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

                                  FORM 10-Q


    [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999.


                                       OR


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

                             COMMISSION FILE NO.

                           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 April 30, 1999, 12,206,710 shares of the Registrant's Common Stock were
                                  outstanding.
<PAGE>
 
                           SYMPHONIX DEVICES, INC.

                              TABLE OF CONTENTS
 
PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements (unaudited)

         Condensed Consolidated Balance Sheets as of March 31, 1999 
         and December 31, 1998............................................. 1

         Condensed Consolidated Statements of Operations for the three 
         months ended March 31, 1999 and 1998.............................. 2

         Condensed Consolidated Statements of  Comprehensive Loss for 
         the three months ended March 31, 1999 and 1998.................... 3

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

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

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk........25

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.................................................26

Item 2.  Changes in Securities and Use of Proceeds.........................26

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

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

Item 5.  Other Information.................................................27

Item 6.  Exhibits..........................................................27



                                     -i-
<PAGE>
 
PART I.       FINANCIAL INFORMATION

Item 1.  Financial Statements

                           SYMPHONIX DEVICES INC.

                    CONDENSED CONSOLIDATED BALANCE SHEETS
                               (in thousands)
                                 (unaudited)

<TABLE>
<CAPTION>
                                                                                                                            
                                                                                   March 31,               December 31,       
                                                                                     1999                     1998           
                                                                            --------------------      --------------------  

                                                          ASSETS
<S>                                                                          <C>                   <C>
Current assets:
     Cash and cash equivalents                                                          $  8,591                  $  3,401
     Short-term investments                                                               12,201                    21,916
     Accounts receivable, net                                                                266                       228
     Inventories                                                                             557                       761
     Prepaid expenses and other current assets                                               313                       211
                                                                            --------------------      --------------------  
          Total current assets                                                            21,928                    26,517
 
Property and equipment, net                                                                2,018                     2,100
Other assets                                                                                  78                        78
                                                                            --------------------      --------------------  
          Total assets                                                                  $ 24,024                  $ 28,695
                                                                            ====================      ====================  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                                   $    431                  $    684
     Accrued compensation                                                                    674                     1,060
     Other accrued liabilities                                                               612                       751
     Current portion of bank borrowings                                                      125                         -
     Current portion of  capital lease obligations                                           189                       227
                                                                            --------------------      --------------------  
          Total current liabilities                                                        2,031                     2,722
 
Capital lease obligations, less current portion                                               64                        98
Bank borrowings, less current portion                                                      1,875                     2,000
                                                                            --------------------      --------------------  
 
          Total liabilities                                                                3,970                     4,820
                                                                            --------------------      --------------------  
 
Stockholders' equity:
     Common stock                                                                             12                        12
     Notes receivable from stockholders                                                     (484)                     (484)
     Deferred compensation                                                                (1,378)                   (1,517)
     Additional paid-in capital                                                           58,045                    58,040
     Accumulated other comprehensive loss                                                    (51)                      (26)
     Accumulated deficit                                                                 (36,090)                  (32,150)
                                                                            --------------------      --------------------  
          Total stockholders' equity                                                      20,054                    23,875
                                                                            --------------------      --------------------  
 
          Total liabilities and stockholders' equity                                    $ 24,024                  $ 28,695
                                                                            ====================      ====================  
 
</TABLE>
  The accompanying notes are an integral part of these condensed consolidated
                             financial statements
<PAGE>
 
                            SYMPHONIX DEVICES INC.

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

 
                                                Three months ended March 31,
                                               1999                     1998
                                               ----                     ----
 
Revenue                                      $    115                  $     -
 
Costs and expenses:
     Cost of goods sold                           951                        -
     Research and development                   1,862                    1,798
     Selling, general and administrative        1,492                    1,115
                                             --------                 --------
 
          Operating loss                       (4,190)                  (2,913)
 
Interest income                                   269                      254
Interest expense                                  (19)                     (31)
 
Net loss                                     $ (3,940)                $ (2,690)
                                             ========                 ========
 
Basic and diluted net loss                   
 per common share                            $  (0.32)                $  (0.36)
                                             ========                 ========  
Shares used in computing basic and 
 diluted net loss per common share             12,205                    7,451
                                             ========                 ========
 
 
 
  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)
 
 
                                            Three months ended March 31,
                                            ----------------------------
                                          1999                       1998
                                          ----                       ----
 
Net loss                               $  (3,940)                 $  (2,690) 
 
Unrealized gains(losses)                              
 on short-term investments                   (12)                        26
 
Translation adjustments                      (13)                       (10)
                                       ---------                  ---------
 
Comprehensive loss                     $  (3,965)                 $  (2,674) 
                                       =========                  =========
 
 
        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)
 
                                                   Three months ended March 31,
                                                   ----------------------------
                                                   1999                   1998
                                                   ----                   ----
 
Cash flows from operating activities:
  Net loss                                       $(3,940)              $(2,690)
  Adjustments to reconcile net loss to 
    cash used in operating activities:
    Amortization of deferred compensation            139                   139
    Depreciation and amortization                    200                   111
    Changes in operating assets and liabilities:
      Accounts receivable                            (38)                    -
      Inventories                                    204                  (100)
      Prepaid expenses and other current assets     (102)                  159
      Accounts payable                              (253)                  476
      Accrued compensation                          (386)                 (490)
      Other accrued liabilities                     (139)                  (41)
                                                 -------              --------
        Net cash used in operating activities     (4,315)               (2,436)
                                                 -------              --------
 
Cash flows from investing activities
  Purchases of short-term investments             (3,800)              (14,120)
  Maturities of short-term investments            13,503                 2,377
  Purchases of property and equipment               (118)                 (904)
       Net cash provided by (used in) investing 
         activities                                9,585               (12,647)
                                                 -------              --------
 
Cash flows from financing activities
  Payments on capital lease obligations              (72)                  (78)
  Proceeds from bank borrowings                    2,000                 2,000
                                      
  Payments on bank borrowings                     (2,000)               (2,000)
  Proceeds from issuance of common stock, net          5                28,404
                                                 -------              --------
       Net cash provided by (used in) financing 
        activities                                   (67)               28,326
 
Net increase in cash and cash equivalents          5,203                13,243
Effect of exchange rates on cash and cash 
  equivalents                                        (13)                  (10)
Cash and cash equivalents,                          
 beginning of period                               3,401                 4,908
                                                 -------              --------
Cash and cash equivalents,                       
 end of period                                   $ 8,591              $ 18,141
                                                 -------              --------

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

                                      -4-
<PAGE>
 
                            SYMPHONIX DEVICES, INC.

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

                                        
1.   Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements as of
March 31, 1999 of Symphonix Devices, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation
have been included.  Operating results for the three month period ended March
31, 1999 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 1999, 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, 1998 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 and diluted net loss per common share are computed using the weighted
average number of shares of common stock outstanding. Common equivalent shares
from stock options, warrants, and preferred stock are excluded from the
computation of diluted net loss per common share, as their effect is
antidilutive.

Stock options and warrants to purchase 767,161 and 601,000 shares of common
stock at prices ranging from $0.14 to $8.81 per share were outstanding at March
31, 1999 and 1998, respectively, but were not included in the computation of
diluted net loss per common share because they were antidilutive. The
aforementioned stock options and warrants could potentially dilute earnings per
share in the future.

 
3.  Inventories:
 
    Inventories Comprise (in thousands):
                                          March 31, 1999   December 31, 1998
                                          --------------   -----------------
                               
Raw materials                             $          288   $             418
Work in Progress                                      87                 182
Finished goods                                       182                 161
                                          --------------   -----------------
                                          $          557   $             761
                                          ==============   =================

                                      -5-
<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, 1998 and
the footnotes thereto. The information set forth below contains forward-looking
statements 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") is a developer of
proprietary semi-implantable and implantable products, or soundbridges, for the
management of moderate to severe hearing impairment. In 1994, mild to severe
hearing impairment affected approximately 26 million people in the United
States, or 10% of the population, of whom approximately 17 million people were
classified as moderately or severely hearing impaired. The Company believes that
its family of Vibrant soundbridges, designed to overcome the inherent
limitations of traditional hearing devices, represent a novel approach in the
management of hearing impairment. The Company's initial products, the Vibrant P,
Vibrant HF and Vibrant D soundbridges, are semi-implantable devices which
mechanically drive the three small bones of the middle ear to overcome the
user's hearing impairment. The Vibrant P soundbridge is a second generation
product that is similar to the first generation Vibrant soundbridge but is
designed to permit a greater degree of customization to address the specific
needs of a particular user's hearing loss and expand the types of hearing loss
that can be managed by the Company's products. The Vibrant HF soundbridge is
designed for people with a noise-induced high frequency hearing loss and the
Vibrant D soundbridge incorporates digital signal processing.

     In September 1996, the Company initiated clinical trials of the first
generation Vibrant soundbridge in both the United States and Europe. The Company
initiated clinical trials of the Vibrant P soundbridge in Europe in July 1997
and in the United States in March 1998. In November 1998, the Company initiated
clinical trials of the Vibrant HF soundbridge in both Europe and the United
States. The Company has received permission to affix the CE mark in the European
Union to the Vibrant P and Vibrant HF soundbridges, and began selling activities
for the Vibrant P soundbridge in March 1998. The Company plans to commence
selling activities for the Vibrant HF soundbridge in Europe after it has
gathered clinical data on a limited number of patients. As of March 31, 1999,
approximately 200 patients have been implanted with the Company's soundbridges.

Results of Operations

     Revenue.  Revenue of $115,000 was recorded in the quarter ended in March
31, 1999 for sales of Vibrant P soundbridge in Europe. No revenue was recorded
in the quarter ended March 31, 1998.

     Cost of goods sold.  Cost of goods sold was $951,000 for the quarter ended
March 31, 1999 and represents the direct cost of the products sold as well as a
portion of the manufacturing overhead. There was no cost of goods sold for the
quarter ended March 31, 1998.

                                      -6-
<PAGE>
 
     Research and Development Expenses.  Research and development expenses of
$1.9 million in the quarter ended March 31, 1999 were essentially unchanged from
the quarter ended March 31, 1998. Research and development expenses consist
primarily of personnel costs, professional services, materials, supplies and
equipment in support of product development, clinical trials, regulatory
submissions, preparation and filing of patent applications and the start-up of
manufacturing.

     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased to $1.5 million in the quarter ended March 31,
1999 from $1.1 million in the quarter ended March 31, 1998. Selling, general and
administrative expenses consist primarily of personnel costs, promotional costs,
legal and consulting costs. These costs increased primarily due to
administrative costs associated with the increased scope of the Company
operations and becoming a public company. In addition, the Company continues to
expand its international sales and marketing efforts. Costs associated with
these activities impacted the quarter ended March 31, 1999 and are expected to
increase over the remaining quarters of 1999.

     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 of $139,000 attributed to such options was
amortized during the quarter ended March 31, 1999. The remaining deferred
compensation will be amortized over the vesting period of the options (generally
four years).

     Interest Income (Expense).  Interest income, net of expense, increased to
$250,000 in the quarter ended March 31, 1999 from $223,000 in the quarter ended
March 31, 1998. Increase is due mainly to higher average cash, cash equivalents
and short-term investments balances. Interest earned in the future will depend
on the Company's funding cycles and prevailing interest rates.

     Income Taxes.  As a result of the net losses incurred, the Company has not
incurred any income tax obligations. At December 31, 1998, the Company had net
operating loss carryforwards of $25 million for federal and $19 million for
state income tax purposes, which will expire at various dates through 2013 and
through 2003, respectively, if not utilized. The principal differences between
losses for financial and tax reporting purposes are the result of the
capitalization of research and development and start-up expenses for tax
purposes. United States and state tax laws contain provisions that may limit the
net operating loss carryforwards that can be used in any given year, should
certain changes in the beneficial ownership of the Company's shares occur. Such
events could limit the future utilization of the Company's net operating loss
carryforwards.

Liquidity and Capital Resources

     Since inception, the Company has funded its operations and 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 and
from bank borrowings totaling, net, $2.0 million. At March 31, 1999, the Company
had $19.9 million in working capital, and its primary source of liquidity was
$20.8 million in cash, cash equivalents and short-term investments.

                                      -7-
<PAGE>
 
     Symphonix used $4.3 million in cash for operations in the quarter ended
March 31, 1999, an increase of $1.9 million from the quarter ended March 31,
1998. This increase was primarily due to the increase in net loss.
 
     Capital expenditures, primarily related to the Company's research and
development and manufacturing activities, were $118,000, and $904,000 in the
quarters ended March 31, 1999 and 1998, respectively.  At March 31, 1999, the
Company did not have any material commitments for capital expenditures.

     In October 1997 the Company entered into a five-year lease for a new
facility that commenced in January 1998.  During the quarter ended March 31,
1998, the Company occupied the new facility and relocated its research and
development and administrative activities to the new facility.  The relocation
of manufacturing activities to the new facility was completed in April 1998.
Through December 31, 1998, the Company had incurred approximately $1.6 million
in capital expenditures on leasehold improvements and furniture and fixtures
related to the new facility.

     The Company has a loan agreement with a bank providing for borrowings of up
to $2.0 million and for the issuance of letters of credit up to $250,000. At
March 31, 1999, the Company had borrowings of $2.0 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. While the Company believes that its existing capital will be sufficient
to fund its operations and its capital investments through 1999, there can be no
assurance that the Company will not require additional financing prior to that
time. In addition, there can be no assurance that such additional financing will
be available on a timely basis on terms acceptable to the Company, or at all, or
that such financing will not be dilutive to stockholders. If adequate funds are
not available, the Company could be required to delay development or
commercialization of certain of its products, license to third parties the
rights to commercialize certain products or technologies that the Company would
otherwise seek to commercialize for itself, or reduce the marketing, customer
support or other resources devoted to certain of its products, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Year 2000 Compliance

     The Company has initiated planning for issues related to the upcoming new
millennium. These issues derive from the use of software and hardware with
embedded chips or processors that 

                                      -8-
<PAGE>
 
use two digits to refer to a year and do not properly recognize a year that
begins with "20" instead of the familiar "19". The use of such software and
hardware occurs at many internal and external points in the Company's
development, supply, manufacturing and distribution chain - both within the
Company's internal operations as well as at important external partners, such as
vendors and customers.

     The Company has developed a plan to address these issues and to enhance the
Company's readiness for Year 2000. The Company's plan (the "Year 2000 Readiness
Program") focuses on five areas: (1) network and facility infrastructure, (2)
business applications software, (3) process control systems, (4) external
partners, and (5) the Company's products. Within each area, the Year 2000
Readiness Program will involve (a) the identification of systems that may be
susceptible to Year 2000 issues (the "identification phase"), (b) the assessment
of the degree of readiness of those systems for the Year 2000 and an assessment
of the risks that may be posed to the Company's business (the "assessment
phase"), (c) the remediation of problems that are identified (the "remediation
phase"), and (d) contingency planning.

     Network and facility infrastructure:  Included in this category are
the computer networks in the Company's San Jose, California headquarters and
Basel, Switzerland European headquarters (including servers, computers, other
network equipment and computer and network operating systems), together with
general facility systems such as telephone and security systems.  The Company
has completed the identification phase and expects that the assessment phase
will be completed during the second quarter of 1999, at which time remediation
and contingency planning will be initiated as appropriate.

     Business applications software:  Included in this category are various
applications used in design, manufacturing, distribution and finance. The
Company's primary business application is a company-wide system used for
manufacturing planning, accounting, inventory management and sales transactions.
The Company has completed the identification phase and expects that the
assessment phase will be completed during the second quarter of 1999, at which
time remediation and contingency planning will be initiated as appropriate. For
many software applications, the Company will, in the assessment phase, rely on
the software developer's representations regarding Year 2000 compliance of their
software. There can be no assurance, however, that software applications
represented by developers as being Year 2000 compliant will be free from Year
2000 errors and defects.

     Process control systems:  Included in this category are instrumentation and
systems used in design and manufacturing processes. The Company expects that the
identification and assessment phases will be completed during the second quarter
of 1999 at which time remediation and contingency planning will be initiated as
appropriate.

     External partners: The Company intends to assess the possible effects on
its operations of the Year 2000 compliance of certain relevant third parties,
such as customers and service providers by using questionnaires and, in limited
cases, site visits and interviews to solicit information from these parties. In
the event the Company identifies a problem with respect to a particular vendor,
then the Company may be forced to identify alternative sources of supply.
However, the Company's 

                                      -9-
<PAGE>
 
ability to seek alternative sources of supply is subject to FDA restrictions and
may involve extensive validation processes. The failure to timely identify and
validate an alternative supplier could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has completed the identification phase and expects to initiate the assessment
phase by the second quarter of 1999.

     Symphonix products:  The Company's products are regulated by the FDA and
the FDA has advised manufacturers of medical devices to address readiness of
their products for year 2000 issues. The Company has completed a preliminary
assessment and has informed the FDA that the Company does not believe that any
of its existing products are susceptible to Year 2000 issues.

     The Company does not expect to incur costs in its Year 2000 Readiness
Program that will be material to its business, financial condition or results of
operations.  However, until the Company completes the identification and
assessment phases of its program, the full extent of the remediation costs will
not be known and there can be no assurance that such costs will not be material.
The Company will utilize both internal and external resources, such as
consultants and professional advisors, in implementing the Year 2000 Readiness
Program and the Company currently estimates that the external resources required
during the identification and assessment phases of the Year 2000 Readiness
Program will cost approximately $50,000.  Because the Year 2000 Readiness
Program is an ongoing process, all cost estimates are subject to change.
Specific contingency plans will be developed upon completion of the assessment
phases and may include additional procurement of inventory to assure continued
supply from vendors.

     Although the Company intends to complete all phases of its Year 2000
Readiness Program by December 31, 1999, there can be no assurance, even if this
program is successfully completed on schedule, that disruptions in the Company's
business will be avoided.  The Year 2000 issues are pervasive in nature and
involve highly technical issues, not all of which are under the Company's
control. Possible consequences of Year 2000 issues that the Company is unable to
adequately identify, assess or remediate include but are not limited to:  delays
in supplies from vendors, delays in shipment to customers, errors in processing
transactions, deficiencies in management of inventory, delays in collection of
funds from customers, and diversion of management time and effort to addressing
difficulties that emerge.  The goal of the Company's Year 2000 Readiness Program
is to plan for and reduce the risk of such difficulties.  There can be no
assurance that the Year 2000 Readiness Program will be completed in a timely
manner or will be successful.

Recent Accounting Pronouncement

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. 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. The Company, to date, has not engaged in
derivative and hedging activities. The Company will adopt SFAS No. 133 as
required for its first quarterly filing of the year 2000.

                                      -10-
<PAGE>
 
Factors That May Affect Future Results

     History of Losses and Expectation of Future Losses. At March 31, 1999, the
Company had an accumulated deficit of $36.1 million. Since the Company's
inception in 1994, substantially all of the Company's resources have been
dedicated to research and development, establishment of a European sales and
marketing organization and the initiation of sales and marketing activities in
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"). Although the Company has
commenced selling the Vibrant P soundbridge in Europe, through March 31,1999 the
Company has not generated significant revenues from these sales. The Company
received CE Mark approval for the Vibrant HF soundbridge in July 1998 and plans
to commence selling the Vibrant HF soundbridge after it has gathered clinical
data on a limited number of patients. In the United States, the Company's
Vibrant P and Vibrant HF soundbridges will require additional clinical testing
prior to the submission of a regulatory application for commercial use. All of
the Company's other products will require additional development, and
preclinical and clinical testing prior to the submission of a regulatory
application for commercial use internationally and domestically. Since the
Vibrant P soundbridge only recently became available for sale in the EU and is
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 2000 as it
continues to expend substantial funds for clinical trials in support of
regulatory approvals, expansion of research and development activities and
establishment of commercial-scale manufacturing and sales and marketing
capabilities. There can be no assurance that any of the Company's soundbridges
will be successfully commercialized internationally or in the United States or
that the Company will achieve significant revenues from product sales. In
addition, there can be no assurance that the Company will achieve or sustain
profitability in the future. The Company's results of operations may fluctuate
from quarter to quarter or year to year and will depend upon numerous factors,
including action relating to regulatory matters, progress of clinical trials,
the timing and scope of research and development efforts, the extent to which
the Company's products gain market acceptance or achieve reasonable
reimbursement levels, the timing of scale-up of manufacturing capabilities, the
timing of expansion of sales and marketing activities and competition.

     Limited Clinical Testing Experience.  In the United States, the Company has
received approval of an IDE and IDE supplements to conduct clinical trials of
the Vibrant, Vibrant P, Vibrant HF and Vibrant D soundbridges but has not yet
completed these trials. In Europe, the Vibrant and Vibrant P soundbridges have
been the subject of limited clinical testing. The Company intends to conduct
clinical testing of the external components of the Vibrant HF and Vibrant D
soundbridges. The implanted components of the Vibrant HF and Vibrant D
soundbridges are the same as the implanted components of the Vibrant P
soundbridge which was tested in clinical trials previously conducted by the
Company in Europe. None of the Company's other soundbridges under development
have been tested in human clinical trials and these soundbridges 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.

                                      -11-
<PAGE>
 
     The rate of completion of the Company's clinical trials may be delayed by
many factors, including slower than anticipated patient enrollment or adverse
events occurring during clinical trials. Completion of preclinical and clinical
activities may take several years, and the length of time for completion of the
required studies is unpredictable. In addition, data obtained from preclinical
and clinical activities are susceptible to varying interpretations, which could
delay, limit or prevent regulatory approval. No assurance can be given that any
of the Company's clinical trials will be successfully completed on a timely
basis, or at all, that additional clinical trials will be allowed by the FDA or
other regulatory authorities or that such clinical trials will commence as
planned. Any delays in the Company's clinical trials would have a material
adverse effect on the Company's business, financial condition and results of
operations. Success in preclinical studies or early stage clinical trials does
not assure success in later stage clinical trials.

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

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

United States

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

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

                                      -12-
<PAGE>
 
     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 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 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 hearing devices. The FDA has recently implemented a new streamlined
PMA process called the modular PMA. Under the modular PMA process, modules
reflecting the content requirements of a traditional PMA can be submitted as
they are completed, allowing them to be reviewed and approved in a sequential
manner.

     Before the Company's products can be commercialized in the United States,
the Company must submit, in a PMA, 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. The Company has enrolled 55 subjects in
the study. However, because the IDE supplement allowing the inclusion of the
Vibrant HF soundbridge was approved when enrollment was almost complete, only
one of the 

                                      -13-
<PAGE>
 
55 subjects is to be fitted with a Vibrant HF soundbridge. 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 expects to enroll these
additional subjects in 1999. In March, 1999 the FDA approved an IDE supplement
permitting the evaluation of the Vibrant D soundbridge. Patients who have
completed the clinical trial protocol for the Vibrant P soundbridge may be
enrolled in the evaluation of the Vibrant D soundbridge. Thus, no additional
subjects are planned for enrollment for the Vibrant D soundbridge. There can be
no assurance that the Company's clinical trial effort will progress as expected,
will not be delayed or that such effort will lead to the successful development
of any product. No assurance can be given that any of the Company's clinical
trials will continue to be allowed by the FDA or other regulatory agencies 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.

     After a PMA is filed, the FDA begins its review of the submitted
information, which generally takes between one and two years, but may take
significantly longer. During this review period, the FDA may request additional
information or clarification of information already provided. Also during the
review period, an advisory panel of experts from outside the FDA will be
convened to review and evaluate the application and provide recommendations to
the FDA as to the approvability of the device. In addition, the FDA will conduct
a preapproval inspection of the manufacturing facility to ensure compliance with
QS regulation requirements. There can be no assurance that the Company will be
able to meet the FDA's requirements or that any necessary approval will be
granted in a reasonable time frame, or at all.

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

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

                                      -14-
<PAGE>
 
     Subsequent to the receipt of an FDA approval, the Company will continue to
be regulated by the FDA with regard to the reporting of adverse events related
to its products, and ongoing compliance with QS regulation. The Company's
manufacturing facility must be registered with the FDA and the CDHS and will be
subject to periodic inspections by the FDA and by the CDHS. A Device
Manufacturing License has been issued by the State of California and this
license must be renewed annually for the Company to continue manufacture of
medical devices in California.

Europe

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

     Devices that comply with the requirements of a relevant directive will be
entitled to bear CE conformity marking, indicating that the device conforms with
the essential requirements of the applicable directive, and accordingly, can be
commercially distributed throughout the EU. The method of assessing conformity
varies depending on the class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third-party assessment
by a Notified Body. This third party assessment may consist of an audit of the
manufacturer's quality system and specific testing of the manufacturer's
product. An assessment by a Notified Body in one country within the EU is
required in order for a manufacturer to commercially distribute the product
throughout the EU.

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

     The Company has undergone an inspection by its Notified Body and its
quality system has been certified by the Notified Body as being in compliance
with the required standards. The 

                                      -15-
<PAGE>
 
Company has received approval to affix the CE mark to the Vibrant P and Vibrant
HF soundbridges. With regard to the Vibrant D soundbridge, the Company has
submitted the technical data that its Notified Body has indicated will be
required to satisfy the essential requirements of the AIMDD. 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
soundbridge. The Notified Body has not yet, but may, request additional clinical
data for the Vibrant D soundbridge. 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 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 

                                      -16-
<PAGE>
 
develop for the Company's products unless acceptable reimbursement from health
care payors is available. There can be no assurance that the Company's
soundbridges will be accepted by the medical community or consumers, that
acceptable reimbursement from third-party payors will be available or that
market demand for such products will be sufficient to allow the Company to
achieve profitable operations. Failure of the Company's soundbridges, for
whatever reason, to achieve significant adoption by the medical community or
consumers or failure of the Company's products to achieve any significant market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations.

     Highly Competitive Market; Risk of Competing Hearing Devices.  The medical
device industry is subject to intense competition in the United States and
abroad. The Company believes its products will compete primarily with the
traditional approaches to managing hearing impairment, principally hearing aids.
Principal manufacturers of acoustic hearing aids include Siemens Hearing
Instruments, Inc., Philips Medical Systems North America Co., Starkey
Laboratories Inc., Beltone Electronics Corp., Dahlberg Inc., ReSound Corp.,
Oticon, Inc., Widex Hearing Aid Co., Inc. and Phonak Inc. There can be no
assurance that the Company's soundbridges will be able to successfully compete
with established hearing aid products. 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 sensorineural hearing devices. Research of this
type has been conducted at various sites for over 20 years. In addition, some
large medical device companies, some of which are currently marketing
implantable medical devices, may develop programs in hearing management. Certain
of these companies have substantially greater financial, technical,
manufacturing, marketing and other resources than the Company. In addition,
there can be no assurance that certain of the Company's competitors will not
develop technologies and products that may be more effective in managing hearing
impairment than the Company's products or that render the Company's products
obsolete.

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

     The medical device industry is characterized by rapid and significant
technological change. Accordingly, the Company's success will depend in part on
its ability to respond quickly to medical and technological change and user
preference through the development and introduction of new products that are of
high quality and that address patient and surgeon requirements.

                                      -17-
<PAGE>
 
     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 HF and Vibrant D soundbridges, the analog and digital signal
processing microcircuits, are provided by sole source suppliers.  None of the
Company's suppliers is contractually obligated to continue to supply the Company
nor is the Company contractually obligated to buy from a particular supplier.
For certain of these components and subassemblies, there are relatively few
alternative sources of supply, and establishing additional or replacement
suppliers for such components and subassemblies could not be accomplished
quickly. In addition, if the Company wishes to significantly modify its
manufacturing processes or change the supplier of a critical component,
additional approvals will be required from the FDA before the change can be
implemented. Because of the long lead time for some components and subassemblies
that are currently available from a single source, a supplier's inability or
failure to supply such components or subassemblies in a timely manner or the
Company's decision to change suppliers could have a material adverse effect on
the Company's business, financial condition and results of operations.

     The Company's manufacturing facilities are subject to periodic inspection 
by regulatory authorities, and its operations must undergo Quality System ("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 California Department of Health Services ("CDHS")
and a Device Manufacturing License has been issued to the Company. The Company
will be required to comply

                                      -18-
<PAGE>
 
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 9 issued patents and 11 pending patent applications, of which
3 have been allowed but not yet issued. Additionally, the Company has 1 issued
and 17 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 he Company's ability to make, use or sell
its products either in the United States or in international markets. Although
the Company has conducted searches of patents issued to other companies,
research or academic institutions or others, there can be no assurance that such
patents do not exist, have not been filed or could not be filed or issued, which
contain claims relating to the Company's technology, products or processes.
Patents issued and patent applications filed in the United States or
internationally relating to medical devices are numerous and there can be no
assurance that current and potential competitors and other third parties have
not filed or in the future will not file applications for, or have not received
or in the future will not receive, patents or obtain additional proprietary
rights relating to products or processes used or proposed to be used by the
Company. In addition, patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries 

                                      -19-
<PAGE>
 
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, who practice these procedures, from being sued for patent
infringement. Therefore, depending upon how these limitations are interpreted by
the courts, they could have a material adverse effect on the Company's ability
to enforce any of its proprietary methods or procedures deemed to be surgical or
medical procedures on a body. In certain other countries outside the United
States, patent coverage relating to the performance of surgical or medical
procedures is not available. Therefore, patent coverage in such countries will
be limited to the FMT or to narrower aspects of the FMT.

     The medical device industry in general has been characterized by
substantial litigation. Litigation regarding patent and other intellectual
property rights, whether with or without merit, could be time-consuming and
expensive to respond to and could distract the Company's technical and
management personnel. The Company may become involved in litigation to defend
against claims of infringement by the Company, to enforce patents issued to the
Company or to protect trade secrets of the Company. If any relevant claims of
third-party patents are held as infringed and not invalid in any litigation or
administrative proceeding, the Company could be prevented from practicing the
subject matter claimed in such patents, or would be required to obtain licenses
from the patent owners of each such patent, or to redesign its products or
processes to avoid infringement. In addition, in the event of any possible
infringement, there can be no assurance that the Company would be successful in
any attempt to redesign its products or processes to avoid such infringement or
in obtaining licenses on terms acceptable to the Company, if at all.
Accordingly, an adverse 

                                      -20-
<PAGE>
 
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.  Net proceeds to the Company totaled approximately
$28.4 million.  While the Company believes that the net proceeds of the
offering, together with its previously existing capital resources and projected
interest income, will be sufficient to fund its operations and its capital
investments through 1999, there can be no assurance that the Company will not
require additional financing prior to that time.  In addition, there can be no
assurance that such additional financing will be available on a timely basis on
terms acceptable to the Company, or at all, or that such financing will not be
dilutive to stockholders.  If adequate funds are not available, the Company
could be required to delay development or commercialization of certain of its
products, to license to third parties the rights to commercialize certain
products or technologies that the Company would otherwise seek to commercialize
for itself, or to reduce the marketing, customer support or other resources
devoted to certain of its products, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.

     Lack of Sales, Marketing and Distribution Experience. The primary market
for the Company's products in the United States is well defined and highly
concentrated. Of the approximately 8,000 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 specialists in otology who are currently
most active in ear surgery, and, subsequently, to the general population of ENT
surgeons. Because the surgical procedure for implementing the Company's
soundbridges utilizes many of the same techniques employed by surgeons trained
and experienced in cochlear implant surgery, the Company believes that surgeon
training will not be a significant impediment to market acceptance.

                                      -21-
<PAGE>
 
     The Company intends to position its family of Vibrant soundbridges as
technologically advanced implants that address an unmet patient need and add to
the products and services that surgeons can offer. Patients who have
traditionally been candidates for a hearing aid often are first seen by an ENT
surgeon, prior to being referred to a hearing device dealer or dispensing
audiologist. Accordingly, endorsement by the surgical community will be an
important goal of the Company's marketing programs. The Company will also seek
to develop a high degree of awareness by and endorsement from audiologists.

     The Company intends to promote the benefits of its products to consumers in
order to expand usage to include not only those who are currently dissatisfied
with hearing aids, but also those who have abandoned hearing aids due to either
dissatisfaction or perceived social stigma.

     The Company has established a European sales and marketing organization
which, as of March 31, 1999, is comprised of 7 marketing, sales and support
personnel. These personnel are performing direct sales activities in Germany,
France, the United Kingdom, Switzerland and Austria, and are supporting
distributors in other European countries. In addition, the Company has hired a
sales manager for South America. The Company's initial selling efforts in Europe
have been targeted primarily at those ENT surgeons specializing in otology.
While the Company intends to continue to market its products to these
specialists, it also plans to focus on the referring physicians, audiologists
and the general population of ENT surgeons in an attempt to increase the number
of patients that are referred to specialist ear surgeons. The Company is also
attempting to gather clinical and other data which it believes will be helpful
in obtaining reasonable reimbursement levels for its products. The Company also
has distributors in Sweden, Denmark, Italy, Spain, Portugal, Belgium, The
Netherlands, Luxembourg, and certain countries in the middle east and North
Africa. The Company has also established a distributor for certain countries in
South America. In other international markets, including Japan, the Company will
seek to establish a network of distributors.

     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 clinics upon the
recommendation of a surgeon. In the United States, hospitals, physicians and
other health care providers that purchase medical devices generally rely on
third-party payors, 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 

                                      -22-
<PAGE>
 
and place a high degree of scrutiny on coverage and payment decisions for new
technologies and procedures.

     Hearing aids, which do not involve surgery and, in certain cases, are
exempt from the requirement for 510(k) approval, are generally not reimbursed,
although a modest reimbursement is provided under certain insurance plans.
Traditionally, hearing aid users have paid for these devices directly. For
cochlear implants, however, that 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
impairment. The Company anticipates that, as surgically implanted devices that
require FDA PMA approval, the Company's products may also be the subject of
reimbursement in the future. During clinical trials, the Company does not
anticipate that there will be any reimbursement for the Vibrant soundbridge
implant or procedure.

     The Company's strategy is to pursue reimbursement for the Company's
soundbridges, once a PMA is approved by the FDA, based on surgeon endorsement
and demonstration of improved quality of life for specific patient groups.
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 soundbridges. Failure by physicians, hospitals and other
potential users of the Company's soundbridges to obtain sufficient reimbursement
from third-party payors for the procedures in which the Company's soundbridges
are intended to be used could have a material adverse effect on the Company's
business, financial condition and results of operations.

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

                                      -23-
<PAGE>
 
     Even after obtaining the necessary foreign regulatory approvals, market
acceptance of the Company's products and products currently under development in
international markets will 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 soundbridges is the various government
sponsored healthcare programs. Requirements for the granting of reimbursement in
many countries are not clearly specified and may involve the collection of
additional clinical data in support of submissions to the appropriate health
care administrations. There can be no assurance that any required data would be
available on a timely basis or that any international reimbursement approvals
will be obtained in a timely manner, if at all. Failure to receive international
reimbursement approvals could have a material adverse effect on market
acceptance of the 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 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 in the United States.  The Company is the beneficiary under a
$1.0 million key man insurance policy on Harry S. Robbins, its President and
Chief Executive Officer.

     Product Liability Risk; Possible Insufficiency of Insurance.  The
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

                                      -24-
<PAGE>
 
Item 3.   Quantitative and Qualitative Disclosures About Market Risk

     The Company had no holdings of derivative financial or commodity
instruments at March 31, 1999. A review of the Company's other financial
instruments and risk exposures at that date revealed that the Company had
exposure to interest rate risk. At March 31, 1999 the Company performed
sensitivity analyses to assess the potential effect of this risk and concluded
that near-term changes in interest rates should not materially adversely affect
the Company's financial position, results of operations or cash flows.

                                      -25-
<PAGE>
 
PART II.      OTHER INFORMATION

Item 1.   Legal Proceedings.

     None

Item 2.   Changes in Securities and Use of Proceeds.

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

                                Use of Proceeds
                                ---------------

       Research & Development, including clinical trials    $ 9,300,000
       Development of sales and marketing organization      $ 2,500,000
       Leasehold improvements and capital expenditures      $ 1,100,000
       Working capital and general corporate                $13,500,000
 
Temporary Investments
       Short-term investments                               $ 2,000,000

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

Item 3.   Defaults upon Senior Securities.

     None

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

     None

                                      -26-
<PAGE>
 
Item 5.   Other Information.

     None

Item 6.   Exhibits.

     (a)        Exhibits

     10.1       Joint Development and Supply Agreement between Symphonix
                Devices, Inc. and Topholm & Westermann ApS dated January 16,
                1998*

     10.2       Amendment to Joint Development and Supply Agreement between
                Symphonix Devices, Inc. and Topholm & Westermann ApS effective
                November 20, 1998*

     27.1       Financial Data Schedule



*  Confidential treatment has been requested with respect to certain portions of
   this Exhibit. Such portions have been omitted from this filing and have been
   filed separately with the Securities and Exchange Commission.
 

                                      -27-
<PAGE>
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this 10-Q report to be signed on its behalf by the
undersigned thereunto duly authorized.


Date:  May 14, 1999                      SYMPHONIX DEVICES, INC.


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



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

                                      -28-