<PAGE>

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

                                   FORM 10-Q


    [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 June 30, 2000, 13,425,510 shares of the Registrant's Common Stock were
                                 outstanding.
<PAGE>

                            SYMPHONIX DEVICES, INC.

                               TABLE OF CONTENTS


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

Item 1.   Financial Statements (unaudited)

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

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

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

          Condensed Consolidated Statements of Cash Flows for the six months
          ended June 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............................................................  25

Item 2.   Changes in Securities and Use of Proceeds....................................  25

Item 3.   Defaults Upon Senior Securities..............................................  26

Item 4.   Submission of Matters to a Vote of Security Holders..........................  26

Item 5.   Other Information............................................................  26

Item 6.   Exhibits.....................................................................  26
</TABLE>

                                      -i-
<PAGE>

PART I.        FINANCIAL INFORMATION

Item 1.   Financial Statements


                            SYMPHONIX DEVICES, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                    June 30,         December 31,
                                                                      2000               1999
                                                                      ----               ----
                                                                   (unaudited)
<S>                                                                <C>              <C>
                                                  ASSETS
Current assets:
     Cash and cash equivalents                                      $  5,387           $  7,998
     Short-term investments                                            1,456              6,150
     Accounts receivable, net                                            144                117
     Inventories                                                         778                662
     Prepaid expenses and other current assets                           363                680
                                                                    --------           --------
          Total current assets                                         8,128             15,607

Property and equipment, net                                            1,393              1,554
Long term investments                                                      -                695
Other assets                                                              74                 78
                                                                    --------           --------

          Total assets                                              $  9,595           $ 17,934
                                                                    ========           ========

                                   LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                               $   554            $   574
     Accrued compensation                                               931              1,161
     Other accrued liabilities                                        2,386              2,026
     Current portion of bank borrowings                                 500                500
     Current portion of  capital lease obligations                       38                 90
                                                                   --------           --------
          Total current liabilities                                   4,409              4,351

Capital lease obligations, less current portion                           -                  8
Deferred Revenue                                                      1,239              1,420
Bank borrowings, less current portion                                 1,250              1,500
                                                                   --------           --------

         Total liabilities                                            6,898              7,279
                                                                   --------           --------

Stockholders' equity:
     Common stock                                                        13                 13
     Notes receivable from stockholders                                (911)            (1,079)
     Deferred compensation                                             (340)              (740)
     Additional paid-in capital                                      61,201             61,346
     Accumulated other comprehensive loss                               (29)               (56)
     Accumulated deficit                                            (57,237)           (48,829)
                                                                   --------           --------
          Total stockholders' equity                                  2,697             10,655
                                                                   --------           --------

          Total liabilities and stockholders' equity                $ 9,595            $17,934
                                                                   ========           ========
</TABLE>

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

                                      -1-
<PAGE>

                            SYMPHONIX DEVICES, INC.

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

<TABLE>
<CAPTION>
                                                            Three months ended June 30,         Six months ended June 30,
                                                            ---------------------------        ---------------------------
                                                              2000               1999            2000               1999
                                                              ----               ----            ----               ----
<S>                                                         <C>                <C>             <C>                <C>
Revenue                                                     $    195           $     35        $    413           $    150

Costs and expenses:
     Cost of goods sold                                          735                927           1,758              1,878
     Research and development                                  1,813              1,752           3,750              3,507
     Selling, general and administrative                       1,833              1,595           3,468              3,194
                                                            --------           --------        --------           --------

          Operating loss                                      (4,186)            (4,239)         (8,563)            (8,429)

Interest income                                                  124                214             255                483
Interest expense                                                 (49)               (25)           (100)               (44)
                                                            --------           --------        --------           --------


Net loss                                                    $ (4,111)          $ (4,050)       $ (8,408)          $ (7,990)
                                                            ========           ========        ========           ========

Basic and diluted net loss per common share                 $  (0.31)          $  (0.33)       $  (0.63)          $  (0.65)
                                                            ========           ========        ========           ========

Shares used in computing basic and diluted
net loss per common share                                     13,406             12,248          13,382             12,226
                                                            ========           ========        ========           ========
</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 June 30,         Six months ended June 30,
                                                            ---------------------------        ---------------------------
                                                              2000               1999            2000               1999
                                                              ----               ----            ----               ----
<S>                                                         <C>                <C>             <C>                <C>
Net loss                                                    $ (4,111)          $ (4,050)       $ (8,408)          $ (7,990)

Change in unrealized gain (loss) on short-term investments        (7)                (7)             40                (30)

Translation adjustments                                          (15)               (10)            (13)                 1
                                                            --------           --------        --------           --------

Comprehensive loss                                          $ (4,133)          $ (4,067)       $ (8,381)          $ (8,019)
                                                            ========           ========        ========           ========
</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>
                                                                                               Six months ended June 30,
                                                                                               -------------------------
                                                                                               2000                 1999
                                                                                               ----                 ----
<S>                                                                                          <C>                    <C>
Cash flows from operating activities:
     Net loss                                                                                $(8,408)               $(7,990)
     Adjustments to reconcile net loss to cash used in
          operating activities:
          Amortization of deferred compensation                                                  155                    278
          Stock based compensation                                                                16                      -
          Depreciation and amortization                                                          395                    390
          Changes in operating assets and liabilities:
                Accounts receivable                                                              (27)                   181
                Inventories                                                                     (116)                    67
                Prepaid expenses and other current assets                                        318                    (42)
                Accounts payable                                                                 (21)                  (248)
                Accrued compensation                                                            (230)                  (161)
                Deferred revenue                                                                (181)                     -
                Other accrued liabilities                                                        360                    184
                                                                                             -------                -------
                      Net cash used in operating activities                                   (7,739)                (7,341)
                                                                                             -------                -------

Cash flows from investing activities
     Purchases of short-term investments                                                      (3,656)                  (800)
     Maturities of short-term & long-term investments                                          9,085                 14,658
     Purchases of property and equipment                                                        (234)                  (133)
     Change in other assets                                                                        4                      2
                                                                                             -------                -------
                      Net cash provided by investing activities                                5,199                 13,727
                                                                                             -------                -------

Cash flows from financing activities
     Payments on capital lease obligations                                                       (60)                  (137)
     Proceeds from bank borrowings                                                                 -                  4,000
     Payments on bank borrowings                                                                (250)                (4,000)
     Proceeds from issuance of common stock                                                      190                     93
     Payments on stockholders notes receivable                                                   182
     Issuance of notes receivable to stockholder                                                (120)                  (270)
                                                                                             -------                -------
                      Net cash used in financing activities                                      (58)                  (314)
                                                                                             -------                -------

Net increase (decrease) in cash and cash equivalents                                          (2,598)                 6,072
Effect of exchange rates on cash and cash equivalents                                            (13)                   (29)
Cash and cash equivalents, beginning of period                                                 7,998                  3,401
                                                                                             -------                -------
Cash and cash equivalents, end of period                                                     $ 5,387                $ 9,444
                                                                                             =======                =======

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)

Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements as of and
for the three and six month periods ended June 30, 2000 of Symphonix Devices,
Inc. (the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation have been included.  Operating
results for the six month period ended June 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               Six months ended
                                                          ------------------               ----------------
                                                    June 30, 2000   June 30, 1999   June 30, 2000   June 30, 1999
                                                    -------------   -------------   -------------   -------------
<S>                                                 <C>             <C>             <C>             <C>
Basic and diluted:
Net loss...........................................    $(4,111)        $(4,050)        $(8,408)        $(7,990)
Weighted average common shares outstanding.........     13,406          12,248          13,382          12,226
Net loss per common share..........................    $ (0.31)        $ (0.33)         $(0.63)        $ (0.65)

Antidilutive Securities:
Options to purchase common stock...................      2,001             744           2,001             744
Common stock subject to repurchase.................         79               -              79               -
Warrants...........................................          7              34               7              34
                                                       -------         -------         -------         -------
                                                         2,087             778           2,087             778
                                                       =======         =======         =======         =======
</TABLE>

                                      -5-
<PAGE>

3.   Inventories:

     Inventories comprise (in thousands):

                                     June 30, 2000    December 31, 1999
                                     -------------    -----------------

Raw materials                             $120                 $211
Work in Progress                           351                  183
Finished goods                             307                  268
                                          ----                 ----
                                          $778                 $662
                                          ====                 ====

4.   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 is currently evaluating the effect, if any, that the
adoption of SAB 101 will have on the current revenue recognition policy.

     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.

     In March 2000, the FASB issued Interpretation No.44, Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25 ("FIN 44").  This Interpretation clarifies the definition of an employee for
the purposes of applying Accounting Practice Board Opinion No. 25, Accounting
for Stock Issued to Employees, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination.  This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000.  The Company believes that FIN 44 will
not have a material effect on the financial position or results of operation of
the Company.

                                      -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. As of June, 2000, approximately 370
patients have been implanted with the Vibrant Soundbridge in over 70 centers in
both the United States and Europe.

Results of Operations

     Revenue.  Revenue was $195,000 in the three months ended June 30, 2000
compared to $35,000 in the three months ended June 30, 1999.  Revenue was
$413,000 in the six months ended June 30, 2000 compared to $150,000 in the six
months ended June 30, 1999.   Revenue in these periods was the result of selling
activities to distributors and direct sales in Europe and Latin America.

     Cost of goods sold.  Cost of goods sold decreased to $735,000 for the three
months ended June 30, 2000 from $927,000 for the three months ended June 30,
1999 and decreased to $1,758,000 for the six months ended June 30, 2000 from
$1,878,000 for the six months ended June 30, 1999.  Cost of goods sold
represents the direct cost of the products sold as well as manufacturing
variances and provisions for warranty.

                                      -7-
<PAGE>

     Research and Development Expenses.  Research and development expenses were
$1.8 million in the three months ended June 30, 2000 and June 30, 1999.
Research and development expenses were $3.8 million in the six months ended
June 30, 2000 compared to $3.5 million in the six months ended June 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 $1.8 million in the three months ended June 30,
2000 compared to $1.6 million in the three months ended June 30, 1999 and were
$3.5 million in the six months ended June 30, 2000 compared to $3.2 million in
the six months ended June 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 $155,000 during the six months ended June 30, 2000 and $278,000
during the six months ended June 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
$75,000 in the three months ended June 30, 2000 from $189,000 in the three
months ended June 30, 1999 and decreased to $155,000 for the six months ended
June 30, 2000 from $439,000 for the six months ended June 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 $5.0
million and from bank borrowings totaling, net, $2.0 million.  At June 30, 2000,
the Company had $3.7 million in working capital, and its primary source of
liquidity was $6.8 million in cash, cash equivalents and short-term investments.

     Symphonix used $7.7 million in cash for operations in the six months ended
June 30, 2000, compared to $7.3 million in the six months ended June 30, 1999
primarily in funding its operating losses.

     Capital expenditures, primarily related to the Company's research and
development and manufacturing activities, were $234,000 and $133,000 in the six
months ended June 30, 2000 and 1999.  At June 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 June 30, 2000, the Company had borrowings of $1.8 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 if approved for marketing and other factors not within the Company's
control. The Company believes that its existing capital will be sufficient to
fund its operations and its capital investments through the second half of 2000.
Additionally, Siemens is committed to a purchase of $5.0 million of the
Company's common stock to be payable at the time of the premarket approval
("PMA") of the Company's Vibrant Soundbridge product.  Commencing in June 2000,
the Company expects to incur substantial expenses in developing a U.S. sales and
marketing organization.  To fully develop such a capability and to effectively
launch its products commercially in the United States, if approved by the U.S.
Food and Drug Administration ("FDA"), the Company expects that it will have to
raise additional financing.  There can be no assurance that such additional
financing will be available on a timely basis on terms acceptable to the
Company, or at all, or that such financing will not be dilutive to stockholders.
If adequate funds are not available, the Company could be required to delay
development or commercialization of certain of its products, license to third
parties the rights to commercialize

                                      -9-
<PAGE>

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.

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 is currently evaluating the effect, if any, that the
adoption of SAB 101 will have on the current revenue recognition policy.

                                      -10-
<PAGE>

     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.

     In March 2000, the FASB issued Interpretation No.44, Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25 ("FIN 44").  This Interpretation clarifies the definition of an employee for
the purposes of applying Accounting Practice Board Opinion No. 25, Accounting
for Stock Issued to Employees, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination.  This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000.  The Company believes that FIN 44 will
not have a material effect on the financial position or results of operation of
the Company.

Factors That May Affect Future Results

     History of Losses and Expectation of Future Losses. At June 30, 2000, the
Company had an accumulated deficit of $57.2 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 June 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. 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 are not currently available for sale in
the United States, significant product revenues will not be realized for at
least several years, if ever. The Company expects its operating losses to
continue at least through the year 2001 as it continues to expend substantial
funds for clinical trials in support of regulatory approvals, expansion of
research and development activities and establishment of commercial-scale
manufacturing and sales and marketing capabilities. There can be no assurance
that any of the Company's Soundbridges will be successfully commercialized
internationally or in the United States or that the Company will achieve
significant revenues from

                                      -11-
<PAGE>

product sales. In addition, there can be no assurance that the Company will
achieve or sustain profitability in the future. The Company's results of
operations may fluctuate from quarter to quarter or year to year and will depend
upon numerous factors, the timing and scope of research and development efforts,
the extent to which the Company's products gain market acceptance or achieve
reasonable reimbursement levels, the timing of scale-up of manufacturing
capabilities, the timing of expansion of sales and marketing activities and
competition.

     Limited Clinical Testing Experience. In the United States, the Company has
received unanimous recommendation from the Ear, Nose, and Throat Medical Devices
Advisory Panel for the FDA to approve, with conditions, the device for use in
the U.S. of the Vibrant P and Vibrant D Soundbridges. 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 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.



                                      -12-
<PAGE>

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 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

                                      -13-
<PAGE>

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 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.  There can be no assurance that
the Company's clinical trial effort will progress as expected, will not be
delayed or that such effort will lead to the successful development of any
product. No assurance can be given that any of the Company's clinical trials
will continue to be allowed by the FDA or other regulatory agencies or that
clinical trials will commence as planned.

     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.


                                      -14-
<PAGE>

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

     Subsequent to the receipt of a FDA approval, the Company will continue to
be regulated by the FDA with regard to the reporting of adverse events related
to its products, and ongoing compliance with QS regulation. The Company's
manufacturing facility must be registered with the FDA and the 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 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

                                      -15-
<PAGE>

issues, if any, constitute an acceptable risk when weighed against the intended
benefits of the device. The two principal aspects of assessing conformity for
Active Implantable Medical Devices are determinations from the Notified Body
that the processes employed in the design and manufacture of a device qualify as
a full quality system in compliance with applicable standards (e.g., EN ISO
9001, EN 46001 and 90/385/EEC), and that the technical, preclinical, and
clinical data gathered on the device are adequate to support CE marking.

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

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

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

     No Assurance of Market Acceptance. The market acceptance of the Company's
Soundbridges will depend upon their acceptance by the medical community and
patients as clinically useful, reliable and cost-effective compared to other
devices. Clinical acceptance will depend on numerous factors, including the
establishment of the safety and the effectiveness of the Soundbridge's ability
to drive the ossicles directly and improve hearing over currently available
hearing aids. Clinical acceptance will also depend on the receipt of regulatory
approvals in the United States and the Company's ability to adequately train ear
surgeons on the techniques for implanting the Company's Soundbridges. There can
be no assurance that the Company's Soundbridges will be preferable alternatives
to existing devices, some of which, such as the acoustic hearing aid, do not
require surgery, or that the Company's Soundbridges will not be rendered
obsolete or noncompetitive by products under development by other companies.
Patient acceptance of the Company's Soundbridges will depend in part upon
physician, audiologist and surgeon recommendations as well as other factors,
including the effectiveness, safety, reliability and invasiveness of the
procedure as

                                      -16-
<PAGE>

compared to established approaches. Prior to undergoing surgery for the
implantation of the Company's Soundbridge, a patient may speak with a number of
medical professionals, including the patient's primary care physician, an
audiologist, an ENT specialist, as well as surgeons who specialize in ear
surgery. The failure by any of these medical professionals to favorably
recommend the Company's products and the surgery required to implant the
Soundbridge could limit the number of potential patients who are introduced to
an ear surgeon as candidates for the Company's Soundbridges. Even if the
Company's Soundbridges are adopted by the medical community, a significant
market may not develop for the Company's products unless acceptable
reimbursement from health care payors is available. There can be no assurance
that the Company's Soundbridges will be accepted by the medical community or
consumers, that acceptable reimbursement from third-party payors will be
available or that market demand for such products will be sufficient to allow
the Company to achieve profitable operations. Failure of the Company's
Soundbridges, for whatever reason, to achieve significant adoption by the
medical community or consumers or failure of the Company's products to achieve
any significant market acceptance would have a material adverse effect on the
Company's business, financial condition and results of operations.

     Highly Competitive Market; Risk of Competing Hearing Devices. The medical
device industry is subject to intense competition in the United States and
abroad. The Company believes its products will compete primarily with the
traditional approaches to managing hearing impairment, principally hearing aids.
Principal manufacturers of acoustic hearing aids include Siemens Hearing
Instruments, Inc., Starkey Laboratories Inc., Dahlberg Inc., GN ReSound Inc.,
Oticon, Inc., Widex Hearing Aid Co., Inc. and Phonak Inc. There can be no
assurance that the Company's Soundbridges will be able to successfully compete
with established hearing aid products. Although, to the Company's knowledge,
none of these acoustic hearing aid manufacturers are currently developing direct
drive devices, there can be no assurance that these potential competitors will
not succeed in developing technologies and products in the future that are more
effective, less expensive than those being developed by the Company or that do
not require surgery. The Company is aware of several university research groups
and development-stage companies that have active research or development
programs related to direct drive devices for sensorineural hearing loss. One
such company, IMPLEX AG Hearing Technology, was authorized by their European
Notified Body on November 15, 1999 to affix the CE mark on their totally
integrated cochlear amplifier (TICA).  This company has reported its intent to
pursue a clinical investigation in the U.S. to support FDA regulatory
requirements, but to the Company's knowledge, has not been given IDE approval to
initiate those trials. A US based company, Otologics, LLC is developing a semi-
implantable direct drive device for sensorineural hearing loss called the MET
(middle ear transducer). This device has begun the FDA regulatory process,
completing the Phase I (feasibility) study and recently initiating limited
multicenter clinical trials. In addition, some large medical device companies,
some of which are currently marketing implantable medical devices, may develop
programs in hearing management.  Certain of these companies have substantially
greater financial, technical, manufacturing, marketing and other resources than
the Company. In addition, there can be no assurance that certain of the
Company's competitors will not develop technologies and products that may be
more effective in managing hearing impairment than the Company's products or
that render the Company's products obsolete.

                                      -17-
<PAGE>

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

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

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

                                      -18-
<PAGE>

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

     Dependence upon Patents and Proprietary Technology. In the United States,
the Company holds 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

                                      -19-
<PAGE>

and potential competitors and other third parties have not filed, or in the
future, will not file, applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights relating to
products or processes used or proposed to be used by the Company. In addition,
patent applications in foreign countries are maintained in secrecy for a period
after filing. Publication of discoveries in the scientific or patent literature
tends to lag behind actual discoveries and the filing of related patent
applications. There may be pending applications, which if issued with claims in
their present form, might provide proprietary rights to third parties relating
to products or processes used or proposed to be used by the Company. The Company
may be required to obtain licenses to patents or proprietary rights of others.
Further, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. Litigation or regulatory proceedings, which could result in substantial
cost and uncertainty to the Company, may also be necessary to enforce patent or
other intellectual property rights of the Company or to determine the scope and
validity of other parties' proprietary rights. There can be no assurance that
the Company will have the financial resources to defend its patents from
infringement or claims of invalidity.

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

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

                                      -20-
<PAGE>

invalid in any litigation or administrative proceeding, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from the patent owners of each such patent, or to
redesign its products or processes to avoid infringement. In addition, in the
event of any possible infringement, there can be no assurance that the Company
would be successful in any attempt to redesign its products or processes to
avoid such infringement or in obtaining licenses on terms acceptable to the
Company, if at all. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure by the Company to redesign its products or
processes or to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
Although the Company has not been involved in any litigation to date, in the
future, costly and time-consuming litigation brought by the Company may be
necessary to enforce patents issued to the Company, to protect trade secrets or
know-how owned by the Company, or to determine the enforceability, scope and
validity of the proprietary rights of others.


     Future Capital Requirements; Uncertainty of Additional Funding. The Company
will expend substantial funds in the future for research and development,
preclinical and clinical testing, capital expenditures and the manufacturing,
marketing and sale of its products. The timing and amount of spending of such
capital resources cannot be accurately predicted and will depend upon several
factors, including the progress of its research and development efforts and
preclinical and clinical activities, competing technological and market
developments, the time and costs of obtaining regulatory approvals, the time and
costs involved in filing, prosecuting and enforcing patent claims, the progress
and cost of commercialization of products currently under development, market
acceptance and demand for the Company's products in the United States, if
approved for marketing, and internationally and other factors not within the
Company's control. On February 17, 1998, the Company completed an initial public
offering of 2,300,000 shares of common stock. On February 27, 1998, the Company
completed the sale of an additional 345,000 shares of common stock pursuant to
the exercise by the underwriters of an over allotment option. On December 1,
1999 the Company completed a private placement of 1,000,000 common shares with
Siemens Audiologische Technik GmbH. Net proceeds to the Company totaled
approximately $33.4 million. Additionally, Siemens will purchase an additional
$5.0 million common shares in a private placement in the event the FDA accepts
the PMA of the Company's Vibrant Soundbridge product. While the Company
believes that the net proceeds of the offering, together with its previously
existing capital resources and projected interest income, will be sufficient
to fund its operations and its capital investments through the second half of
2000, there can be no assurance that the Company will not require additional
financing prior to that time. In addition, there can be no assurance that such
additional financing will be available on a timely basis on terms acceptable
to the Company, or at all, or that such financing will not be dilutive to
stockholders. If adequate funds are not available, the Company could be
required to delay development or commercialization of certain of its products,
to license to third parties the rights to commercialize certain products or
technologies that the Company would otherwise seek to commercialize for
itself, or to reduce the marketing, customer support or other resources
devoted to certain of its products, any of which could have a material adverse
effect on the Company's business, financial condition and results of
operations.

                                      -21-
<PAGE>

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

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

     The Company has established a European sales and marketing organization
which, as of June 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. The Company believes this partnership
will significantly enhance its presence, especially within the audiology
community. In the United States, the Company intends to establish a direct sales
force focused on both surgeons and audiologists. In other international markets,
including Japan, the Company will seek to establish either a network of
distributors or a strategic partner.

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

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

                                      -22-
<PAGE>

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

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

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

     Third-party payors that do not use prospectively fixed payments
increasingly use other cost-containment processes or require various outcomes
data that may pose administrative hurdles to the use of the Company's products.
In addition, third-party payors may deny reimbursement if they determine that
the device used in a procedure is unnecessary, inappropriate, experimental, used
for a non-approved indication or is not cost-effective. Potential purchasers
must determine that the clinical benefits of the Company's products justify the
additional cost or the additional effort required to obtain prior authorization
or coverage and the uncertainty of actually obtaining such authorization or
coverage.

     Even after obtaining the necessary foreign regulatory approvals, market
acceptance of the Company's products and products currently under development in
international markets will be dependent, in part, upon the availability of
reimbursement within prevailing health care payment systems. Reimbursement and
health care payment systems in international markets vary significantly by
country, and include both government sponsored health care and private
insurance. The Company believes that in Europe, the primary source of funding
for products such as the Company's products is the various government sponsored
healthcare programs. Requirements for the granting of

                                      -23-
<PAGE>

reimbursement in many countries are not clearly specified and may involve the
collection of additional clinical data in support of submissions to the
appropriate health care administrations. There can be no assurance that any
required data would be available on a timely basis or that any international
reimbursement approvals will be obtained in a timely manner, if at all. Failure
to receive international reimbursement approvals could have a material adverse
effect on market acceptance of the Company's products in the EU as well as in
international markets in which such approvals are sought.

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


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

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


Item 3.   Quantitative and Qualitative Disclosures About Market Risk

     The Company considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative

                                      -24-
<PAGE>

Financial Instruments, Other Financial Instruments and Derivative Commodity
Instruments". The Company had no holdings of derivative financial or commodity
instruments at June 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 June 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

                                      -25-
<PAGE>

Item 3.   Defaults upon Senior Securities.

     None

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

          (a)  The Company held its Annual Meeting of Stockholders on May 18,
               2000.

          (b)  The Company's stockholders voted upon the following matters:

               (1)  Election of Class II directors. All nominees were elected,
               with the votes indicated below:

                                                    Authority
               Name                     Votes For               Against

               Petri Vainio             9,362,935               210,442
               George Montgomery        9,342,267               231,110

               (2)  Appointment of PricewaterhouseCoopers LLP as the Company's
               independent auditors for the 2000 fiscal year, 9,570,177 votes
               were cast in favor of the appointment 3,000 votes were cast
               against and there were 200 abstentions.

               (3)  Adoption of an amendment to the Company's 1994 Stock
               Option Plan ("Plan") to increase the number of shares
               authorized to be issued under the Plan by 1,000,000 shares.
               8,730,163 votes were cast in favor of the amendment, 843,014
               votes were cast against, there were 200 abstentions.

               (4)  Adoption of an amendment of the Company's 1997 Employee
               Stock Purchase Plan ("Purchase Plan") to increase the number of
               shares authorized to be issued under the Purchase Plan by
               200,000 shares. 9,556,547 votes were cast in favor of the
               amendment, 16,630 votes were cast against, there were 200
               abstentions.

Item 5.   Other Information.

     None

Item 6.   Exhibits and Reports on Form 8-K

          (a)  Exhibits

               The following exhibit is filed as part of this report:

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

          (b)  No reports on Form 8-K were filed during the quarter ended
               June 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:  August 2, 2000         SYMPHONIX DEVICES, INC.

                                   /s/ Kirk Davis
                                   -----------------------------------
                                   Kirk 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)

                                      -26-