operations...................................................................................    6

Item 3           Quantitative and Qualitative Disclosures About Market Risk...................................   24

PART II.         OTHER INFORMATION

Item 1.          Legal Proceedings............................................................................   24

Item 2.          Changes in Securities and Use of Proceeds....................................................   24

Item 3.          Defaults Upon Senior Securities..............................................................   25

Item 4.          Submission of Matters to a Vote of Security Holders..........................................   25

Item 5.          Other Information............................................................................   25

Item 6.          Exhibits.....................................................................................   25
</TABLE>

                                      -i-
<PAGE>

PART I.               FINANCIAL INFORMATION

Item 1.  Financial Statements

                            SYMPHONIX DEVICES, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                         March 31,              December 31,
                                                                                           2000                    1999
                                                                                         --------               -----------
                                                                                        (unaudited)
<S>                                                                                     <C>                    <C>
                                  ASSETS
Current assets:
     Cash and cash equivalents                                                           $  7,500                   $  7,998
     Short-term investments                                                                 2,200                      6,150
     Accounts receivable, net                                                                 176                        117
     Inventories                                                                              556                        662
     Prepaid expenses and other current assets                                                651                        680
                                                                                         --------                   --------
          Total current assets                                                             11,083                     15,607

Property and equipment, net                                                                 1,509                      1,554
Long term investments                                                                         179                        695
Other assets                                                                                   74                         78
                                                                                         --------                   --------
          Total assets                                                                   $ 12,845                   $ 17,934
                                                                                         ========                   ========

                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                                    $    303                   $    574
     Accrued compensation                                                                     785                      1,161
     Other accrued liabilities                                                              2,029                      2,026
     Current portion of bank borrowings                                                       500                        500
     Current portion of  capital lease obligations                                             60                         90
                                                                                         --------                   --------
          Total current liabilities                                                         3,677                      4,351

Capital lease obligations, less current portion                                                 4                          8
Deferred Revenue                                                                            1,329                      1,420
Bank borrowings, less current portion                                                       1,375                      1,500
                                                                                         --------                   --------
         Total liabilities                                                                  6,385                      7,279
                                                                                         --------                   --------

Stockholders' equity:
     Common stock                                                                              14                         13
     Notes receivable from stockholders                                                    (1,139)                    (1,079)
     Deferred compensation                                                                   (445)                      (740)
     Additional paid-in capital                                                            61,163                     61,346
     Accumulated other comprehensive loss                                                      (7)                       (56)
     Accumulated deficit                                                                  (53,126)                   (48,829)
                                                                                         --------                   --------
          Total stockholders' equity                                                        6,460                     10,655
                                                                                         --------                   --------
          Total liabilities and stockholders' equity                                     $ 12,845                   $ 17,934
                                                                                         ========                   ========
</TABLE>

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


                                      -1-
<PAGE>

                            SYMPHONIX DEVICES, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)
                                  (unaudited)


<TABLE>
<CAPTION>
                                                               Three months ended March 31,
                                                               ----------------------------
                                                               2000                 1999
                                                               ------              -------
<S>                                                        <C>                  <C>

Revenue                                                       $   218              $   115

Costs and expenses:
     Cost of goods sold                                         1,023                  951
     Research and development                                   1,937                1,862
     Selling, general and administrative                        1,635                1,492
                                                              -------              -------
          Operating loss                                       (4,377)              (4,190)

Interest income                                                   131                  269
Interest expense                                                  (51)                 (19)
                                                              -------              -------
Net loss                                                      $(4,297)             $(3,940)
                                                              =======              =======
Basic and diluted net loss per common share                   $ (0.32)             $ (0.32)
                                                              =======              =======
Shares used in computing basic and diluted
net loss per common share                                      13,357               12,205
                                                              =======              =======

</TABLE>
  The accompanying notes are an integral part of these condensed consolidated
                              financial statements

                                      -2-
<PAGE>

                            SYMPHONIX DEVICES, INC.

            CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                 (in thousands)
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                              Three  months ended March 31,
                                                                              ----------------------------
                                                                                2000                 1999
                                                                              -------              -------
<S>                                                                      <C>                   <C>
Net loss                                                                      $(4,297)             $(3,940)

Change in unrealized gain (loss) on short-term investments                         47                  (12)

Translation adjustments                                                             2                  (13)
                                                                              -------              -------
Comprehensive loss                                                            $(4,248)             $(3,965)
                                                                              =======              =======


</TABLE>


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

                                      -3-
<PAGE>

                            SYMPHONIX DEVICES, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (in thousands)
                               (unaudited)
<TABLE>
<CAPTION>

                                                                                           Three months ended March 31,
                                                                                          -------------------------------
                                                                                            2000                    1999
                                                                                          -------                 -------
<S>                                                                                      <C>                     <C>
Cash flows from operating activities:
     Net loss                                                                             $(4,297)                $(3,940)
     Adjustments to reconcile net loss to cash used in
          operating activities:
          Amortization of deferred compensation                                                81                     139
          Stock based compensation                                                             16                       -
          Depreciation and amortization                                                       199                     200
          Changes in operating assets and liabilities:
                Accounts receivable                                                           (59)                    (38)
                Inventories                                                                   106                     204
                Prepaid expenses and other current assets                                      29                    (102)
                Accounts payable                                                             (271)                   (253)
                Accrued compensation                                                         (376)                   (386)
                Deferred revenue                                                              (91)                      -
                Other accrued liabilities                                                       3                    (139)
                                                                                          -------                 -------
                      Net cash used in operating activities                                (4,660)                 (4,315)
                                                                                          -------                 -------
Cash flows from investing activities
     Purchases of short-term investments                                                   (2,200)                 (3,800)
     Maturities of short-term & long-term investments                                       6,713                  13,503
     Purchases of property and equipment                                                     (154)                   (118)
     Change in other assets                                                                     4                       -
                                                                                          -------                 -------
                      Net cash provided by investing activities                             4,363                   9,585
                                                                                          -------                 -------

Cash flows from financing activities
     Payments on capital lease obligations                                                    (34)                    (72)
     Proceeds from bank borrowings                                                              -                   2,000
     Payments on bank borrowings                                                             (125)                 (2,000)
     Proceeds from issuance of common stock                                                    16                       5
     Issuance of notes receivable to stockholder                                              (60)                      -
                                                                                          -------                 -------
                      Net cash used in financing activities                                  (203)                    (67)
                                                                                          -------                 -------

Net increase in cash and cash equivalents                                                    (500)                  5,203
Effect of exchange rates on cash and cash equivalents                                           2                     (13)
Cash and cash equivalents, beginning of period                                              7,998                   3,401
                                                                                          -------                 -------
Cash and cash equivalents, end of period                                                  $ 7,500                 $ 8,591
                                                                                          =======                 =======
Supplemental disclosure of non-cash financing activities
     Reversal of unrealized deferred compensation                                         $   214                 $     -
                                                                                          =======                 =======
</TABLE>



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

                                      -4-
<PAGE>

                            SYMPHONIX DEVICES, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

1.  Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements as of
March 31, 2000 of Symphonix Devices, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation
have been included.  Operating results for the three month period ended March
31, 2000 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 2000, or any future interim period.

These financial statements and notes should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1999 and
footnotes thereto, included in the Company's Annual Report on Form 10-K.

2.  Computation of Basic and Diluted Net Loss per Common Share:

Basic earnings per share ("EPS") is computed by dividing net loss by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock options, warrants and other convertible securities, if dilutive.
The following table is a reconciliation of the numerator (net loss) and the
denominator (number of shares) used in the basic and diluted EPS calculations
and sets forth potential shares of common stock that are not included in the
diluted net loss per share calculation as their effect is antidilutive (in
thousands):

<TABLE>
<CAPTION>
                                                                           Three months ended
                                                                           ------------------
                                                                 March 31, 2000                March 31, 1999
                                                                 --------------                --------------
<S>                                                           <C>                          <C>
Basic and diluted:
Net loss.....................................................   $   (4,297)                   $   (3,940)
Weighted average common shares outstanding...................       13,357                        12,205
Net loss per common share....................................   $    (0.32)                   $    (0.32)
                                                                ==========                    ==========

Antidilutive Securities:
Options to purchase common stock.............................        1,994                           656
Common stock subject to repurchase...........................           85                             -
Warrants.....................................................           34                            34
                                                                   -------                    ----------
                                                                     2,113                           690
                                                                   =======                    ==========
</TABLE>

                                      -5-
<PAGE>

3.  Inventories:

    Inventories comprise (in thousands):

<TABLE>
<CAPTION>
                                                                 March 31, 1999        December 31, 1999
                                                                 --------------        -----------------
<S>                                                            <C>                    <C>
Raw materials                                                    $     203              $     211
Work in Progress                                                       145                    183
Finished goods                                                         208                    268
                                                                 ---------              ---------
                                                                 $     556              $     662
                                                                 =========              =========
</TABLE>

4.     Recent Accounting Pronouncements:

  In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes methods of accounting
and reporting for derivative instruments and hedging activities related to those
instruments as well as other hedging activities, and is effective for all fiscal
quarters for all fiscal years beginning after June 15, 2000, as amended by SFAS
137. It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. To date, the Company has not engaged in derivative or hedging
activities.

  In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, which outlines the
basic criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. The Company believes that
adopting SAB 101 will not have a material impact on the Company's financial
position and results of operations.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

     The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and footnotes thereto, and with the
Company's audited financial statements for the year ended December 31, 1999 and
the footnotes thereto. The information set forth below contains forward-looking
statements regarding research and development and publishing quarterly results
and the Company's actual results could differ materially from those anticipated
in these forward looking statements as a result of certain factors, including
those set forth below under "Factors That May Affect Future Results".

Overview

  Symphonix Devices, Inc. ("Symphonix" or the "Company") develops, manufactures
and markets a proprietary line of semi-implantable Soundbridge hearing devices
for the management of hearing impairment, a medical disorder that affects
approximately 28 million people in the United States alone. The Company is also
developing a fully implantable Soundbridge. The Soundbridge is

                                      -6-

<PAGE>

a middle ear implant technology designed to vibrate the small bones in the
middle ear, enhancing the natural hearing process. The Vibrant Soundbridge, the
family of semi-implantable devices, is currently being marketed in Europe in
conjunction with the Company's European distribution partner, Siemens
Audiologische Technik GmbH ("Siemens"), and is in clinical trials in the United
States. The fully implantable Soundbridge family is currently in development.
The Company believes that the Soundbridge technology overcomes the inherent
limitations of traditional hearing devices, and represents a novel approach in
the management of hearing loss.

  In September 1996, the Company initiated clinical trials of the first-
generation Vibrant Soundbridge in both the United States and Europe. The Company
received permission in the European Union (EU) to affix the CE mark to the
Vibrant Soundbridge in March 1998. Through a technology alliance with Siemens,
the Company is currently developing its fourth generation Vibrant Soundbridge,
based on 8-channel, digital signal processing. As of March, 2000, approximately
350  patients have been implanted with the Vibrant Soundbridge in over 60
centers in both the United States and Europe.

Results of Operations

     Revenue.  Revenue was $218,000 in the three months ended March 31, 2000
compared to $115,000 in the three months ended March 31, 1999.  Revenue in these
periods was the result of selling activities to distributors and direct sales in
Europe and Latin America.

     Cost of goods sold.  Cost of goods sold increased to $1,023,000 for the
three months ended March 31, 2000 from $951,000 for the three months ended March
31, 1999. Cost of goods sold represents the direct cost of the products sold as
well as manufacturing variances and provisions for warranty.

  Research and Development Expenses.  Research and development expenses were
$1.9 million in the three months ended March 31, 2000 and in the three months
ended March 31, 1999. The Company has incurred substantial costs in 2000 and
1999 on clinical trials for its Vibrant Soundbridge. Research and development
expenses consist primarily of personnel costs, professional services, materials,
supplies and equipment in support of product development, clinical trials,
regulatory submissions, and the preparation and filing of patent applications.
The Company expects to continue to invest in research and development in the
remainder of 2000 and 2001 primarily in the development of the totally
implantable version of the Soundbridge.

     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses were $1.6 million in the three months ended March 31,
2000 compared to $1.5 million in the three months ended March 31, 1999.
Selling, general and administrative expenses consist primarily of personnel
costs, promotional costs, legal and consulting costs.  The Company expects to
incur substantial increases in expenses in developing a U.S. sales and marketing
organization in the remainder of 2000 and 2001.

  Deferred compensation of $2.3 million was recorded in 1997, representing the
difference between the exercise prices of certain options granted and the deemed
fair value of the Company's

                                      -7-
<PAGE>

common stock on the options grant dates. Deferred compensation expense, net of
terminated employees, attributed to such options was $81,000 during the quarter
ended March 31, 2000 and $139,000 during the quarter ended March 31, 1999. The
remaining deferred compensation will be amortized over the vesting period of the
options (generally four years).

  Interest Income (Expense).  Interest income, net of expense, decreased to
$80,000 in the three months ended March 31, 2000 from $250,000 in the three
months ended March 31, 1999. The reduction in net interest income was due to the
reduction in the Company's cash and short-term investment balances. Interest
earned in the future will depend on the Company's funding cycles and prevailing
interest rates.

  Income Taxes. To date, the Company has not incurred any U.S. income tax
obligations. At December 31, 1999, the Company had net operating loss
carryforwards of approximately $32.5 million for federal and $21.3 million for
state income tax purposes, which will expire at various dates through 2014 and
2004, respectively, if not utilized. The principal differences between losses
for financial and tax reporting purposes are the result of the capitalization of
research and development and start-up expenses for tax purposes. Federal and
state tax laws contain provisions that may limit the net operating loss
carryforwards that can be used in any given year, should certain changes in the
beneficial ownership of the Company's outstanding common stock occur. Such
events could limit the future of the Company's net operating loss carryforwards.

Liquidity and Capital Resources

  Since inception, the Company has funded its operations and its capital
investments from proceeds from its initial public offering completed in February
1998 totaling $28.4 million, from the private sale of equity securities,
totaling $26.5 million, from equipment lease financing totaling $1.3 million,
from a private placement with Siemens Audiologische Technik GmbH totaling $5
million and from bank borrowings totaling, net, $2.0 million.  At March 31,
2000, the Company had $7.4 million in working capital, and its primary source of
liquidity was $9.7 million in cash, cash equivalents and short-term investments.

  Symphonix used $4.7 million in cash for operations in the three months ended
March 31, 2000, compared to $4.3 million in the three months ended March 31,
1999 primarily in funding its operating losses.

  Capital expenditures, primarily related to the Company's research and
development and manufacturing activities, were $154,000 and $118,000 in the
three months ended March 31, 2000 and 1999. At March 31, 2000, the Company did
not have any material commitments for capital expenditures.

  The Company has a loan agreement with a bank that provides for borrowings of
up to $2.0 million and for the issuance of letters of credit up to $250,000.  At
March 31, 2000, the Company had borrowings of $1.9 million and an outstanding
letter of credit in the amount of $195,000 under the loan agreement.  Borrowings
under the loan agreement are repayable over four years commencing in January
2000.

                                      -8-
<PAGE>

  The Company will expend substantial funds in the future for research and
development, preclinical and clinical testing, capital expenditures and the
manufacturing, marketing and sale of its products.  The timing and amount of
spending of such capital resources cannot be accurately predicted and will
depend on several factors, including the progress of its research and
development efforts and preclinical and clinical activities, competing
technological and market developments, the time and costs of obtaining
regulatory approvals, the time and costs involved in filing, prosecuting and
enforcing patent claims, the progress and cost of commercialization of products
currently under development, market acceptance and demand for the Company's
products if approved for marketing and other factors not within the Company's
control. The Company believes that its existing capital will be sufficient to
fund its operations and its capital investments through the second half of 2000.
Additionally, Siemens is committed to a purchase of $5.0 million of the
Company's common stock to be payable at the time of the pre market approval
("PMA") of the Company's Vibrant Soundbridge product.  Commencing in 2000, the
Company expects to incur substantial expenses in developing a U.S. sales and
marketing organization.  To fully develop such a capability and to effectively
launch its products commercially in the United States, if approved by the U.S.
Food and Drug Administration ("FDA"), the Company expects that it will have to
raise additional financing.  There can be no assurance that such additional
financing will be available on a timely basis on terms acceptable to the
Company, or at all, or that such financing will not be dilutive to stockholders.
If adequate funds are not available, the Company could be required to delay
development or commercialization of certain of its products, license to third
parties the rights to commercialize certain products or technologies that the
Company would otherwise seek to commercialize for itself, or reduce the
marketing, customer support or other resources devoted to certain of its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.

Year 2000 Compliance

  The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The issue arises if date-
sensitive software recognizes a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.

  During 1999 the Company completed its process which addressed year 2000
readiness of its systems and completed its process of identifying and making
inquiries of its significant suppliers and large public and private sector
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to solve their own Year 2000 issues.

  The Company has not experienced any significant interruption in work or cash
flow related to the date change to the year 2000, either from its own
information systems or those of significant third parties with whom the Company
does business. The Company believes that the risk of significant business
interruption due to unanticipated problems with its own systems or the systems
of significant third parties is low based on our experience to date. In the
unlikely event that unforeseen Year 2000 related internal disruptions occur, the
Company believes that its existing

                                      -9-
<PAGE>

disaster recovery program, which includes the manual processing of certain key
transactions, would significantly mitigate the impact.

  The Company's costs to address the Year 2000 issue were approximately $50,000,
all of which were incurred during 1999. These costs included consulting fees and
costs to remediate or replace hardware and software as well as non-incremental
costs resulting from redeployment of internal resources. The Company's Year 2000
efforts did not have a significant impact on other information technology
projects.

Recent Accounting Pronouncement

  In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes methods of accounting
and reporting for derivative instruments and hedging activities related to those
instruments as well as other hedging activities, and is effective for all fiscal
quarters for all fiscal years beginning after June 15, 2000, as amended by SFAS
137. It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. To date, the Company has not engaged in derivative or hedging
activities.

  In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, which outlines the
basic criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. The Company believes that
adopting SAB 101 will not have a material impact on the Company's financial
position and results of operations.

Factors That May Affect Future Results

  History of Losses and Expectation of Future Losses. At March 31, 2000, the
Company had an accumulated deficit of $53.1 million. Since the Company's
inception in 1994, substantially all of the Company's resources have been
dedicated to research and development, clinical trials, establishment of a
European sales and marketing organization and the initiation of sales and
marketing activities in Europe. In March 1998, the Company received the
authorization to affix the CE Mark to the Vibrant and Vibrant P Soundbridges,
permitting the initiation of commercial sales in the European Union ("EU"). In
May 1999, the Company received authorization to affix the CE Mark to the Vibrant
D Soundbridge. Although the Company has commenced selling the Vibrant P and
Vibrant D Soundbridges in Europe, through March 31, 2000 the Company has not
generated significant revenues from these sales. The Company received CE Mark
approval for the Vibrant HF Soundbridge in July 1998. In the United States, a
regulatory application for commercial use of the Company's Vibrant P and Vibrant
D Soundbridges was submitted in September 1999. The Vibrant HF Soundbridge will
require additional clinical testing prior to the submission of a regulatory
application for commercial use. All of the Company's other products will require
additional development, and preclinical and clinical testing prior to the
submission of a regulatory application for commercial use internationally and
domestically. Since the Vibrant P and Vibrant D

                                      -10-
<PAGE>

Soundbridges only recently became available for sale in the EU and are not
currently available for sale in the United States, significant product revenues
will not be realized for at least several years, if ever. The Company expects
its operating losses to continue at least through the year 2001 as it continues
to expend substantial funds for clinical trials in support of regulatory
approvals, expansion of research and development activities and establishment of
commercial-scale manufacturing and sales and marketing capabilities. There can
be no assurance that any of the Company's Soundbridges will be successfully
commercialized internationally or in the United States or that the Company will
achieve significant revenues from product sales. In addition, there can be no
assurance that the Company will achieve or sustain profitability in the future.
The Company's results of operations may fluctuate from quarter to quarter or
year to year and will depend upon numerous factors, the timing and scope of
research and development efforts, the extent to which the Company's products
gain market acceptance or achieve reasonable reimbursement levels, the timing of
scale-up of manufacturing capabilities, the timing of expansion of sales and
marketing activities and competition.

  Limited Clinical Testing Experience. In the United States, the Company has
completed its pivotal clinical trials of the Vibrant P and Vibrant D
Soundbridges. The Company has also received approval of an IDE to conduct a
clinical trial of the Vibrant HF Soundbridge. The Company's totally-implantable
Soundbridge, currently under development, will require additional development,
clinical trials and regulatory approval prior to commercialization. The results
from preclinical studies and early clinical trials may not be indicative of
results obtained in later clinical trials, and there can be no assurance that
clinical trials conducted by the Company will demonstrate sufficient safety and
efficacy to obtain requisite approvals.

  The rate of completion of the Company's clinical trials may be delayed by many
factors, including slower than anticipated patient enrollment or adverse events
occurring during clinical trials. Completion of preclinical and clinical
activities may take several years, and the length of time for completion of the
required studies is unpredictable. In addition, data obtained from preclinical
and clinical activities are susceptible to varying interpretations, which could
delay, limit or prevent regulatory approval. No assurance can be given that any
of the Company's clinical trials will be successfully completed on a timely
basis, or at all, that additional clinical trials will be allowed by the FDA or
other regulatory authorities or that such clinical trials will commence as
planned. Any delays in the Company's clinical trials would have a material
adverse effect on the Company's business, financial condition and results of
operations. Success in preclinical studies or early stage clinical trials does
not assure success in later stage clinical trials.

  Reliance on FMT Technology. The Company has concentrated its efforts primarily
on the development, implementation and acceptance of the FMT, the patented core
direct drive technology upon which all of the Company's Soundbridges are based.
The Company's Soundbridges employ a direct drive approach to the management of
hearing impairment, which is a novel development. There can be no assurance that
the Company's Soundbridges, based on the Company's FMT technology, will prove to
be safe and effective, or that if proven safe and effective, can be manufactured
at a reasonable cost or successfully commercialized.

                                      -11-
<PAGE>

  Government Regulation. The Company's medical products, such as the Vibrant
Soundbridge, are regulated as medical devices. Accordingly, clinical trials,
product development, labeling, manufacturing processes and promotional
activities are subject to extensive review and rigorous regulation by government
agencies in most countries in which the Company will seek to commercialize its
products.

United States

  In the United States, the Company's products are subject to applicable
provisions of the United States Federal Food, Drug, and Cosmetic Act ("FDC
Act"), and other federal statutes and regulations governing, among other things,
the design, manufacture, testing, safety, labeling, storage, record keeping,
reporting, approval, advertising and promotion of medical devices. Noncompliance
with applicable requirements can result in warning letters, fines, recalls or
seizure of products, civil penalties, injunctions, total or partial suspension
of production, withdrawal of approval or refusal to approve new marketing
applications and criminal prosecution. Changes in existing requirements or
adoption of new requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.

  Pursuant to the FDC Act, the FDA regulates the design, manufacture,
distribution, preclinical and clinical study and approval of medical devices in
the United States. Medical devices are classified in one of three classes (Class
I, Class II or Class III) on the basis of the controls necessary to reasonably
assure their safety and effectiveness. Safety and effectiveness is considered to
be reasonably assured for Class I devices through general controls (e.g.,
labeling, premarket notification and adherence to current QS regulations) and
for Class II devices through the use of additional special controls (e.g.,
performance standards, post-market surveillance, patient registries and FDA
guidelines).

  Generally, Class III devices are those which must receive premarket approval
by the FDA to reasonably assure their safety and effectiveness (e.g., life-
sustaining, life-supporting and implantable devices, or new devices which have
been found not to be substantially equivalent to legally marketed devices, or
devices whose safety and effectiveness cannot be reasonably assured through
general controls, even if supplemented by additional special controls). Active
implantable devices, such as the Company's implantable middle ear hearing
devices, are considered Class III devices.

  Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through a 510(k) Premarket Notification or
FDA approval through a PMA application. While the Company has no products for
which it expects to seek 510(k) clearance, it may file 510(k) submissions with
respect to future products. A 510(k) clearance will generally only be granted if
the information submitted to the FDA establishes that the device is
"substantially equivalent" to a legally marketed predicate medical device.
Frequently, the FDA will require clinical data in support of a 510(k)
submission, and the 510(k) process can become time-consuming and expensive.
Significant modifications of the labeling, manufacturing and design of any
product that has been cleared through the 510(k) process will require a new
510(k) Premarket Notification, if those modifications could significantly affect
the safety, effectiveness or intended use of the device.

                                      -12-
<PAGE>

  A PMA application must be submitted if the device cannot be cleared through
the 510(k) process. A PMA must be supported by extensive data, including, but
not limited to, technical, preclinical, clinical trials, manufacturing, and
labeling to demonstrate the safety and effectiveness of the device. The Company
believes that all versions of the Vibrant Soundbridge currently under
development are Class III devices and will require a PMA, as will future
configurations of implantable middle ear hearing devices. The FDA has
implemented a new streamlined PMA process called the modular PMA. Under the
modular PMA process, modules reflecting the content requirements of a
traditional PMA can be submitted as they are completed, allowing them to be
reviewed and approved in a sequential manner.

  Before the Company's products can be commercialized in the United States, the
Company must submit, in a PMA application, extensive data on preclinical studies
and clinical trials, device design, manufacturing, labeling, promotion and
advertising, as well as other aspects of the product. In addition, the Company
must submit clinical data gathered in trials conducted under an IDE
demonstrating to the satisfaction of the FDA that the product is safe and
effective for its labeling claims, and obtain marketing approval from the FDA.
Phase I of the IDE study has been completed. Phase I was limited to two sites
and five subjects and was intended to test the safety and provide preliminary
evidence of the effectiveness of the device and the surgical procedure used to
implant the device. In November 1997, the Company filed an IDE supplement
summarizing the Phase I results, finalizing the study protocol and proposed
labeling claims, providing technical information regarding the Vibrant P
Soundbridge, and requested permission to proceed to the pivotal study. In
December 1997, the FDA approved the multi-center pivotal study in 55 subjects at
up to 12 sites with the second generation Vibrant P Soundbridge. In November
1998 the Company received FDA approval of an IDE supplement to include the
Vibrant HF Soundbridge in this study. To facilitate enrollment of a greater
number of subjects who receive the Vibrant HF Soundbridge, on December 22, 1998,
the Company requested FDA approval of an IDE supplement to allow an additional
15 subjects. This IDE supplement was approved by the FDA on January 19, 1999 and
the Company has enrolled 8 subjects in this part of the clinical study. In March
1999 the FDA approved an IDE supplement permitting the evaluation of the Vibrant
D Soundbridge. Subjects who had completed the clinical trial protocol for the
Vibrant P Soundbridge were eligible for enrollment in the evaluation of the
Vibrant D Soundbridge. In September 1999 the Company submitted a PMA application
pursuant to the modular process which included data gathered in the clinical
study of the Vibrant P and Vibrant D Soundbridges. The Company also submitted
information related to a manufacturing change to the device and proposed to
enroll additional subject to provide safety data on this manufacturing change.
The Company placed an applicant hold on the FDA's fileability review of the
Company's PMA pending agreement on a protocol for the safety follow-up of those
additional subjects. In January 2000 the FDA approved the Company's protocol for
90 subjects (30 from the U.S. or Canada and 60 from the European Union), all of
whom have been enrolled. In February 2000 the Company amended its PMA
application and requested a removal of applicant hold on the FDA's fileability
review of the PMA. The FDA has reviewed this submission and deemed it fileable.
There can be no assurance that the Company's clinical trial effort will progress
as expected, will not be delayed or that such effort will lead to the successful
development of any product. No assurance can be given that any of the Company's
clinical trials will continue to be allowed by the FDA or other regulatory
agencies or that clinical trials will commence as planned.

                                      -13-
<PAGE>

  Any delays in the Company's clinical trials would have a material adverse
effect on the Company's business, financial condition and results of operations.
Success in preclinical studies or early stage clinical trials does not assure
success in later stage clinical trials. Data obtained from preclinical and
clinical activities are susceptible to varying interpretations which could
delay, limit or prevent regulatory approval. Further, there can be no assurance
that if such testing of products under development is completed, any such
devices will be accepted for formal review by the FDA, or approved by the FDA
for marketing in the United States.

  New PMAs or PMA supplements are required for significant modifications to the
manufacture, labeling and design of a device that is approved through the PMA
process. Supplements to a PMA often require submission of the same type of
information as a PMA, except that the supplement is limited to information
needed to support any changes from the device covered by the original PMA and
may not require as extensive clinical data or the convening of an advisory
panel.

  The PMA process can be expensive, uncertain and can frequently require several
years. Even when a PMA is approved, the FDA may impose restrictions on the
indications for which the device can be marketed. There can be no assurance that
the Company will be able to obtain necessary approvals on a timely basis, or at
all, and delays in obtaining or failure to obtain such approvals, the loss of
previously obtained approvals, or failure to comply with existing or future
regulatory requirements could have an adverse effect on the Company's business,
financial condition and results of operations.

  Subsequent to the receipt of a FDA approval, the Company will continue to be
regulated by the FDA with regard to the reporting of adverse events related to
its products, and ongoing compliance with QS regulation. The Company's
manufacturing facility must be registered with the FDA and the CDHS and will be
subject to periodic inspections by the FDA and by the CDHS. A Device
Manufacturing License has been issued by the State of California and this
license must be renewed annually for the Company to continue manufacture of
medical devices in California.

Europe

  The primary regulatory environment in Europe is that of the EU which consists
of 15 countries encompassing most of the major countries in Europe.  The EU has
adopted numerous directives and standards regulating the design, manufacture,
clinical trial, labeling, and adverse event reporting for medical devices. The
principal directives prescribing the laws and regulations pertaining to medical
devices in the EU are the Medical Devices Directive 93/42/EEC ("MDD") and the
Active Implantable Medical Devices Directive 90/385/EEC ("AIMDD"). In the EU,
the Company's soundbridges will be regulated as active implantables and
therefore be governed by the AIMDD. For products, such as those of the Company,
that have not previously been commercialized in the EU, CE marking is required
prior to initiation of sales in the EU. Certain other countries, such as
Switzerland, have voluntarily adopted laws and regulations that mirror those of
the EU with respect to medical devices.

  Devices that comply with the requirements of a relevant directive will be
entitled to bear CE conformity marking, indicating that the device conforms with
the essential requirements of the

                                      -14-
<PAGE>

applicable directive, and accordingly, can be commercially distributed
throughout the EU. The method of assessing conformity varies depending on the
class of the product, but normally involves a combination of self-assessment by
the manufacturer and a third-party assessment by a Notified Body. This third
party assessment may consist of an audit of the manufacturer's quality system
and specific testing of the manufacturer's product. An assessment by a Notified
Body in one country within the EU is required in order for a manufacturer to
commercially distribute the product throughout the EU.

  For purposes of determining the necessary steps for assessing conformity,
devices are classified under the Directives as Class I, Class IIa, Class IIb,
Class III, or Active Implantable Medical Devices. Devices having a higher
classification are considered to have a higher risk and, accordingly, are
subject to more controls in order to bear CE marking. The Vibrant Soundbridge is
designated as an Active Implantable Medical Device. Essential requirements under
the AIMDD include substantiating that the device meets the manufacturer's
performance claims and that safety issues, if any, constitute an acceptable risk
when weighed against the intended benefits of the device. The two principal
aspects of assessing conformity for Active Implantable Medical Devices are
determinations from the Notified Body that the processes employed in the design
and manufacture of a device qualify as a full quality system in compliance with
applicable standards (e.g., EN ISO 9001, EN 46001 and 90/385/EEC), and that the
technical, preclinical, and clinical data gathered on the device are adequate to
support CE marking.

  The Company has undergone an inspection by its Notified Body and its quality
system has been certified by the Notified Body as being in compliance with the
required standards. The Company has received approval to affix the CE mark to
the Vibrant P, the Vibrant HF, and the Vibrant D Soundbridges. To satisfy these
requirements, the Company generally must complete a clinical trial conducted
under European clinical trial standards (EN 540) to determine the safety and
performance of the products. The Vibrant HF and Vibrant D Soundbridges utilize
the same implanted component as the Vibrant P Soundbridge. Accordingly, the
Notified Body did not require additional clinical data for the Vibrant HF and
Vibrant D Soundbridges. The Company must continue to pass annual EN ISO 9001, EN
46001 and AIMDD 2.3 quality system audits in order to retain the authorization
to affix the CE mark to its products.

  Once a manufacturer has satisfactorily completed the regulatory compliance
tasks required by the directives and received favorable determinations by the
Notified Body, it is eligible to place the CE mark on its products.
Manufacturers are subject to ongoing regulation under the AIMDD. The quality
system will be subject to periodic audit and recertification, and serious
adverse events must be reported to the authorities in the country where the
incident takes place. If such incidents occur, the manufacturer may have to take
remedial action, including withdrawal of the product from the EU market.

  While no additional premarket approvals in individual EU countries are
required, prior to the marketing of a device bearing the CE mark, practical
complications with respect to market introduction may occur. For example,
differences among countries have arisen with regard to labeling requirements.
Also, as the directives do not cover reimbursement and distribution practices,
differences may occur in these and other areas.

                                      -15-
<PAGE>

  No Assurance of Market Acceptance. The market acceptance of the Company's
Soundbridges will depend upon their acceptance by the medical community and
patients as clinically useful, reliable and cost-effective compared to other
devices. Clinical acceptance will depend on numerous factors, including the
establishment of the safety and the effectiveness of the Soundbridge's ability
to drive the ossicles directly and improve hearing over currently available
hearing aids. Clinical acceptance will also depend on the receipt of regulatory
approvals in the United States and the Company's ability to adequately train ear
surgeons on the techniques for implanting the Company's Soundbridges. There can
be no assurance that the Company's Soundbridges will be preferable alternatives
to existing devices, some of which, such as the acoustic hearing aid, do not
require surgery, or that the Company's Soundbridges will not be rendered
obsolete or noncompetitive by products under development by other companies.
Patient acceptance of the Company's Soundbridges will depend in part upon
physician, audiologist and surgeon recommendations as well as other factors,
including the effectiveness, safety, reliability and invasiveness of the
procedure as compared to established approaches. Prior to undergoing surgery for
the implantation of the Company's Soundbridge, a patient may speak with a number
of medical professionals, including the patient's primary care physician, an
audiologist, an ENT specialist, as well as surgeons who specialize in ear
surgery. The failure by any of these medical professionals to favorably
recommend the Company's products and the surgery required to implant the
Soundbridge could limit the number of potential patients who are introduced to
an ear surgeon as candidates for the Company's Soundbridges. Even if the
Company's Soundbridges are adopted by the medical community, a significant
market may not develop for the Company's products unless acceptable
reimbursement from health care payors is available. There can be no assurance
that the Company's Soundbridges will be accepted by the medical community or
consumers, that acceptable reimbursement from third-party payors will be
available or that market demand for such products will be sufficient to allow
the Company to achieve profitable operations. Failure of the Company's
Soundbridges, for whatever reason, to achieve significant adoption by the
medical community or consumers or failure of the Company's products to achieve
any significant market acceptance would have a material adverse effect on the
Company's business, financial condition and results of operations.

  Highly Competitive Market; Risk of Competing Hearing Devices. The medical
device industry is subject to intense competition in the United States and
abroad. The Company believes its products will compete primarily with the
traditional approaches to managing hearing impairment, principally hearing aids.
Principal manufacturers of acoustic hearing aids include Siemens Hearing
Instruments, Inc., Starkey Laboratories Inc., Beltone Electronics Corp.,
Dahlberg Inc., GN ReSound Inc., Oticon, Inc., Widex Hearing Aid Co., Inc. and
Phonak Inc. There can be no assurance that the Company's Soundbridges will be
able to successfully compete with established hearing aid products. Although, to
the Company's knowledge, none of these acoustic hearing aid manufacturers are
currently developing direct drive devices, there can be no assurance that these
potential competitors will not succeed in developing technologies and products
in the future that are more effective, less expensive than those being developed
by the Company or that do not require surgery. The Company is aware of several
university research groups and development-stage companies that have active
research or development programs related to direct drive devices for
sensorineural hearing loss. One such company, IMPLEX AG Hearing Technology, was
authorized by their European Notified Body on November 15, 1999 to affix the CE
mark on their totally integrated cochlear amplifier (TICA).  This company has
reported its intent to pursue a clinical investigation in the U.S. to support
FDA

                                      -16-
<PAGE>

regulatory requirements, but to the Company's knowledge, has not been given IDE
approval to initiate those trials. A US based company, Otologics, LLC is
developing a semi-implantable direct drive device for sensorineural hearing loss
called the MET (middle ear transducer). This device has begun the FDA regulatory
process, completing the Phase I (feasibility) study and recently initiating
limited multicenter clinical trials. In addition, some large medical device
companies, some of which are currently marketing implantable medical devices,
may develop programs in hearing management. Certain of these companies have
substantially greater financial, technical, manufacturing, marketing and other
resources than the Company. In addition, there can be no assurance that certain
of the Company's competitors will not develop technologies and products that may
be more effective in managing hearing impairment than the Company's products or
that render the Company's products obsolete.

  The Company believes that the primary competitive factors in the hearing
management market will be the quality of the hearing enhancement, safety,
whether surgery is required, reliability, endorsement by the surgeon and
believes that it will be competitive with respect to these factors.
Nonetheless, because the Company's products are either under development or in
the very early stages of commercialization, the relative competitive position of
the Company in the future is difficult to predict.

  Limited Manufacturing Experience; Scale-Up Risk; Dependence on Key Suppliers.
The Company currently manufactures its products in limited quantities for
laboratory testing, for its clinical trials and for initial commercial sales.
The manufacture of the Company's soundbridges is a complex operation involving a
number of separate processes, components and assemblies. Each device is
assembled and individually tested by the Company. The manufacturing process
consists primarily of assembly of internally manufactured and purchased
components and subassemblies, and certain processes are performed in an
environmentally controlled area. After completion of the manufacturing and
testing processes, implantable devices are sterilized by a sub-contracted
supplier. The Company has no experience manufacturing its products in the
volumes or with the yields that will be necessary for the Company to achieve
significant commercial sales, and there can be no assurance that the Company can
establish high volume manufacturing capacity or, if established, that the
Company will be able to manufacture its products in high volumes with
commercially acceptable yields. The Company will need to expend significant
capital resources and develop manufacturing expertise to establish commercial-
scale manufacturing capabilities. Furthermore, prior to approval of a PMA, the
Company's facilities, procedures and practices will be subject to a pre-approval
inspection by the FDA. The Company's inability to successfully manufacture or
commercialize its soundbridges in a timely matter could have a material adverse
effect on the Company's business, financial condition and results of operations.

  Raw materials, components and subassemblies for the Company's soundbridges are
purchased from various qualified suppliers and are subject to stringent quality
specifications and inspections. The Company conducts quality audits of its key
suppliers, several of whom are experienced in the supply of components to
manufacturers of implantable medical devices, such as pacemakers, defibrillators
and drug delivery pumps. A number of components and subassemblies, such as
silicone, signal processing electronics and implant packaging are provided by
single source suppliers. Certain components of the Vibrant P, Vibrant D and
Vibrant HF soundbridges, the analog

                                      -17-
<PAGE>

and digital signal processing microcircuits, are provided by sole source
suppliers. None of the Company's suppliers is contractually obligated to
continue to supply the Company nor is the Company contractually obligated to buy
from a particular supplier. For certain of these components and subassemblies,
there are relatively few alternative sources of supply, and establishing
additional or replacement suppliers for such components and subassemblies could
not be accomplished quickly. In addition, if the Company wishes to significantly
modify its manufacturing processes or change the supplier of a critical
component, additional approvals will be required from the FDA before the change
can be implemented. Because of the long lead time for some components and
subassemblies that are currently available from a single source, a supplier's
inability or failure to supply such components or subassemblies in a timely
manner or the Company's decision to change suppliers could have a material
adverse effect on the Company's business, financial condition and results of
operations.

  The Company's manufacturing facilities are subject to periodic inspection by
regulatory authorities, and its operations must undergo QS regulation compliance
inspections conducted by the FDA and corresponding state agencies. Additionally,
prior to approval of a PMA, the Company's and its third-party manufacturers'
facilities, procedures and practices will be subject to pre-approval QS
regulation inspections. The Company has been inspected by the Food and Drug
Branch of the CDHS and a Device Manufacturing License has been issued to the
Company. The Company will be required to comply with the QS regulation
requirements in order to produce products for sale in the United States and with
applicable quality system standards and directives in order to produce products
for sale in the EU. Any failure of the Company to comply with the QS regulation
or applicable standards and directives may result in the Company being required
to take corrective actions, such as modification of its policies and procedures.
Pending such corrective actions, the Company could be unable to manufacture or
ship any products, which could have a material adverse effect on the Company's
business, financial condition and results of operations.

  Dependence upon Patents and Proprietary Technology. In the United States, the
Company holds 11 issued patents and 11 pending patent applications, of which 1
has been allowed but not yet issued. Additionally, the Company has 1 issued and
24 pending foreign patent applications. These patents and patent applications
generally cover the invention and application of the FMT as well as the specific
application of the FMT and other concepts in the field of hearing impairment. In
addition, the Company has licensed, on a royalty-free basis, a United States
patent covering the magnetic attachment of an external audio processor to an
implanted receiver. The Company's success will depend in part on its ability to
obtain patent protection for its products and processes, to preserve its trade
secrets, and to operate without infringing or violating the proprietary rights
of others.

  The patent positions and trade secret provisions of medical device companies,
including those of the Company, are uncertain and involve complex and evolving
legal and factual questions. The coverage sought in a patent application either
can be denied or significantly reduced before or after the patent is issued.
Consequently, there can be no assurance that any patents from pending
applications or from any future patent application will be issued, that the
scope of the patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the Company's patents will be held valid
if subsequently challenged or that others will not claim

                                      -18-
<PAGE>

rights in or ownership of the patents and other proprietary rights held by the
Company. Since patent applications are secret until patents are issued in the
United States or corresponding applications are published in other countries,
and since publication of discoveries in the scientific or patent literature
often lags behind actual discoveries, the Company cannot be certain that it was
the first to file patent applications for such inventions.

  In addition, there can be no assurance that competitors, many of which have
substantial resources, will not seek to apply for and obtain patents that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the United States or in international markets. Although the
Company has conducted searches of patents issued to other companies, research or
academic institutions or others, there can be no assurance that such patents do
not exist, have not been filed or could not be filed or issued, which contain
claims relating to the Company's technology, products or processes. Patents
issued and patent applications filed in the United States or internationally
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed, or in
the future, will not file, applications for, or have not received or in the
future will not receive, patents or obtain additional proprietary rights
relating to products or processes used or proposed to be used by the Company. In
addition, patent applications in foreign countries are maintained in secrecy for
a period after filing. Publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries and the filing of related
patent applications. There may be pending applications, which if issued with
claims in their present form, might provide proprietary rights to third parties
relating to products or processes used or proposed to be used by the Company.
The Company may be required to obtain licenses to patents or proprietary rights
of others. Further, the laws of certain foreign countries do not protect the
Company's intellectual property rights to the same extent as do the laws of the
United States. Litigation or regulatory proceedings, which could result in
substantial cost and uncertainty to the Company, may also be necessary to
enforce patent or other intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. There can
be no assurance that the Company will have the financial resources to defend its
patents from infringement or claims of invalidity.

  The Company also relies upon trade secrets and other unpatented proprietary
technology, and no assurance can be given that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to or disclose the Company's proprietary technology or
that the Company can meaningfully protect its rights in such unpatented
proprietary technology. The Company's policy is to require each of its
employees, consultants, investigators and advisors to execute a confidentiality
agreement upon the commencement of an employment or consulting relationship with
the Company. These agreements generally provide that all inventions conceived by
the individual during the term of the relationship shall be the exclusive
property of the Company and shall be kept confidential and not be disclosed to
third parties except in specified circumstances. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's proprietary information in the event of unauthorized use or disclosure
of such information.

  Recently Public Law 104-208 was signed into law in the United States and
limits the enforcement of patents relating to the performance of surgical or
medical procedures on a body. This

                                      -19-
<PAGE>

law precludes medical practitioners and health care entities, which practice
these procedures, from being sued for patent infringement. Therefore, depending
upon how these limitations are interpreted by the courts, they could have a
material adverse effect on the Company's ability to enforce any of its
proprietary methods or procedures deemed to be surgical or medical procedures on
a body. In certain other countries outside the United States, patent coverage
relating to the performance of surgical or medical procedures is not available.
Therefore, patent coverage in such countries will be limited to the FMT or to
narrower aspects of the FMT.

  The medical device industry in general has been characterized by substantial
litigation. Litigation regarding patent and other intellectual property rights,
whether with or without merit, could be time-consuming and expensive to respond
to and could distract the Company's technical and management personnel. The
Company may become involved in litigation to defend against claims of
infringement by the Company, to enforce patents issued to the Company or to
protect trade secrets of the Company. If any relevant claims of third-party
patents are held as infringed and not invalid in any litigation or
administrative proceeding, the Company could be prevented from practicing the
subject matter claimed in such patents, or would be required to obtain licenses
from the patent owners of each such patent, or to redesign its products or
processes to avoid infringement. In addition, in the event of any possible
infringement, there can be no assurance that the Company would be successful in
any attempt to redesign its products or processes to avoid such infringement or
in obtaining licenses on terms acceptable to the Company, if at all.
Accordingly, an adverse determination in a judicial or administrative proceeding
or failure by the Company to redesign its products or processes or to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations. Although the Company has not been
involved in any litigation to date, in the future, costly and time-consuming
litigation brought by the Company may be necessary to enforce patents issued to
the Company, to protect trade secrets or know-how owned by the Company, or to
determine the enforceability, scope and validity of the proprietary rights of
others.

  Future Capital Requirements; Uncertainty of Additional Funding. The Company
will expend substantial funds in the future for research and development,
preclinical and clinical testing, capital expenditures and the manufacturing,
marketing and sale of its products. The timing and amount of spending of such
capital resources cannot be accurately predicted and will depend upon several
factors, including the progress of its research and development efforts and
preclinical and clinical activities, competing technological and market
developments, the time and costs of obtaining regulatory approvals, the time and
costs involved in filing, prosecuting and enforcing patent claims, the progress
and cost of commercialization of products currently under development, market
acceptance and demand for the Company's products in the United States, if
approved for marketing, and internationally and other factors not within the
Company's control. On February 17, 1998, the Company completed an initial public
offering of 2,300,000 shares of common stock. On February 27, 1998, the Company
completed the sale of an additional 345,000 shares of common stock pursuant to
the exercise by the underwriters of an over allotment option. On December 1,
1999 the Company completed a private placement of 1,000,000 common shares with
Siemens Audiologische Technik GmbH.  Net proceeds to the Company totaled
approximately $33.4 million.  Additionally,

                                      -20-
<PAGE>

Siemens will purchase an additional $5.0 million common shares private placement
upon the acceptance of the PMA of the Company's Vibrant Soundbridge product by
the FDA. While the Company believes that the net proceeds of the offering,
together with its previously existing capital resources and projected interest
income, will be sufficient to fund its operations and its capital investments
through the second half of 2000, there can be no assurance that the Company will
not require additional financing prior to that time. In addition, there can be
no assurance that such additional financing will be available on a timely basis
on terms acceptable to the Company, or at all, or that such financing will not
be dilutive to stockholders. If adequate funds are not available, the Company
could be required to delay development or commercialization of certain of its
products, to license to third parties the rights to commercialize certain
products or technologies that the Company would otherwise seek to commercialize
for itself, or to reduce the marketing, customer support or other resources
devoted to certain of its products, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.

  Lack of Sales, Marketing and Distribution Experience. The primary market for
the Company's products in the United States is well defined and highly
concentrated. Of the approximately 10,000 ENT surgeons in the United States,
approximately 400 are specialists in otology. The Company believes that it can
address this market with a direct sales force. The Company's strategy is to
market its products initially to those 400 specialists in otology. Because the
surgical procedure for implanting the Soundbridge utilizes many of the same
techniques currently used by otologists, the Company believes that surgeon
training will not be a significant impediment to market acceptance.

  The Company intends to focus on the elements of the patient flow process and
to create educational and other programs to stimulate patient flow at all
levels, including going directly to the hearing-impaired patient. The Company
will also seek to develop a high degree of awareness of the Soundbridge therapy
by audiologists.

  The Company has established a European sales and marketing organization which,
as of March 31, 2000, is comprised of ten (10) sales, marketing and clinical
support personnel with headquarters located in Basel, Switzerland. In December
1999, the Company established a distribution partnership with Siemens covering
most of the markets in Europe. The Company believes this partnership will
significantly enhance its presence, especially within the audiology community.
In the United States, the Company intends to establish a direct sales force
focused on both surgeons and audiologists. In other international markets,
including Japan, the Company will seek to establish either a network of
distributors or a strategic partner.

  There can be no assurance that the Company will be able to build an adequate
direct sales force or marketing organization in any country, that establishing a
direct sales force or marketing organization will be cost-effective or that the
Company's sales and marketing efforts will be successful. In addition, the
Company has entered into distribution agreements with only a limited number of
international distributors. There can be no assurance that the Company will be
able to enter into similar agreements with other qualified distributors on a
timely basis on terms acceptable to the Company, or at all, or that such
distributors will devote adequate resources to selling the Company's products.
Failure to establish an adequate direct sales force domestically and in select

                                      -21-
<PAGE>

international markets, and to enter into successful distribution relationships,
could have a material adverse effect on the Company's business, financial
condition and results of operations.

  Uncertain Availability of Third-Party Reimbursement. The Company believes that
its products will generally be purchased by hospitals and otology practices upon
the recommendation of an otologic surgeon. In the United States, hospitals,
physicians and other health care providers that purchase medical devices
generally rely on third-party payors, principally Medicare, Medicaid, private
health insurance plans, health maintenance organizations and other sources of
reimbursement for health care costs, to reimburse all or part of the cost of the
procedure in which the medical device is being used. Such third-party payors
have become increasingly sensitive to cost containment in recent years and place
a high degree of scrutiny on coverage and payment decisions for new technologies
and procedures.

  Hearing aids, which do not involve surgery and, in certain cases, are exempt
from the requirement for 510(k) approval, are generally not reimbursed, although
a modest reimbursement is provided under certain insurance plans.
Traditionally, hearing aid users have paid for these devices directly. For
cochlear implants, however, which are technologically advanced and FDA-approved
through the PMA process for the treatment of profound hearing impairment, a
reimbursement is available for the device, the audiological testing, and the
surgery. Similarly, reimbursement is available for ossicular replacement
prostheses that are FDA-approved for the treatment of conductive hearing loss.

  The Company's strategy is to pursue reimbursement for the Soundbridge, once a
PMA is approved by the FDA, based on surgeon endorsement and demonstrated
performance and quality of life improvement. Quality of life issues are included
in the Company's clinical trial to provide data in support of this reimbursement
strategy. There can be no assurance that the Company will be able to demonstrate
improvement in quality of life or that reimbursement will ever be available for
the Company's products.

  Certain third-party payors are moving toward a managed care system in which
they contract to provide comprehensive health care for a fixed cost per person.
The fixed cost per person established by these third-party payors may be
independent of the hospital's cost incurred for the specific case and the
specific devices used. Medicare and other third-party payors are increasingly
scrutinizing whether to cover new products and the level of reimbursement for
covered products. Because the Company's hearing prostheses are currently under
development and have not received FDA clearance or approval, uncertainty exists
regarding the availability of third-party reimbursement for procedures that
would use the Company's products. Failure by physicians, hospitals and other
potential users of the Company's products to obtain sufficient reimbursement
from third-party payors for the procedures in which the Company's products are
intended to be used, could have a material adverse effect on the Company's
business, financial condition and results of operations.

  Third-party payors that do not use prospectively fixed payments increasingly
use other cost-containment processes or require various outcomes data that may
pose administrative hurdles to the use of the Company's products. In addition,
third-party payors may deny reimbursement if they

                                      -22-
<PAGE>

determine that the device used in a procedure is unnecessary, inappropriate,
experimental, used for a non-approved indication or is not cost-effective.
Potential purchasers must determine that the clinical benefits of the Company's
products justify the additional cost or the additional effort required to obtain
prior authorization or coverage and the uncertainty of actually obtaining such
authorization or coverage.

  Even after obtaining the necessary foreign regulatory approvals, market
acceptance of the Company's products and products currently under development in
international markets will be dependent, in part, upon the availability of
reimbursement within prevailing health care payment systems. Reimbursement and
health care payment systems in international markets vary significantly by
country, and include both government sponsored health care and private
insurance. The Company believes that in Europe, the primary source of funding
for products such as the Company's products is the various government sponsored
healthcare programs. Requirements for the granting of reimbursement in many
countries are not clearly specified and may involve the collection of additional
clinical data in support of submissions to the appropriate health care
administrations. There can be no assurance that any required data would be
available on a timely basis or that any international reimbursement approvals
will be obtained in a timely manner, if at all. Failure to receive international
reimbursement approvals could have a material adverse effect on market
acceptance of the Company's products in the EU as well as in international
markets in which such approvals are sought.

  The Company believes that in the future reimbursement will be subject to
increased restrictions both in the United States and in international markets.
The Company believes that the overall escalating cost of medical products and
services will continue to lead to increased pressures on the health care
industry, both foreign and domestic, to reduce the cost of products and
services, including the Company's products and products currently under
development. There can be no assurance in either the United States or
international markets that third-party reimbursement and coverage will be
available or adequate, that future legislation, regulation or reimbursement
policies of third-party payors will not otherwise adversely affect the demand
for the Company's products or products currently under development or its
ability to sell its products on a profitable basis. The unavailability of third-
party payor coverage or the inadequacy of reimbursement could have a material
adverse effect on the Company's business, financial condition and results of
operations.

  Dependence upon Key Personnel. The Company's future success depends in
significant part upon the continued service of certain key scientific, technical
and management personnel.  Competition for such personnel is intense and there
can be no assurance that the Company can retain its key scientific, technical
and managerial personnel or that it can attract, assimilate or retain other
highly qualified scientific, technical and managerial personnel in the future.
The loss of key personnel, especially if without advance notice, or the
inability to hire or retain qualified personnel could have a material adverse
effect upon the Company's business, financial condition and results of
operations. The Company has not entered into employment agreements with any of
its key personnel.

                                      -23-
<PAGE>

     Product Liability Risk; Possible Insufficiency of Insurance. The Company's
business involves the inherent risk of product liability claims. The Company
maintains limited product liability insurance at coverage levels which the
Company believes to be commercially reasonable and adequate given the Company's
current operations. However, there can be no assurance that such insurance will
continue to be available on commercially reasonable terms, or at all, or that
such insurance will be adequate to cover liabilities that may arise. Any claims
that are brought against the Company could, if successful, have an adverse
effect on the Company's business, financial condition and results of operations

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     The Company considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments". The Company
had no holdings of derivative financial or commodity instruments at March 31,
2000. The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. The fair value of the
Company's investment portfolio or related income would not be significantly
impacted by either a 100 basis point increase or decrease in interest rates due
mainly to the short-term nature of the Company's investment portfolio. The
Company's fixed rate debt obligations are subject to interest rate risk with
minimal impact. An increase in interest rates would not significantly affect the
Company's net loss. Much of the Company's revenue and all of its capital
spending is transacted in U.S. dollars. However, the Company does enter into
these transactions in other currencies, primarily certain European currencies.
At March 31, 2000, the Company performed sensitivity analyses to assess the
potential effect of this risk and concluded that near-term changes in interest
rates and foreign currency exchange rates should not materially adversely affect
the Company's financial position, results of operations or cash flows.

PART II.    OTHER INFORMATION

Item 1.   Legal Proceedings.

     None

Item 2.  Changes in Securities and Use of Proceeds.

     On February 17, 1998, the Company completed the sale of 2,300,000 Common
Shares at a per share price of $12.00 in a firm commitment underwritten public
offering.  The offering was effected pursuant to a Registration Statement on
Form S-1 (Registration No. 333-40339), which the United States Securities and
Exchange Commission declared effective on February 12, 1998.  The offering was
underwritten by Cowen & Company and UBS Securities. On February 27, 1998 the
Company completed the sale of an additional 345,000 Common Shares at a per share
price of $12.00 pursuant to the exercise of the over-allotment option by the
underwriters. Of the $31,740,000 in aggregate proceeds raised by the Company in
connection with the February 1998 offering, (i) approximately $2,221,800 was
paid to the underwriters in connection with underwriting discounts and
commissions and (ii) approximately $1,120,000 was paid by the Company in
connection with

                                      -24-
<PAGE>

offering expenses, including legal, printing and filing fees. On December 1,
1999, the Company completed the sale of 1,000,000 common shares at a per share
price of $5.00 to Siemens Audiologische Technik GmbH. The Company has used the
remaining proceeds of the offering in the following manner:

                                Use of Proceeds
                                ---------------
<TABLE>

    <S>                                                   <C>
     Research & Development, including clinical trials      $15,100,000
     Development of sales and marketing organization        $ 5,300,000
     Leasehold improvements and capital expenditures        $ 1,550,000
     Working capital and general corporate                  $ 9,250,000

Temporary Investments
     Short-term investments                                 $ 2,200,000

</TABLE>

     All amounts represent estimates of direct or indirect payments of amounts
to third parties.  No amounts were paid directly or indirectly for the above
purposes to directors or officers of the Company, to persons owning ten percent
or more of any class of equity securities of the Company, or to affiliates of
the Company.  The use of proceeds described above do not represent a material
change in the use of proceeds described in the offering prospectus.


Item 3.  Defaults upon Senior Securities.

     None


Item 4.  Submission of Matters to a Vote of Security Holders.

     None

Item 5.   Other Information.

     None

Item 6.   Exhibits and Reports on Form 8-K

          (a)  Exhibits

               The following exhibit was filed as part of this report:

               Exhibit No.    Exhibit Description
               -----------    -------------------
               27.01          Financial Data Schedule

          (b)  No reports on Form 8-K were filed during the quarter ended March
               31, 2000.

                                      -25-
<PAGE>

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this 10-Q report to be signed on its behalf by the
undersigned thereunto duly authorized.



Date:  May 12, 2000               SYMPHONIX DEVICES, INC.


                                  /s/ Kirk Davis
                                  -----------------------------
                                  Kirk Davis
                                  President and Chief Executive Officer


                                  /s/ Terence J. Griffin
                                  -----------------------------
                                  Terence J. Griffin
                                  Vice President Finance and Chief Financial
                                  Officer (Principal Financial and Accounting
                                  Office

                                      -26-