<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 SEPTEMBER 30, 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 September 30, 2000, 14,459,800 shares of the Registrant's Common Stock
                               were outstanding.
<PAGE>

                            SYMPHONIX DEVICES, INC.

                               TABLE OF CONTENTS

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (unaudited)

         Condensed Consolidated Balance Sheets as of September 30, 2000
         and December 31, 1999................................................1

         Condensed Consolidated Statements of Operations for the three months
         and nine months ended September 30, 2000 and 1999....................2

         Condensed Consolidated Statements of Comprehensive Loss for the three
         months and nine months ended September 30, 2000 and 1999.............3

         Condensed Consolidated Statements of Cash Flows for the nine months
         ended September 30, 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................................................7

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.....................................24

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

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

Item 6.  Exhibits............................................................25

                                      -i-
<PAGE>

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

                            SYMPHONIX DEVICES, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)


<TABLE>
<CAPTION>
                                                                                September 30,      December 31,
                                                                                    2000               1999
                                                                                    ----               ----
                                                                                 (unaudited)
<S>                                                                          <C>                   <C>
ASSETS
Current assets:
     Cash and cash equivalents                                               $  8,109                  $  7,998
     Short-term investments                                                         -                     6,150
     Accounts receivable, net                                                     316                       117
     Inventories                                                                1,651                       662
     Prepaid expenses and other current assets                                    297                       680
                                                                             --------                  --------
          Total current assets                                                 10,373                    15,607

Property and equipment, net                                                     1,253                     1,554
Long term investments                                                               -                       695
Other assets                                                                       73                        78
                                                                             --------                  --------

          Total assets                                                       $ 11,699                  $ 17,934
                                                                             ========                  ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                        $    537                  $    574
     Accrued compensation                                                       1,388                     1,161
     Other accrued liabilities                                                  2,757                     2,026
     Current portion of bank borrowings                                           500                       500
     Current portion of  capital lease obligations                                 24                        90
                                                                             --------                  --------
           Total current liabilities                                            5,206                     4,351

Capital lease obligations, less current portion                                     -                         8
Deferred revenue                                                                1,190                     1,420
Bank borrowings, less current portion                                           1,125                     1,500
                                                                             --------                  --------

          Total liabilities                                                     7,521                     7,279
                                                                             --------                  --------

Stockholders' equity:
     Common stock                                                                   14                        13
     Notes receivable from stockholders                                           (421)                   (1,079)
     Deferred compensation                                                        (266)                     (740)
     Additional paid-in capital                                                 66,156                    61,346
     Accumulated other comprehensive (income) loss                                  12                       (56)
     Accumulated deficit                                                       (61,317)                  (48,829)
                                                                              --------                  --------
          Total stockholders' equity                                             4,178                    10,655
                                                                              --------                  --------

          Total liabilities and stockholders' equity                          $ 11,699                  $ 17,934
                                                                              ========                  ========

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

                                      1
<PAGE>

                            SYMPHONIX DEVICES, INC.

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

<TABLE>
<CAPTION>


                                                   Three months ended September 30,             Nine months ended September  30,
                                                   --------------------------------             --------------------------------
                                                      2000                1999                      2000                1999
                                                     ------              -------                   ------              ------
<S>                                                  <C>                 <C>                       <C>                 <C>

Revenue                                              $   293             $    73                   $    706            $    224

Costs and expenses:
     Cost of goods sold                                  573                 891                      2,331               2,771
     Research and development                          1,611               1,952                      5,361               5,460
     Selling, general and administrative               2,217               1,642                      5,685               4,817
                                                     -------             -------                   --------            --------

          Operating loss                              (4,108)             (4,412)                   (12,671)            (12,824)

Interest income                                           75                 171                        329                 654
Interest expense                                         (47)                (15)                      (146)                (76)
                                                     -------             -------                   --------            --------


Net loss                                             $(4,080)            $(4,256)                  $(12,488)           $(12,246)
                                                     =======             =======                   ========            ========

Basic and diluted net loss per common share           $(0.30)             $(0.35)                    $(0.93)             $(1.00)
                                                     =======             =======                   ========            ========

Shares used in computing basic and diluted
net loss per common share                             13,475              12,338                     13,413              12,264
                                                     =======             =======                   ========            ========
</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                    Nine months ended
                                                                       September 30,                         September 30,
                                                             ----------------------------------   --------------------------------
                                                                        2000              1999             2000             1999
                                                                       ------            ------           -----            ------
<S>                                                                <C>                <C>               <C>              <C>
Net loss                                                              $(4,080)          $(4,256)        $(12,488)        $(12,246)

Change in unrealized gain (loss) on short-term investments                  9                (6)              49              (36)

Translation adjustments                                                    32                16               19               17
                                                                      -------           -------         --------         --------

Comprehensive loss                                                    $(4,039)          $(4,246)        $(12,420)        $(12,265)
                                                                      =======           =======         ========         ========
</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>
                                                                                       Nine months ended September 30,
                                                                                 ------------------------------------------
                                                                                          2000                   1999
                                                                                        --------               --------
<S>                                                                                     <C>                   <C>
Cash flows from operating activities:
     Net loss                                                                           $(12,488)              $(12,246)
     Adjustments to reconcile net loss to cash used in
          operating activities:
          Amortization of deferred compensation                                              229                    417
          Stock based compensation                                                            16                      -
          Depreciation and amortization                                                      592                    585
          Changes in operating assets and liabilities:
                Accounts receivable                                                         (199)                   135
                Inventories                                                                 (989)                  (210)
                Prepaid expenses and other current assets                                    383                   (129)
                Accounts payable                                                             (37)                  (413)
                Accrued compensation                                                         227                    132
                Deferred revenue                                                            (230)                     -
                Other accrued liabilities                                                    731                    745
                                                                                        --------               --------
                      Net cash used in operating activities                              (11,765)               (10,984)
                                                                                        --------               --------

Cash flows from investing activities
     Purchases of short-term investments                                                  (3,656)                (3,150)
     Maturities of short-term & long-term investments                                     10,550                 19,112
     Purchases of property and equipment                                                    (291)                  (158)
     Change in other assets                                                                    5                     (1)
                                                                                        --------               --------
                      Net cash provided by investing activities                            6,608                 15,803
                                                                                        --------               --------

Cash flows from financing activities
     Payments on capital lease obligations                                                   (74)                  (190)
     Proceeds from bank borrowings                                                             -                  6,000
     Payments on bank borrowings                                                            (375)                (6,000)
     Proceeds from issuance of common stock                                                5,146                    115
     Payments on stockholders notes receivable                                               712                      -
     Issuance of notes receivable to stockholder                                            (160)                  (310)
                                                                                        --------               --------
                      Net cash provided by (used in) financing activities                 (5,249)                  (385)
                                                                                        --------               --------

Net increase in cash and cash equivalents                                                    (92)                 4,434
Effect of exchange rates on cash and cash equivalents                                         19                    (19)
Cash and cash equivalents, beginning of period                                             7,998                  3,401
                                                                                        --------               --------
Cash and cash equivalents, end of period                                                $  8,109               $  7,816
                                                                                        ========               ========

Supplemental disclosure of non-cash financing activities
     Reversal of unrealized deferred compensation                                       $    245               $      -
                                                                                        ========               ========
     Cancellation of note receivable to stockholder for unvested restricted             $    107               $      -
      stock                                                                             ========               ========
</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 condensed balance sheet as of September 30, 2000, the
statements of operations for the three and nine months ended September 30, 2000
and 1999 and the statements of cash flows for the nine months ended September
30, 2000 and 1999 are unaudited and 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.
The unaudited interim financial statements have been prepared on the same basis
as the annual financial statements and, in the opinion of management, reflect
all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation. Operating results for the three and nine
months ended September 30, 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 except per share data):

<TABLE>
<CAPTION>
                                                         Three months ended                         Nine months ended
                                             -----------------------------------------   -----------------------------------------
                                             September 30, 2000     September 30, 1999   September 30, 2000     September 30, 1999
                                             ------------------     ------------------   ------------------     ------------------

Basic and diluted:
<S>                                          <C>                    <C>                  <C>                    <C>
Net loss....................................            $(4,080)               $(4,256)            $(12,488)             $(12,246)
Weighted average common shares outstanding..             13,475                 12,338               13,413                12,264
Net loss per common share...................            $ (0.30)               $ (0.35)            $  (0.93)             $  (1.00)

Antidilutive Securities:
Options to purchase common stock...........               2,066                  1,371                2,066                 1,371
Common stock subject to repurchase.........                  73                      -                   73                     -
Warrants...................................                   7                     34                    7                    34
                                            -------------------     ------------------   ------------------     -----------------
                                                          2,146                  1,405                2,146                 1,405
                                            ===================     ==================   ==================     =================
</TABLE>


                                       5
<PAGE>

3.  Inventories:

    Inventories comprise (in thousands):
<TABLE>
<CAPTION>

                                        September 30, 2000       December 31, 1999
                                       --------------------     -------------------

<S>                                          <C>                        <C>
Raw materials                                $  103                     $211
Work in Progress                                948                      183
Finished goods                                  600                      268
                                             ------                     ----
                                             $1,651                     $662
                                             ======                     ====
</TABLE>

4.     Subsequent Event:

  In November 2000, the Company completed a private equity financing in which
6,397,632 shares of common stock were sold at a price of $4.064 per share
resulting in net proceeds of $25.9 million. The pro forma effects of this
transaction will result in an increase in total assets to $37.6 million and an
increase in total equity to 30.1 million, respectively. This increase in assets
and equity is net of expenditures of $125,000.

5.     Reclassifications:

  Certain prior year financial statement items have been reclassified to
conform to the current years presentation.

6.     Recent Accounting Pronouncements:

  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.  In June 2000, the SEC
issued SAB 101B which delays the implementation of SAB 101 until no later than
the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
Company currently believes the current revenue policy is in compliance with SAB
101.

  In June 1998, the Financial Accounting Standards Board ("FASB") 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.



                                       6
<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, 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 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 has received unanimous recommendation from the Ear, Nose,
and Throat Medical Devices Advisory Panel of the Food and Drug Administration
("FDA") to approve, with conditions, the device for use 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 has developed its fourth generation Vibrant Soundbridge,
based on 8-channel, digital signal processing. In August 2000, the Company
received notice of approval of its Premarket Approval (PMA) application for
the Vibrant P and Vibrant D Soundbridge, which enables the Company to
manufacture and distribute the device commercially in the United States. As of
September 2000, approximately 419 patients have been implanted with the
Vibrant Soundbridge in over 75 centers in both the United States and Europe.

Results of Operations

  Revenue.  Revenue was $293,000 in the three months ended September 30, 2000
compared to $73,000 in the three months ended September 30, 1999.  Revenue was
$706,000 in the nine months ended September 30, 2000 compared to $224,000 in the
nine months ended September 30, 1999.   Revenue in these periods was the result
of selling activities to distributors and direct sales in Europe and the United
States.

  Cost of goods sold.  Cost of goods sold decreased to $573,000 for the three
months ended September 30, 2000 from $891,000 for the three months ended
September 30, 1999 and decreased to $2,331,000 for the nine months

                                       7
<PAGE>

ended September 30, 2000 from $2,771,000 for the nine months ended September 30,
1999, primarily due to increased volumes. 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
$1.6 million in the three months ended September 30, 2000 compared to $2.0
million in the three months ended September 30, 1999.  Research and development
expenses were $5.4 million in the nine months ended September 30, 2000 compared
to $5.5 million in the nine months ended September 30, 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 $2.2 million in the three months ended September
30, 2000 compared to $1.6 million in the three months ended September 30, 1999
and were $5.7 million in the nine months ended September 30, 2000 compared to
$4.8 million in the nine months ended September 30, 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 common stock on the options' grant dates.  Deferred
compensation expense, net of terminated employees, attributed to such options
was $229,000 during the nine months ended September 30, 2000 and $417,000 during
the nine months ended September 30, 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
$28,000 in the three months ended September 30, 2000 from $156,000 in the three
months ended September 30, 1999 and decreased to $183,000 for the nine months
ended September 30, 2000 from $578,000 for the nine months ended September 30,
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.

                                       8
<PAGE>

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 $10.0
million and from bank borrowings totaling, net, $2.0 million. In November 2000,
the Company completed an additional private placement of $25,9 million, net of
$125,000 of expenditures. At September 30, 2000, the Company had $5.2 million in
working capital, and its primary source of liquidity was $8.1 million in cash
and cash equivalents.

  Symphonix used $11.8 million in cash for operations in the nine months ended
September 30, 2000, compared to $11.0 million in the nine months ended September
30, 1999 primarily in funding its operating losses.

  Capital expenditures, primarily related to the Company's research and
development and manufacturing activities, were $291,000 and $158,000 in the nine
months ended September 30, 2000 and 1999.  At September 30, 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
September 30, 2000, the Company had borrowings of $1.6 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.

  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 and other factors not within the Company's control. The Company
believes that its existing capital including the proceeds from the November 2000
private placement will be sufficient to fund its operations and its capital
expenditures through 2001. The Company expects to incur substantial expenses in
developing a U.S. sales and marketing organization in order to develop and
effectivity launch its products commercialy in the United States. There can be
no assurance that 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.

                                       9
<PAGE>

Recent Accounting Pronouncements

  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.  In June 2000, the SEC
issued SAB 101B which delays the implementation of SAB 101 until no later than
the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
Company currently believes the current revenue policy is in compliance with SAB
101.

  In June 1998, the Financial Accounting Standards Board ("FASB") 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.

Factors That May Affect Future Results

  History of Losses and Expectation of Future Losses. At September 30, 2000, the
Company had an accumulated deficit of $61.3 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 September 30, 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 and approved by the U.S. Food and
Drug Administration (FDA) in August 2000. 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 Soundbridges only recently
became available for sale in the EU and 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.

  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


                                       10
<PAGE>

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 and hearing aid industries are 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., 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 approval of an IDE to pursue an initial clinical investigation in the
U.S. to support FDA regulatory requirements. A U.S. based company, Otologics,
LLC from Boulder, CO has developed a semi-implantable direct drive device for
mild to severe sensorineural hearing loss call the MET (middle ear transducer).
This device has completed Phase I of its initial device design and has recently
announced enrollment in its multicenter clinical trials. Another U.S. company,
SoundTec Inc. from Oklahoma City, OK has indicated completion of a Phase II
multicenter clinical trial for its semi-implantable direct drive technology
which still requires a "hearing aid" like device in the ear canal and is for
mild to moderately-severe sensorineural hearing loss. Another U.S. company, St.
Croix Medical from Minneapolis, MN has developed a fixed point piezoelectric-
middle ear transducer which requires surgical removal of part of the ossicular
chain in order to operate. The company reports early Phase I studies began in
Europe in mid-year 2000. 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
                                       11
<PAGE>

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, and endorsement by the surgeon. The
Company 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.

  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 intends to
address this market with a direct sales force.

  The Company has established a European sales and marketing organization which,
as of September 30, 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. 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 maintain these agreements or 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.

                                       12
<PAGE>

  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, 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. Although the Company has received FDA 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 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.

                                       13
<PAGE>

  Even after obtaining the necessary foreign regulatory approvals, market
acceptance of the Company's products and products currently under development in
international markets will depend, 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.

  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.

                                       14
<PAGE>

  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 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. The Company's
facilities, procedures and practices were subjected to pre-approval QS
regulation inspections and received notice of satisfactory compliance in August
2000.. 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.


  Limited Clinical Testing Experience. The U.S. FDA approved the Vibrant P and
Vibrant D Soundbridges for commercial distribution in August 2000.  The Company
has also received approval of an Investigational Device Exemption ("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

                                       15
<PAGE>

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 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.

  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 Quality Systems ("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

                                       16
<PAGE>

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.

  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 February 2000 the Company amended its PMA

                                       17
<PAGE>

application and the FDA deemed it fileable. Data from the PMA were reviewed by
the Ear, Nose, and Throat Medical Devices Advisory Panel of the FDA in July
2000, and the panel voted unanimously to recommend approval, with conditions, of
the Vibrant P and Vibrant D Soundbridges for use in the U.S. The FDA approved
the Vibrant P and Vibrant D Soundbridges for commercial distribution in August
2000. There can be no assurance that the Company's future clinical trial efforts
will progress as expected, will not be delayed or that such efforts 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.

  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.

  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 California Department of Health Services ("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

                                       18
<PAGE>

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 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

                                       19
<PAGE>

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.

  Dependence upon Patents and Proprietary Technology. In the United States, the
Company holds 13 issued patents and 10 pending patent applications.
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 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

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<PAGE>

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 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

                                       21
<PAGE>

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 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. On September 17, 2000, the Company completed an
additional private placement of 1,026,086 shares of common stock with Siemens
Audiologische Technik GmbH. On November 10, 2000, the Company completed an
additional private placement of 6,397,632 shares of common stock. Net proceeds
to the Company from these financings totaled approximately $64.4 million. While
the Company believes the net proceeds of the initial offering, along with the
private placements and its previously existing capital resources and projected
interest income, should be sufficient to fund its operations and its capital
investments through 2001, there can be no assurance that the Company will not
require additional financing prior to that time. 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 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.

  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,
sales and marketing and managerial personnel or that it can attract, assimilate
or retain other highly qualified scientific, technical, sales and marketing 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.

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<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.

  Rights granted to investors. Under the terms of the Common Stock Purchase
Agreement among the Company and a number of investors, dated as of September 13,
2000, pursuant to which the Company issued approximately 6.4 million shares of
common stock to the investors for an aggregate purchase price of $26 million,
the Company is subject to certain investors' rights. In the event the market
price of the Company's common stock declines, the Company may be required to
issue additional shares of common stock to the investors at no additional cost
to the investors pursuant to a purchase price adjustment. The purchase price
adjustment allows the investors, at any time until November 10, 2002, to
calculate an adjusted per share purchase price equal to the average closing
market price of our common stock as reported on the Nasdaq National Market for
the 33 consecutive trading days immediately preceding the date of the
adjustment. Those investors who desire to participate in this purchase price
adjustment will receive additional shares of common stock equal to the
difference between the number of shares which each investor could have purchased
based on the adjusted per share purchase price at the investor's original
investment amount and the number of shares originally purchased by the investor.
Each investor may participate in a purchase price only once until November 10,
2002. A possible consequence of the investors' right to adjust their purchase
price is that the investors, who as of November 10, 2000 held approximately 31%
of the total number of shares of our outstanding common stock, could gain
control of a majority of the voting power of the Company.

The Company is also subject restrictions on how we can conduct our business. The
Company must first receive the prior written consent of J.P. Morgan Capital,
L.P. and Patricof & Co. Ventures, Inc., the two largest investors, before the
Company can:

  . acquire any other business or business entity in any transaction in which
    the total amount of consideration we pay exceeds $10 million; or

  . issue, until November 10, 2002, any securities senior to the common stock,
    or any common stock sold at a discount from its fair market value in a
    transaction in which the Company receive at least $5 million in proceeds.

  Furthermore, the Company has agreed that as long as J.P. Morgan and Patricof
maintain minimum share ownership levels, the Company's board of directors will
nominate one individual designated by each of J.P. Morgan and Patricof to the
board of directors for each annual meeting of the stockholders, and the
Company's board of directors and management will vote all shares for which they
hold proxies or are otherwise entitled to vote in favor of the nominees
designated by J.P. Morgan and Patricof.
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<PAGE>

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 September
30, 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 September 30, 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.

        None

Item 3.  Defaults upon Senior Securities.

        None

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<PAGE>

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
          -----------    -------------------
          10.01          Common Stock Purchase Agreement among Symphonix and
                         certain investors dated September 18, 2000.
                         * Exhibit 10.01 to the report on Form 8-K filed on
                           November 2, 2000 is hereby incorporated by reference

          27.01          Financial Data Schedule

         (b) No reports on Form 8-K were filed during the quarter ended
             September 30, 2000.

  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:  November 14, 2000        SYMPHONIX DEVICES, INC.

                                /s/ Kirk B. Davis
                                ----------------------
                                Kirk B. Davis
                                Chairman of the Board, President and Chief
                                Executive Officer

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

                                       25