<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 JUNE 30, 1998.


                                       OR


  [_]  QUARTERLY 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 July 31, 1998, 12,125,752 shares of the Registrant's Common Stock were
                                  outstanding.

                                       1
<PAGE>
 
                            SYMPHONIX DEVICES, INC.

                               TABLE OF CONTENTS


PART I.  FINANCIAL INFORMATION

Item 1.   Financial Statements

          Condensed Consolidated Balance Sheets as of June 30, 1998 and December
          31, 1997.............................................................3
 
          Condensed Consolidated Statements of Operations for the three months
          and six months ended June 30, 1998 and 1997..........................4

          Condensed Consolidated Statements of  Comprehensive Loss for the three
          months and six months ended June 30, 1998 and 1997...................5

          Condensed Consolidated Statements of Cash Flows for the six months
          ended June 30, 1998 and 1997.........................................6

          Notes to Condensed Consolidated Financial Statements.................7

 
Item 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations................................................9

 
PART II.  OTHER INFORMATION      

Item 1.   Legal proceedings...................................................22
 
Item 2.   Changes in Securities and Use of Proceeds...........................22

Item 3.   Defaults upon Senior Securities.....................................22

Item 4.   Submission of Matters to a Vote of Security Holders.................22

Item 5.   Other Information...................................................22

Item 6.   Exhibits............................................................22
 

                                       2
<PAGE>
 
PART I.  FINANCIAL INFORMATION

Item 1.   Financial Statements

                        SYMPHONIX DEVICES, INC.  AND SUBSIDIARIES
                          (A COMPANY IN THE DEVELOPMENT STAGE)

                          CONDENSED CONSOLIDATED BALANCE SHEETS
                                    (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                       June 30,                 December 31,       
                                                                                     ------------               ------------
                                                                                         1998                       1997           
                                                                                     ------------               ------------
                                                                                     (unaudited)               

                                                                                                                    ASSETS
<S>                                                                          <C>                   <C> 
Current assets:
     Cash and cash equivalents                                                          $ 14,736                  $  4,908
     Short-term investments                                                               18,295                     6,549
     Accounts receivable                                                                      91                         -
     Inventories                                                                             233                         -
     Prepaid expenses and other current assets                                               374                       451
                                                                                        --------                  --------
          Total current assets                                                            33,729                    11,908
 
Property and equipment, net                                                                2,028                     1,157
Other assets                                                                                  76                        76
                                                                                        --------                  --------
 
          Total assets                                                                  $ 35,833                  $ 13,141
                                                                                        ========                  ========
</TABLE> 

<TABLE> 
<CAPTION> 
 

                                                                                      LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                                          <C>                   <C> 
Current liabilities:
     Accounts payable                                                                   $    594                  $    366
     Accrued compensation                                                                    736                       888
     Other accrued liabilities                                                               508                       778
     Current portion of bank borrowings                                                      250                         -
     Current portion of capital lease obligations                                            300                       322
                                                                                        --------                  --------
          Total current liabilities                                                        2,388                     2,354
 
Capital lease obligations, less current portion                                              188                       325
Bank borrowings, less current portion                                                      1,750                     2,000
                                                                                        --------                  --------
         Total liabilities                                                                 4,326                     4,679
                                                                                        --------                  --------
 
Stockholders' equity:
     Convertible preferred stock                                                               -                         9
     Common stock                                                                             12                         3
     Notes receivable from stockholders                                                     (484)                     (499)
     Deferred compensation                                                                (1,795)                   (2,073)
     Additional paid-in capital                                                           57,937                    29,526
     Accumulated other comprehensive loss                                                    (13)                        -
     Deficit accumulated during the development stage                                    (24,150)                  (18,504)
                                                                                        --------                  --------
          Total stockholders' equity                                                      31,507                     8,462
                                                                                        --------                  --------
 
          Total liabilities and stockholders' equity                                    $ 35,833                  $ 13,141
                                                                                        ========                  ========
</TABLE> 
 
The accompanying notes are an integral part of these condensed consolidated
                             financial statements

                                       3
<PAGE>
 
                    SYMPHONIX DEVICES, INC. AND SUBSIDIARIES
                      (A COMPANY IN THE DEVELOPMENT STAGE)

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
                                        


<TABLE>
<CAPTION>
 

                                                                                                                                
                                                                                                              Cumulative period   
                                                                                                              from May 17, 1994    
                                             Three months ended June 30,          Six months ended June 30,   (date of inception)  
                                        ---------------------------------------  ----------------------------    to June 30,       
                                               1998                 1997                1998           1997         1998
                                        -------------------  ------------------  ------------------  --------    ---------
 
 
 
<S>                                     <C>                  <C>                 <C>                 <C>       <C>
Revenue                                            $    85             $     -             $    85   $     -   $     85
 
Costs and expenses:
    Cost of goods sold                                 366                   -                 366         -        366
     Research and development                        1,743               1,551               3,540     3,110     19,354
     Selling, general and                            1,378                 481               2,494       867      6,371
      administrative                               -------             -------             -------   -------   --------
                                                     3,487               2,032               6,400     3,977     26,091
                                                   -------             -------             -------   -------   --------
 
          Operating loss                            (3,402)             (2,032)             (6,315)   (3,977)   (26,006)
 
Interest income                                        476                 137                 730       252      2,170
Interest expense                                       (30)                (28)                (61)      (55)      (314)
 
 
Net loss                                           $(2,956)            $(1,923)            $(5,646)  $(3,780)  $(24,150)
                                                   =======             =======             =======   =======   ========
 
Basic and diluted net loss per common              $ (0.24)            $ (0.71)            $ (0.58)  $ (1.48)  $  (7.47)
share                                              =======             =======             =======   =======   ========
 
Shares used in computing basic and
diluted net loss per common share                   12,126               2,726               9,788     2,552      3,235
                                                   =======             =======             =======   =======   ========
 
</TABLE> 
 
 
The accompanying notes are an integral part of these condensed consolidated
                             financial statements

                                       4
<PAGE>
 
                    SYMPHONIX DEVICES, INC. AND SUBSIDIARIES
                      (A COMPANY IN THE DEVELOPMENT STAGE)

            CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                 (IN THOUSANDS)
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                     Three months ended June 30,               Six  months ended June 30,
                                               ---------------------------------------  -----------------------------------------
                                                      1998                 1997                1998                  1997
                                               -------------------  ------------------  -------------------  --------------------
 
 
<S>                                            <C>                  <C>                 <C>                  <C>
Net loss                                                  $(2,956)            $(1,923)             $(5,646)              $(3,780)
 
Unrealized losses on short-term investments                   (27)                  -                   (1)                    -
 
Translation adjustments                                        (2)                  -                  (12)                    -
                                                          -------             -------              -------               -------
 
Comprehensive loss                                        $(2,985)            $(1,923)             $(5,659)              $(3,780)
                                                          =======             =======              =======               =======
 
</TABLE> 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated
                             financial statements

                                       5
<PAGE>
 
                    SYMPHONIX DEVICES, INC. AND SUBSIDIARIES
                      (A COMPANY IN THE DEVELOPMENT STAGE)
                                        
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                                              
                                                                                                                                    
                                                                                                              Cumulative period     
                                                                           Six  months ended June 30,         from May 17, 1994     
                                                                      ----------------------------------      (date ofinception) to 
                                                                                                               June 30,             
                                                                            1998              1997                    1998
                                                                      ----------------  ----------------      -------------------
                                                                      
<S>                                                                   <C>               <C>               <C> 
Cash flows from operating activities:                                 
     Net loss                                                                $ (5,646)          $(3,780)            $(24,150)
     Adjustments to reconcile net loss to cash used in                
          operating activities:                                       
          Amortization of deferred compensation                                   278                 -                  469
          Depreciation and amortization                                           301               236                1,436
          Preferred and common stock issued for services                            -                 -                   93
          Changes in operating assets and liabilities:                
                Accounts receivable                                               (91)                -                  (91)
                Inventories                                                      (233)                -                 (233)
                Prepaid expenses and other current assets                        (205)             (164)                (656)
                Accounts payable                                                  228               254                  594
                Accrued compensation                                             (152)             (172)                 736
                Other accrued liabilities                                        (268)              208                  509
                                                                             --------           -------             --------
          Net cash used in operating activities                                (5,788)           (3,418)             (21,293)
                                                                             --------           -------             --------
                                                                      
Cash flows from investing activities                                  
     Purchases of short-term investments                                      (21,618)           (5,998)             (72,738)
     Sales of short-term investments                                            9,872             4,018               54,441
     Purchases of property and equipment                                       (1,172)             (121)              (3,464)
     Change in other assets                                                        (2)                -                  (78)
                                                                             --------           -------             --------
           Net cash used in investing activities                              (12,920)           (2,101)             (21,839)
                                                                             --------           -------             --------
                                                                      
Cash flows from financing activities                                  
     Proceeds from capital leases                                                   -                63                1,269
     Payments on capital lease obligations                                       (160)             (145)                (782)
     Proceeds from bank borrowings                                              4,000                 -                6,000
     Payments on bank borrowings                                               (4,000)                -               (4,000)
     Payments received on notes receivable                            
         From stockholders                                                         15                 -                   30
     Proceeds from issuance of preferred stock, net                                 -             5,990               26,552
     Proceeds from issuance of common stock, net                               28,693                10               28,809
                                                                             --------           -------             --------
          Net cash provided by financing activities                            28,548             5,918               57,878
                                                                             --------           -------             --------
                                                                      
Net increase in cash and cash equivalents                                       9,840               399               14,746
Effect of exchange rates on cash and cash equivalents                             (12)                1                  (10)
Cash and cash equivalents, beginning of period                                  4,908             6,539                    -
                                                                             --------           -------             --------
Cash and cash equivalents, end of period                                     $ 14,736           $ 6,939             $ 14,736
                                                                             ========           =======             ========
</TABLE> 
 
The accompanying notes are an integral part of these condensed consolidated
                             financial statements

                                       6
<PAGE>
 
                    SYMPHONIX DEVICES, INC. AND SUBSIDIARIES
                                        
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                  (UNAUDITED)

                                        
1.  Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements as of
June 30, 1998 of Symphonix Devices, Inc. and subsidiaries (the "Company") has
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 and six month periods ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the fiscal year ending December 31,
1998, 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, 1997 and
footnotes thereto included in the Company's February 13, 1998 Prospectus.

2.  Computation of basic and diluted net loss per common share:

The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings Per Share" and the provisions of the Securities and Exchange
Commission Staff Accounting Bulletin (SAB) No. 98, and accordingly all prior
periods have been restated.  Basic and diluted net loss per common share are
computed using the weighted average number of shares of common stock
outstanding. Common equivalent shares from stock options, warrants, and
preferred stock are excluded from the computation of diluted net loss per share,
as their effect is antidilutive.  The Company has determined that no incremental
shares should be included in the computation of earnings per share in accordance
with SAB No. 98.

Stock options and warrants to purchase 587,612 shares of common stock at prices
ranging from $0.14 to $10.50 per share were outstanding at June 30, 1998, but
were not included in the computation of diluted net loss per share because they
were antidilutive.  The aforementioned stock options and warrants could
potentially dilute earnings per share in the future.



                                       7
<PAGE>
 

3.   Revenue recognition:

Revenue is generally recognized upon shipment of product to the customer.

4.    Inventories:

Inventories comprise ($ in thousands):

<TABLE>
<CAPTION>
                                                                    June 30, 1998              December 31, 1997
                                                              -------------------------  ------------------------------
                                                                     (Unaudited)
 
<S>                                                           <C>                        <C>
Raw materials and work in progress                                                $190          $    -
Finished goods                                                                      43               -
                                                                                  ----          ------
                                                                                  $233          $    -
                                                                                  ====          ======
</TABLE>

5.  Initial public offering:

On February 17, 1998, the Company completed the sale of 2,300,000 shares of its
Common Stock at a price of $12 per share in a firm commitment underwritten
public offering.  On February 27, 1998 the Company completed the sale of an
additional 345,000 shares of its Common Stock at a price of $12 per share
pursuant to the exercise of an over-allotment option by the underwriters.
Aggregate proceeds of these sales of common stock, net of issuance costs were
$28.4 million.

                                       8
<PAGE>
 
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, 1997 and
the footnotes thereto included in the Company's February 13, 1998 Prospectus.

       The information set forth below contains forward-looking statements
(designated by an *), 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

       Since its inception in May 1994, Symphonix has been a development stage
company. The Company is developing a family of proprietary semi-implantable
and implantable soundbridges for the management of moderate to severe hearing
impairment. The Company's family of Vibrant soundbridges is based on its
patented core FMT technology. 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. Although
selling activities have commenced in Europe and initial sales were made in the
three months ended June 30, 1998, through June 30, 1998 the Company has not
generated significant revenue from sales of products and had an accumulated
deficit of $24.2 million. The Company received CE Mark approval for its
Vibrant HF soundbridge in July 1998. Prior to commencing selling activities
with respect to the Vibrant HF soundbridge in Europe, the Company intends to
conduct additional clinical testing.* To date, the Company's principal sources
of funding have been its initial public offering, private equity financings,
equipment leases and bank borrowings.

       In September 1996 the Company initiated clinical trials of the Vibrant
soundbridge in the United States and Europe.  The Company will be required to
conduct further research, development, testing and regulatory activities.  The
costs of these activities, together with the costs of establishing commercial-
scale manufacturing and sales and marketing capabilities, and general and
administrative expenses, are expected to result in substantial losses through at
least 1999.*

RESULTS OF OPERATIONS

     Revenue.  Revenues of $85,000 were recorded in the three months ended June
30, 1998.  No revenues have been recorded in any prior period.

     Cost of goods sold.  Cost of goods sold was $366,000 in the three months
ended June 30, 1998 and represents the direct cost of the products sold as well
as a portion of the manufacturing overhead.

                                       9
<PAGE>
 
       Research and Development Expenses.  Research and development expenses
increased from $1.5 million in the three months ended June 30, 1997 to $1.7
million in the three months ended June 30, 1998, and increased from $3.1 million
in the six months ended June 30, 1997 to $3.5 million in the six months ended
June 30, 1998.   Research and development expenses consist primarily of
personnel costs, professional services, materials, supplies and equipment in
support of product development, clinical trials, regulatory submissions,
preparation and filing of patent applications and the start-up of manufacturing.
Expenses increased in each of the periods due to higher facility costs arising
from the commencement in January 1998 of the lease on a new facility, as well as
to increases in the level of staffing and spending on supplies, professional
services and equipment as the Company expanded its product development efforts
and clinical trial activities.  The Company expects its research and development
expenses to increase over the remaining quarters of 1998.*

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $0.5 million in the three months ended
June 30, 1997 to $1.4 million in the three months ended June 30, 1998, and
increased from $0.9 million in the six months ended June 30, 1997 to $2.5
million in the six months ended June 30, 1998. Selling, general and
administrative expenses consist primarily of personnel, promotional, legal and
consulting costs. Expenses increased in each of the periods due to the
establishment of a European sales and marketing organization, the initiation of
selling and promotional activities, amortization of deferred compensation and
increases in the Company's administrative costs associated with the expanded
scope of the Company's operations, including becoming a public company. In late
1997 and early 1998, the Company established a European sales and marketing
organization and as of June 30, 1998, had three marketing management and support
personnel located in its European headquarters in Basel, Switzerland and three
sales managers performing direct sales activities in Germany, France, the U.K.,
Switzerland and Austria. In addition, the Company has recently hired a sales
manager to oversee distributors that will be sought to cover Latin America.
Costs associated with these activities impacted the three month and six month
periods ended June 30, 1998 and are expected to increase over the remaining
quarters of 1998.*

       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 Common Stock on the grant dates.  Deferred
compensation expense of $139,000 and $278,000 attributed to such options was
amortized during the three months and six months ended June 30, 1998,
respectively.  The remaining deferred compensation will be amortized over the
vesting period of the options (generally four years).

       Interest Income (Expense).  Interest  income, net increased from $109,000
in the three months ended June 30, 1997 to $446,000 in the three months ended
June 30, 1998, and increased from $197,000 in the six months ended June 30, 1997
to $669,000 in the six months ended June 30, 1998. This increase was due to the
Company's higher level of cash, cash equivalents and short-term investment
balances as a result of the Company's initial public offering completed in
February 1998.

       Income Taxes.  As a result of the net losses incurred, the Company has
not incurred any income tax obligations.  At December 31, 1997, the Company had
net operating loss carryforwards of $13 million for federal, and $13 million for
state, income tax purposes, which 

                                       10
<PAGE>
 
will expire at various dates through 2012 and through 2002, 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. United States 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 shares of Common Stock occur. Such events
could limit the future utilization of the Company's net operating loss
carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

       Since inception, the Company has funded its operations and capital
expenditures from proceeds from its initial public offering completed in
February 1998 totaling $28.4 million, the private sale of equity securities,
totaling $26.5 million, equipment lease financing totaling $1.3 million and bank
borrowings totaling $4.0 million.  At June 30, 1998, the Company had $31.3
million in working capital, and its primary source of liquidity was $33.0
million in cash, cash equivalents and short-term investments.

       Capital expenditures, primarily related to the Company's research and
development and manufacturing activities, were $1.2 million and $121,000 in the
six months ended June 30, 1998 and 1997, respectively.  At June 30, 1998, the
Company did not have any material commitments for capital expenditures.

       In October 1997 the Company entered into a five-year lease for a new
facility that commenced in January 1998.  During the quarter ended March 31,
1998 the Company commenced occupying, and relocated its research and development
and administrative activities to, the new facility.  The Company completed the
relocation of its manufacturing activities to the new facility in April 1998.
Through June 30, 1998, the Company had incurred approximately $1.2 million in
capital expenditures on leasehold improvements and furniture and fixtures
related to the new facility, substantially all of which was paid as of June 30,
1998.

       The Company has a loan agreement with a bank providing for borrowings of
up to $2.0 million and for the issuance of letters of credit up to $250,000.  At
June 30, 1998, the Company had borrowings of $2.0 million and an outstanding
letter of credit in the amount of $243,680 under the loan agreement.  Borrowings
under the loan agreement are repayable over four years commencing in January
1999.

       Cash used in operating activities was $5.8 million and $3.4 million in
the six months ended June 30, 1998 and 1997, respectively.  The increase in cash
used in operating activities over this period primarily reflects the increase in
net losses incurred, primarily as a result of higher selling, general and
administrative expenses.

       Based on a preliminary review of its existing information systems, the
Company does not anticipate that it will incur significant costs in connection
with bringing its information systems into compliance with year 2000
requirements.*

       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 

                                       11
<PAGE>
 
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 approved for marketing and other factors not
within the Company's control. While the Company believes that its existing
capital will be sufficient to fund its operations and its capital investments
through 1999, 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, 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.

     In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." SFAS No. 131 requires publicly held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operating decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the financial statements would be provided. SFAS No. 131 is
effective for the Company in 1998. The Company operates in one business segment;
namely, the design, manufacture, and sale of implantable and semi-implantable
hearing management devices.

FACTORS THAT MAY AFFECT FUTURE RESULTS

DEVELOPMENT STAGE COMPANY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES

     The Company is a development stage company and, at June 30, 1998, had an
accumulated deficit of $24.2 million. Since the Company's inception in 1994,
substantially all of the Company's resources have been dedicated to research and
development, establishment of a European sales and marketing organization and 
the initiation of sales and marketing activities. 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"). Although selling activities have commenced in Europe and initial
sales have been made, through June 30, 1998 the Company has not generated
significant revenues from product sales. The Company only recently received CE
Mark approval for the Vibrant HF soundbridge and intends to conduct additional
clinical testing before commencing selling activities.* In the United States,
the Company's Vibrant, Vibrant P and Vibrant HF soundbridges 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 and Vibrant P 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 1999
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,
including action relating to regulatory matters, progress of clinical trials,
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.


                                       12
<PAGE>
 
LIMITED CLINICAL TESTING EXPERIENCE

     In the United States, the Company has conducted only limited clinical
trials of its Vibrant and Vibrant P soundbridges. The Company has received
approval of an investigational device exemption ("IDE") to conduct a clinical
trial of the Vibrant and Vibrant P soundbridges. In Europe, the Vibrant and
Vibrant P have been the subject of limited clinical testing. The Company intends
to conduct clinical testing of the external components of the Vibrant HF
soundbridge.* The implanted components of the Vibrant HF are the same as the
implanted components of the Vibrant and Vibrant P soundbridges which were tested
in clinical trials previously conducted by the Company in Europe. None of the
Company's other soundbridges under development have been tested in human
clinical trials and 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 United
States Food and Drug Administration ("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 floating mass transducer ("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.

NO ASSURANCE OF PRODUCT APPROVAL; GOVERNMENT REGULATION

     The research, preclinical and clinical activities, manufacturing, labeling,
distribution, sale, marketing, advertising and promotion of the Company's
proposed products are subject to extensive and rigorous government regulation in
the United States and certain other countries.  In the United States and certain
other countries, the process of obtaining and maintaining required regulatory
clearances or approvals is lengthy, expensive and uncertain.  Noncompliance with

                                       13
<PAGE>
 
applicable FDA requirements can result in administrative sanctions or judicially
imposed sanctions such as civil penalties, criminal prosecution, injunctions,
product seizure or detention, product recalls, or total or partial suspension of
production.  In addition, noncompliance may result in the FDA's refusal to
approve pending applications for marketing approval or clearance or supplements
to approved marketing approvals, or in the withdrawal of marketing approval.

     Before any of the Company's products can be commercialized in the United
States, the Company must submit, in a premarket approval ("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
a product is safe and effective for its labeling claims, and obtain marketing
approval from the FDA. Phase I of the IDE study for the Vibrant soundbridge 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. On November 14, 1997, the Company filed an IDE supplement summarizing
the Phase I results, finalizing the study protocol and labeling claims,
providing technical information regarding the second generation Vibrant P
soundbridge, and requested permission to proceed to the pivotal study. On
December 11, 1997, the FDA approved the multi-center pivotal study in 55
subjects at up to 12 sites with the Vibrant P soundbridge. 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.

     Subsequent to the receipt of an 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 Quality System regulation compliance (which
includes elaborate testing, control, documentation and other quality assurance
procedures).  The Company's manufacturing facility must be registered with the
FDA and the California Food and Drug Branch and will be subject to periodic
inspections by the FDA and by the California Food and Drug Branch.  The timing
and requirements of obtaining approval for sale in foreign countries may differ
from that required for FDA approval.  In addition, there may be foreign
regulatory barriers other than pre-market approval.

     The EU 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 Vibrant, Vibrant P and Vibrant
HF soundbridges are regulated as active implantables and are governed by the
AIMDD.  Certain other countries, such as Switzerland, have voluntarily adopted
laws and regulations that mirror those of the EU with respect to medical
devices.

     The Company's facilities have been inspected by the Notified Body and its
quality system has been certified by the Notified Body as being in compliance
with the required standards. In 

                                       14
<PAGE>
 
March 1998, the Company obtained the certification necessary to enable the CE
mark to be affixed to the Company's Vibrant and Vibrant P soundbridges for
commercial sales in member countries of the EU. In April 1998 the Company
transferred its manufacturing activities to a new facility, and this facility
has been certified by the Company's Notified Body. The Company is subject to
ongoing regulation under the AIMDD. As a result, 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 Company may have to take remedial action, including
withdrawal of the product from the EU market. In July 1998, the Company received
CE Mark approval for its Vibrant HF soundbridge.

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 and surgeon
recommendations as well as other factors, including the effectiveness, safety,
reliability and invasiveness of the procedure as compared to established
approaches. 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., Philips Medical Systems North America Co., Starkey
Laboratories Inc., Beltone Electronics Corp., Dahlberg Inc., ReSound
Corp.,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.  In addition, 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 

                                       15
<PAGE>
 
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 sensorineural hearing devices. 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.

LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK; DEPENDENCE ON KEY SUPPLIERS

     The Company only has limited experience in manufacturing the Vibrant and
Vibrant P soundbridges. The Company currently manufactures the Vibrant and
Vibrant P soundbridges in limited quantities for laboratory testing, its
United States clinical trials and in connection with its commercial activities
in the EU. 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. In the first half of 1998, the Company relocated its
manufacturing activities to a new facility. Although this new facility has the
capacity to handle large-scale commercial manufacturing activities, 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. 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 large-scale
manufacturing capabilities. 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 its
products in a timely manner or at a reasonable cost 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.  A number of components and
subassemblies, such as silicone, control electronics and implant packaging are
provided by single source suppliers.  One component, the signal processing
microcircuit, is provided by a sole source supplier, Gennum Corporation.  None
of the Company's vendors is contractually obligated to continue to supply the
Company nor is the Company contractually obligated to buy from a particular
vendor.  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.  

                                       16
<PAGE>
 
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 its suppliers 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 three issued patents and 17 pending
patent applications.  Additionally, outside of the U.S., the Company holds one
issued patent and 17 pending 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
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 

                                       17
<PAGE>
 
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 law precludes medical practitioners and
health care entities that 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.  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 

                                       18
<PAGE>
 
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 domestically, 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 Common Shares.  On February
27, 1998, the Company completed the sale of an additional 345,000 Common Shares
pursuant to the exercise by the underwriters of an  over allotment option.  Net
proceeds to the Company totaled approximately $28.4 million.  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 1999, 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 Company has established a European sales and marketing organization and
has an office in Basel, Switzerland, where the Company's Director of European
Sales and Marketing and European Clinical Manager are based. In addition, the
Company has employed three sales personnel to provide direct sales coverage in
Germany, France, Switzerland, Austria and the United Kingdom. The Company has
established distributors in Sweden, Denmark, Italy, Spain, Portugal, Belgium,
The Netherlands and Luxembourg. In other international markets, including Japan,
the Company will seek to establish a network of distributors.* The Company has
recently hired a sales manager to oversee distributors that will be sought to
cover Latin America. 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

                                       19
<PAGE>
 
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
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 clinics upon the recommendation of a surgeon.*  In the United
States, hospitals, physicians and other health care providers that purchase
medical devices generally rely on third-party payors to reimburse all or part of
the cost of the procedure in which the medical device is being used.  In most
European markets, medical devices are purchased primarily pursuant to government
sponsored healthcare programs.  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 are the subject of 510(k) clearance in the U.S. and do
not involve surgery, are generally not reimbursed, although a modest
reimbursement is provided under certain insurance plans.  Traditionally, hearing
aid users have paid for these devices directly.  The Company believes that to
obtain reimbursement on a widespread basis, it will have to demonstrate through
clinical outcomes studies an improvement in the quality of life for patients.
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.  During clinical trials, the Company does not anticipate
that there will be any reimbursement for the soundbridge implant or procedure.

     Certain third-party payors in the U.S. 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 none of the Company's products have received FDA clearance or
approval, uncertainty exists regarding the ultimate availability in the U.S. of
third-party reimbursement for procedures that would use the Company's
soundbridges.  Even though the Company's Vibrant, Vibrant P and Vibrant HF
soundbridges are approved for commercial sales in the EU, there remains
uncertainty in international markets regarding the availability of third-party
reimbursement for procedures using the Company's soundbridges.  Failure by
physicians, hospitals and other potential users of the Company's soundbridges to
obtain sufficient reimbursement from third-party payors for the procedures in
which the Company's soundbridges 

                                       20
<PAGE>
 
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
soundbridges.  In addition, third-party payors may deny reimbursement if they
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.

     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 soundbridges 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 Vibrant, Vibrant P and Vibrant HF
soundbridges in the EU as well as in other international markets in which such
approvals are sought.

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.  The Company
is the beneficiary under a $1.0 million key man insurance policy on Harry S.
Robbins, its President and Chief Executive Officer.

PRODUCT LIABILITY RISK; POSSIBLE INSUFFICIENCY OF INSURANCE

     The manufacture, sale and implantation of the Company's products involve
the risk of product liability claims. The Company currently has limited product
liability insurance. There can be no assurance that such insurance will continue
to be available on commercially reasonable terms or that the coverage limits
will be adequate. The Company intends to evaluate its coverage on a regular
basis. Such insurance is expensive and may not be available on acceptable terms,
or at all. A successful claim brought against the Company in excess of its
insurance coverage would have a material adverse effect on the Company's
business, financial condition and results of operations.

                                       21
<PAGE>
 
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 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
offering expenses, including legal, printing and filing fees.  The Company has
used the remaining proceeds of the offering in the following manner:

<TABLE>
<CAPTION>
 
 
           Use of Proceeds
           ---------------
<S>                                                                 <C>
               Research & Development, including clinical trials        $ 2,600,000
               Development of sales and marketing organization          $ 1,900,000
               Leasehold improvements and capital expenditures          $   900,000
               Working capital and general corporate                    $11,300,000
          Temporary Investments
          ---------------------
               Short-term investments                                   $11,700,000
</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.

(a)    Exhibits

27.1  Financial Data Schedules

                                       22
<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:  August 13, 1998              SYMPHONIX DEVICES, INC.

                                         /s/ Harry S. Robbins
                                         -----------------------------------
                                         Harry S. Robbins
                                         President and Chief Executive Officer

                                         /s/ Alfred G. Merriweather
                                         ------------------------------------
                                         Alfred G. Merriweather
                                         Vice President Finance and Chief
                                         Financial Officer
                                         (Principal Financial and Accounting
                                         Officer)

                                       23