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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended: December 31, 2002

OR

For the transition period from __________ to __________

Commission File Number 000-23767

SYMPHONIX DEVICES, INC.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code:

(408) 232-0710

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

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 ¨.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x

The aggregate market value of voting stock held by non-affiliates of the registrant as of February 11, 2003 was approximately $1,400,000 based upon the last sales price reported for such date on the NASDAQ Market. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the registrant, have been excluded in that such persons may be deemed to be affiliates. This determination is not necessarily conclusive.

At February 11, 2003, registrant had outstanding 35,887,000 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III of this Form 10-K is incorporated by reference to the definitive proxy statement for the annual meeting of stockholders of Symphonix which will be filed no later than 120 days after December 31, 2002.

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PART I

This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including statements that indicate what Symphonix “believes”, “expects” and “anticipates” or similar expressions. These statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of Symphonix to differ materially from those expressed or implied by such forward-looking statements. Such factors include, among others, the information contained under the captions Part I, Item 1, “Business,” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Additional Factors that May Affect Future Results” in this Annual Report. The reader is cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Annual Report. Symphonix undertakes no obligation to publicly release the results of any revision of these forward-looking statements. The reader is strongly urged to read the information set forth under the captions Part I, Item 1, “Business,” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a more detailed description of these significant risks and uncertainties.

Overview

Symphonix has developed a family of proprietary implantable Soundbridges for the management of mild to severe hearing impairment. Our family of Vibrant Soundbridges is based on our patented core Floating Mass Transducer, or FMT, technology. In March 1998, we received authorization to market and sell the Vibrant Soundbridge in the European Union and in early 2000 began selling through our European distribution partner, Siemens Audiologische Technik GmbH. Late in 2000, we received approval from the Food and Drug Administration, or FDA, to commercially market our products in the United States. Subsequent to FDA approval, our products were launched to the otology community and audiology community in the U.S. Symphonix was incorporated in California in 1994 and reincorporated in Delaware in 1998. Our website is www.symphonix.com.

On November 13, 2002, the Company’s Board of Directors approved a plan of complete dissolution and liquidation, subject to approval by the Company’s stockholders at a special meeting to be held at a future date set by the Company’s Board of Directors. In connection with the proposed liquidation, we have terminated the majority of our employees. We have retained only a limited number of personnel necessary to facilitate the liquidation process. In connection with the liquidation, we intend to liquidate our property, equipment, intellectual property and other assets. In addition, we may consider various legal alternatives to liquidating the Company, including bankruptcy.

On March 20, 2003, the Company entered into a purchase agreement with MED-EL GmbH (“MED-EL”) whereby MED-EL will purchase the inventory, property and equipment, intellectual property and assume the product warranty of the Company for $2.5 million. The closing of the purchase agreement is contingent upon the shareholders of the Company approving the proposed plan of liquidation and dissolution of the Company.

On March 20, 2003, the Company entered into an agreement with Siemens whereby Siemens and the Company agree to terminate the Marketing and Distribution Agreement between the Company and Siemens with no consideration due to either party. The agreement also provides for the assignment of the OEM Purchase Agreement between the Company and Siemens to MED-EL with no consideration due to either party. The agreement is contingent upon the closing of the purchase agreement between the Company and MED-EL.

On March 28, 2003 our common stock will be delisted from the NASDAQ Market and commence trading on the Over-the-Counter Bulletin Board.

Employees

At December 31, 2002, Symphonix had five employees. In conjunction with the Company’s announced intention to dissolve, the Company has retained these key employees for the purpose of executing the dissolution

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process, including the sale of assets, and other key milestones such as our annual audit, filing our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 and filing our tax returns for the year ended December 31, 2002.

Symphonix leases approximately 2,000 square feet of office space in San Jose, California, on a month-to-month basis for administrative purposes pursuant to executing the liquidation and dissolution of its business.

Symphonix has filed a complaint against Soundtec, Inc., the Central Ear Research Institute, or CERI, and three senior Soundtec executives in late 2001 alleging actions that include misappropriation of trade secrets, breach of contract and inducing breach of contract. Central to the complaint is Symphonix’s contention that Soundtec and its three executives utilized Symphonix’s confidential, proprietary and trade secret information to develop and market the Direct System^™, Soundtec’s implantable middle ear hearing device. Prior to their tenure at Soundtec, the three executives named in the complaint were employed by CERI, which, in December 1994, entered into an agreement to undertake a research and development project with Symphonix on the development of an implantable hearing device. The agreement permanently transferred exclusive rights to Symphonix for all technology developed during the research period. It further required that CERI disclose and permanently transfer rights to Symphonix for all improvements invented, developed or otherwise acquired by CERI for five years after termination of the agreement. Two of the named executives in the complaint executed this agreement on CERI’s behalf. Soundtec was founded in March 1997, five months after CERI terminated its agreement with Symphonix. Among other requests, Symphonix is seeking to restrain Soundtec from selling its Direct System device for a period of two years and to collect related damages.

No matters were submitted for a vote of security holders during the fourth quarter of the fiscal year covered by this Report.

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PART II

Symphonix’s common stock will be traded on the NASDAQ SmallCap Market under the symbol “SMPX” until March 27, 2003. On March 28, 2003 our common stock will be delisted from the NASDAQ Market and commence trading on the Over-the-Counter Bulletin Board. The following table sets forth, for the periods indicated, the range of the low and high sales prices for Symphonix’s common stock as reported on the NASDAQ SmallCap Market.

As of February 11, 2003, there were approximately 5,150 holders of record of the common stock. On February 11, 2003, the last reported sale price on the NASDAQ Market for the common stock was $0.04.

Symphonix has not declared or paid any cash dividends on its common stock. Although the Board of Directors has not established a firm timetable for distributions to stockholders, if a plan of dissolution is ratified and approved by the stockholders, the Board of Directors intends, subject to contingencies inherent in winding up our business, to make such distributions as promptly as practicable. While we intend that any distributions to the stockholders will be in the form of cash, we cannot be certain since we have not completed a sale of our assets at this time. In the event that we sell our assets for property other than cash and we cannot effectively liquidate such property, we may distribute property to the stockholders rather than cash.

Equity Compensation Plan Information

Information regarding Symphonix’s equity compensation plans, including both stockholder approved plans and non-stockholder approved plans, is set forth in the following table (in thousands, except per share data):

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SELECTED CONSOLIDATED FINANCIAL DATA

(In thousands, except per share amounts)

The consolidated statement of operations data for each of the three years in the period ended December 31, 2002 and the consolidated balance sheet data at December 31, 2002 and 2001 are derived from the audited consolidated financial statements included in this report. The consolidated statement of operations data for each of the two years in the period ended December 31, 1999 and the consolidated balance sheet data at December 31, 2000, 1999 and 1998 are derived from audited financial statements not included in this report. Our historical results are not necessarily indicative of results to be expected for future periods. The consolidated financial data set forth below should be read in conjunction with the accompanying consolidated financial statements of Symphonix and related notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Results of Operations

Revenues.    Revenues of $1.7 million, $2.0 million and $1.2 million were recorded in the years ended December 31, 2002, 2001 and 2000, respectively, for sales of the Vibrant Soundbridge in North America, Europe and Latin America. The decrease in revenues from 2001 to 2002 is due to decreased unit sales in both the U.S. and European markets resulting from longer than expected buying decisions from customers and the fact that the Company, with its November 2002 announcement to dissolve, did not sell any of its products in December 2002. The increase in revenue from 2000 to 2001 is a result of increased unit sales in the U.S. resulting from increased investments in sales and marketing activities. Included in revenue for 2002, 2001 and 2000 is $0.4 million, $0.4 million and $0.4 million, respectively, representing the amortization of $1,885,000 which was the difference between the purchase price and the fair market value of Symphonix’s common stock purchased by Siemens in accordance with a marketing and distribution agreement. The deferred revenue is being amortized on a straight line basis over the five year life of the agreement. In conjunction with the Company’s decision to dissolve the business in November 2002, the Company ceased all selling activity and does not plan to generate any product revenue in the future.

Costs of Goods Sold.    Costs of goods sold were $1.6 million, $4.3 million and $3.1 million in the years ended December 31, 2002, 2001 and 2000, respectively, and represent the direct costs of the products sold as well as warranty provisions and production variances. The reduction in costs of goods sold from 2001 to 2002 is due primarily to a reduction in the warranty provision resulting from lower than expected repair costs, plus lower product costs resulting from lower unit sales in the U.S. and European markets. Additionally, early in 2002, Symphonix implemented a reduction in force which reduced its manufacturing overhead and direct labor costs. In November 2002, in conjunction with Symphonix’s announced intention to dissolve, Symphonix laid off all of its manufacturing personnel further reducing 2002 costs of goods sold. In conjunction with Symphonix’s decision to dissolve the business in November 2002, Symphonix ceased all selling activity and does not plan to incur any manufacturing costs in the future, including manufacturing overhead, direct labor or direct product cost. However, Symphonix plans to continue to incur some costs associated with its warranty obligations in the future.

Warranty expense is computed based on the number of audio processor units outstanding. In 1999, when these units began shipping, Symphonix reserved approximately 65% of the units outstanding, representing $320,000 in warranty provision less $72,000 in warranty costs charged against the provision. In 2000, Symphonix reserved approximately 58% of units outstanding, representing $1,248,000 in warranty provision less $377,000 in warranty costs charged against the provision. In 2001, Symphonix charged $279,000 in warranty costs against the provision. In 2002, Symphonix charged $755,000 in warranty costs against the provision. At December 31, 2002 the remaining provision of $85,000 represents approximately 7% of units outstanding. The decrease in percentage of units outstanding reserved for the year ended December 31, 2002 is due to fewer units covered by the warranty as a percentage of units outstanding.

Research and Development Expenses.    Research and development expenses were $2.1 million, $6.1 million, and $7.1 million in the years ended December 31, 2002, 2001, and 2000, respectively. Research and development expenses consist primarily of personnel costs, professional services, materials, supplies and equipment in support of product development, clinical trials, regulatory submissions and the preparation and filing of patent applications. Research and development expenses decreased from 2000 to 2001 in part due to the PMA approval from the FDA. Research and development expenses decreased from 2001 to 2002 due to the completion of a number of key research and development milestones and subsequent significant reduction in headcount, consulting and project costs. In November 2002, in conjunction with Symphonix’s announced intention to dissolve, all research and development projects were ceased and all research and development personnel, except for Symphonix’s CTO and VP Clinical Affairs, were laid off. Symphonix does not plan to incur any research and development expenses in the future, other than compensation expenses associated with the CTO and VP Clinical Affairs in their roles in the dissolution process.

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Selling, General and Administrative Expenses.    Selling, general and administrative expenses were $5.7 million, $9.2 million, and $8.7 million in the years ended December 31, 2002, 2001, and 2000, respectively. Selling, general and administrative expenses consist primarily of personnel, marketing, legal and consulting costs. Expenses increased from 2000 to 2001 due to increased investment in U.S. marketing and selling efforts. Expenses decreased from 2001 to 2002 due to a reduction in headcount and marketing and selling programs in conjunction with expense reductions implemented by Symphonix in early 2002. In conjunction with the November 2002 announcement by Symphonix of its intention to dissolve its business, Symphonix laid off all of its sales and marketing personnel and ceased all selling efforts. Additionally, in November 2002, Symphonix laid off the majority of its administrative staff. Symphonix does not plan to incur any selling or marketing expenses in the future. Symphonix will continue to incur administrative expenses associated with the management of the dissolution process including compensation, professional fees and rent expense.

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 Symphonix’s common stock on the grant dates. Deferred compensation expense of zero, $34,000, and $295,000 attributed to such options was amortized during the years ended December 31, 2002, 2001, and 2000, respectively. During 2002, 2001 and 2000, Symphonix reversed zero, zero and $411,000, respectively, of unrecognized deferred compensation relating to employees that have terminated employment with Symphonix.

Interest Income, net.    Interest income, net was $338,000, $793,000, and $463,000 in the years ended December 31, 2002, 2001, and 2000, respectively. The decrease from 2001 to 2002 was due to a decrease in cash associated with funding Symphonix’s net loss in 2002. The increase from 2000 to 2001 was due to an increase in cash associated with a private placement in 2000.

Income Taxes.    To date, Symphonix has not incurred any U.S. income tax obligations. At December 31, 2002, Symphonix had net operating loss carryforwards of approximately $84.5 million for federal and $42.7 million for state income tax purposes, which will expire at various dates in 2022 and 2013, 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, if certain changes in the beneficial ownership of Symphonix’s outstanding common stock occur. Such events could limit the future utilization of Symphonix’s net operating loss carryforwards.

Liquidity and Capital Resources

Since its inception, Symphonix has funded its operations and its capital expenditures from proceeds of its initial public offering completed in February 1998 totaling $28.4 million, net of issuance costs, from the private sale of equity securities totaling $62.5 million, from an equipment lease financing totaling $1.3 million and from bank borrowings totaling $2.0 million, net. Included in the $62.5 million private sale of equity securities was $10.0 million to Siemens and $26.0 million in a private placement in 2000. At December 31, 2002, Symphonix had $1.6 million in working capital, and its primary source of liquidity was $2.0 million in cash and cash equivalents.

Capital expenditures, related primarily to Symphonix’s research and development and manufacturing activities, were $17,000, $749,000, and $608,000 in the years ended December 31, 2002, 2001, and 2000 respectively. The increased capital expenditures in 2001 from 2000 related primarily to the purchase of test and production equipment. The reduction in capital expenditures from 2001 to 2002 was a result of slowing business for Symphonix and cuts made in research and development and manufacturing programs during 2002. At December 31, 2002, Symphonix did not have any material commitments for capital expenditures.

In November 2002, Symphonix paid down its remaining loan obligation of $0.6 million pursuant to a loan agreement with a bank. Symphonix has no amounts available for future borrowings under the loan agreement.

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Symphonix used $9.2 million in cash for operations in 2002, down from $16.3 million in 2001 and $15.8 million in 2000 due primarily to the reduction of program and headcount expenditures in marketing and research and development. The primary use of cash was to fund operating losses during the year.

Since Symphonix’s formation in May 1994 through December 2001, Symphonix has generated an accumulated deficit of approximately $90.0 million.

In connection with the proposed liquidation, we expect to liquidate our remaining assets, including property, equipment and intellectual property. We also expect to incur liquidation expenses, in addition to payments of ongoing operating expenses and settlement of existing and potential obligations. Liquidation expenses may include, among others, employee severance and related costs, customer warranty obligations and legal and accounting fees. While we cannot currently make a precise estimate of these expenses, we believe that most if not all of our current cash and cash equivalents, together with proceeds from future sales of the remaining assets may be required to pay for the above expenditures.

Critical Accounting Policies

Symphonix’s discussion and analysis of its financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires Symphonix to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues, and expenses, and related contingent liabilities. On an on going basis Symphonix evaluates its estimates, including those related to revenues, collectibility of receivables, inventories, investments, income taxes, contingencies and litigation. Symphonix bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Symphonix’s critical accounting policies are as follows:

Revenue Recognition

Symphonix recognizes revenue from product sales upon shipment to the customer against a valid purchase order, provided no significant obligations remain and collection of the receivables is probable. Upon shipment, Symphonix provides for estimated product return and estimated costs that may be incurred for product warranties.

Estimating Expenses

On an ongoing basis, Symphonix evaluates its estimates for expenses including bonus and commissions related to our sales force, collectibility of receivables, inventory reserves, impairment of investments, valuation allowance for deferred income taxes, warranty provisions and other various expenses. Symphonix bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from those estimates under different assumptions and conditions.

Recent Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 145 (“SFAS 145”), “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” which is effective for fiscal years beginning after May 15, 2002. Under SFAS 145, gains and losses from the extinguishment of debt should be classified as extraordinary items only if they meet the criteria of Accounting Principles Board Opinion No. 30. SFAS also addresses financial accounting and reporting for capital leases that are modified in such a way as to give rise to a new

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agreement classified as an operating lease. The Company believes that the adoption of SFAS 145 will not have a material impact on the consolidated financial position or results of operations of the Company.

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities,” which is effective for exit or disposal activities initiated after December 31, 2002. SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Under SFAS 146, a liability is required to be recognized for a cost associated with an exit or disposal activity when the liability is incurred. SFAS 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a retirement or disposal activity covered by FASB Statements No. 143 and 144. The Company believes that the adoption of SFAS 146 will not have a material impact on the consolidated financial position or results of operations of the Company.

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company believes that the adoption of FIN 45 will not have a material impact on the consolidated financial position or results of operations of the Company.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation, Transition and Disclosure.” SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. The Company believes that the adoption of SFAS 148 will not have a material impact on the consolidated financial position or results of operations of the Company.

ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS

WE CANNOT ASSURE YOU OF THE AMOUNT, IF ANY, OF ANY DISTRIBUTION TO OUR STOCKHOLDERS UNDER THE PLAN OF COMPLETE LIQUIDATION AND DISSOLUTION.

Liquidation and dissolution may not create value to our stockholders or result in any remaining capital for distribution to our stockholders. We cannot assure you of the precise nature and amount of any distribution to our stockholders pursuant to the plan of dissolution. Uncertainties as to the precise net value of our non-cash assets and the ultimate amount of our liabilities make it impracticable to predict the aggregate net value, if any, ultimately distributable to our stockholders. The actual nature and amount of all distributions will depend in part upon our ability to convert our remaining non-cash assets into cash. We may not be successful in selling our non-cash assets, in which case we may not generate meaningful cash, if any, to return to our stockholders.

THE PROCEEDS FROM ANY SALES OF OUR NON-CASH ASSETS MAY BE LESS THAN ANTICIPATED.

Sales of our non-cash assets will be made on terms approved by our Board of Directors and may be conducted by competitive bidding, public sales or privately negotiated sales. The prices at which we will be able

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to sell our various non-cash assets will depend largely on factors beyond our control, including, without limitation, the condition of financial markets, the availability of financing to prospective purchasers of the assets, regulatory approvals and public market perceptions. In addition, we may not obtain as high a price for a particular asset as we might secure if we were not in liquidation. Furthermore, many of our non-cash assets, particularly our intellectual property, will decline in value over time, and we may not be able to consummate the sale of these assets in time to generate meaningful value which could be returned to our stockholders.

WE MAY NOT BE ABLE TO SETTLE ALL OF OUR OBLIGATIONS TO CREDITORS.

We have current and future obligations to creditors. These include, without limitation, long-term contractual obligations associated with business agreements with customers, including certain product warranties, and other third parties. As part of the wind down process, we will attempt to settle our obligations with our creditors. We may not, however, succeed in doing so. If we cannot reach an agreement with a creditor concerning an obligation, that creditor may choose to bring a lawsuit against us. Any litigation could delay or even prevent us from completing the plan of dissolution. Moreover, amounts required to settle our obligations to creditors will reduce the amount of remaining capital available for distribution to stockholders.

WE WILL CONTINUE TO INCUR CLAIMS, LIABILITIES AND EXPENSES WHICH WILL REDUCE THE AMOUNT AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS.

Claims, liabilities and expenses from operations (such as operating costs, salaries, directors’ and officers’ insurance, payroll and local taxes, legal, accounting and consulting fees and miscellaneous office expenses) will continue to be incurred as we wind down. These expenses will reduce the amount of assets available for ultimate distribution to stockholders. If available cash and amounts received on the sale of non-cash assets are not adequate to provide for our obligations, liabilities, expenses and claims, we may not be able to distribute meaningful cash, or any cash at all, to our stockholders.

DISTRIBUTION OF ASSETS, IF ANY, TO OUR STOCKHOLDERS COULD BE DELAYED.

Our Board of Directors has not established a firm timetable for distributions to our stockholders, and we are currently unable to predict the precise timing of any distribution, if any, pursuant to our wind down. The timing of distribution, if any, will depend on and could be delayed by, among other things, the timing of sales of our non-cash assets, claim settlements with creditors and the amounts paid out under warranty claims. Additionally, a creditor could seek an injunction against the making of distributions to our stockholders on the ground that the amounts to be distributed were needed to provide for the payment of our liabilities and expenses. Additionally, we could seek protection from creditors under the federal bankruptcy code. Any action of this type could delay or substantially diminish, or eliminate, the amount available for distribution to our stockholders.

IF WE FAIL TO CREATE AN ADEQUATE CONTINGENCY RESERVE FOR PAYMENT OF OUR EXPENSES AND LIABILITIES, OUR STOCKHOLDERS COULD BE HELD LIABLE FOR PAYMENT TO OUR CREDITORS OF EACH SUCH STOCKHOLDER’S PRO RATA SHARE OF AMOUNTS OWED TO THE CREDITORS IN EXCESS OF THE CONTINGENCY RESERVE, UP TO THE AMOUNT ACTUALLY DISTRIBUTED TO SUCH STOCKHOLDER.

If the plan of dissolution is ratified and approved by our stockholders, we will file a Certificate of Dissolution with the State of Delaware dissolving Symphonix. Pursuant to the Delaware General Corporation Law, we will continue to exist for three years after the dissolution becomes effective or for such longer period as the Delaware Court of Chancery shall direct, for the purpose of prosecuting and defending suits against us and enabling us gradually to close our business, to dispose of our property, to discharge our liabilities and to distribute to our stockholders any remaining assets. Under the Delaware General Corporation Law, in the event we fail to create an adequate contingency reserve for payment of our expenses and liabilities during this three-year period, each stockholder could be held liable for payment to our creditors of such stockholder’s pro rata

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share of amounts owed to creditors in excess of the contingency reserve, up to the amount actually distributed to such stockholder.

However, the liability of any stockholder would be limited to the amounts previously received by such stockholder from us (and from any liquidating trust or trusts) in the dissolution. Accordingly, in such event a stockholder could be required to return all distributions previously made to such stockholder. In such event, a stockholder could receive nothing from us under the plan of dissolution. Moreover, in the event a stockholder has paid taxes on amounts previously received, a repayment of all or a portion of such amount could result in a stockholder incurring a net tax cost if the stockholder’s repayment of an amount previously distributed does not cause a commensurate reduction in taxes payable. There can be no assurance that the contingency reserve established by us will be adequate to cover any expenses and liabilities. See “Contingent Liabilities; Contingency Reserve; Liquidating Trust.”

OUR STOCK TRANSFER BOOKS WILL CLOSE ON THE DATE WE FILE THE CERTIFICATE OF DISSOLUTION WITH THE DELAWARE SECRETARY OF STATE, AFTER WHICH IT WILL NOT BE POSSIBLE FOR STOCKHOLDERS TO PUBLICLY TRADE OUR STOCK.

We intend to close our stock transfer books and discontinue recording transfers of our common stock at the close of business on the date we file the Certificate of Dissolution with the Delaware Secretary of State, referred to as the “final record date.” Thereafter, certificates representing our common stock shall not be assignable or transferable on our books except by will, intestate succession or operation of law. The proportionate interests of all of our stockholders shall be fixed on the basis of their respective stock holdings at the close of business on the final record date, and, after the final record date, any distributions made by us shall be made solely to the stockholders of record at the close of business on the final record date, except as may be necessary to reflect subsequent transfers recorded on our books as a result of any assignments by will, intestate succession or operation of law.

WE DO NOT EXPECT TO RECOGNIZE ANY MATERIAL REVENUE FOLLOWING THE ANNOUNCEMENT OF OUR INTENT TO WIND DOWN.

Except for revenue resulting from the sale of our remaining inventory, we do not expect to recognize much, if any, additional revenue. Furthermore, it may be difficult to collect receivables now that we have announced our intent to wind down.

WE WILL CONTINUE TO INCUR THE EXPENSES OF COMPLYING WITH PUBLIC COMPANY REPORTING REQUIREMENTS.

We have an obligation to continue to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, referred to as the “Exchange Act,” even though compliance with such reporting requirements is economically burdensome. In order to curtail expenses, we intend to, after filing our Certificate of Dissolution, seek relief from the Securities and Exchange Commission from the reporting requirements under the Exchange Act. We anticipate that, if such relief were granted, we would continue to file current reports on Form 8-K to disclose material events relating to our liquidation and dissolution along with any other reports that the Securities and Exchange Commission might require. However, the Securities and Exchange Commission may not grant any such relief.

IF WE FAIL TO RETAIN THE SERVICES OF CERTAIN KEY PERSONNEL, THE PLAN MAY NOT SUCCEED.

The success of the plan of dissolution depends in large part upon our ability to retain the services of certain of our current officers. The retention of Kirk B. Davis and Terence J. Griffin is particularly difficult under our current circumstances. Failure to retain these personnel could harm the implementation of the plan of dissolution.

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If we fail to retain these personnel, we will need to hire others to oversee our liquidation and dissolution, which could involve additional compensation expenses, if such other personnel are available at all. For this reason and others discussed below, we are providing retention incentives to our remaining employees certain executive officers with the exception of Kirk B. Davis, our Chief Executive Officer, who has a severance agreement.

OUR STOCKHOLDERS COULD VOTE AGAINST THE PLAN.

Our stockholders could vote against the plan of dissolution. If we do not obtain stockholder ratification and approval of the plan of dissolution, we would have to continue our business operations from a difficult position, in light of our announced intent to liquidate and dissolve. Among other things, a substantial majority of our employees have been terminated, and customer relationships will have been severely strained. On November 14, 2002, we terminated all of our employees with the exception of our Chief Executive Officer, our Chief Financial Officer, our Chief Technical Officer, our Vice President of Clinical Affairs and our Controller. Prospective employees, customers and other third parties may refuse to form relationships or conduct business with us if they have no confidence in our future.

THE COMPANY’S STOCK IS TO BE DELISTED FROM THE NASDAQ MARKET

The Nasdaq has informed the Company that its common stock will be delisted from the Nasdaq Market commencing on March 28, 2003. The decision by the Nasdaq Listing Qualifications Panel to delist Symphonix was based on the Company’s failure to meet the Nasdaq’s minimum $1 bid price per share requirement. On March 28, 2003, the Company’s shares will commence trading on the Over-the-Counter Bulletin Board (OTCBB). The OTCBB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities. As a result of the Company’s common stock being listed on the OTCBB, your ability to resell your shares of our common stock be adversely affected.

Symphonix considered the provisions of Financial Reporting Release No. 48 “Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments”. Symphonix had no holdings of derivative financial or commodity instruments at December 31, 2002. Symphonix is exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. The fair value of Symphonix’s investment portfolio or related income would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due mainly to the short-term nature of Symphonix’s investment portfolio. Symphonix’s debt obligations are subject to interest rate risk but due to the minimal amount of debt, this risk is insignificant. An increase in interest rates would not significantly affect the Company’s net loss. Much of the Company’s revenue and all of its capital spending is transacted in U.S. dollars. However, the Company does enter into transactions in other currencies, primarily the Euro. Gains and losses on the conversion to U.S. dollars of accounts receivable and accounts payable resulting from these transactions may contribute to fluctuations in our operating results. However, these transactions in other currencies were not material relative to transactions in U.S. dollars. At December 31, 2002, the Company performed sensitivity analyses to assess the potential effect of this risk and concluded that near-term changes in interest rates and foreign currency exchange rates should not materially adversely affect the Company’s financial position, results of operations or cash flows.

The consolidated financial statements as of December 31, 2002 and 2001 and for the years then ended and the related report of PricewaterhouseCoopers LLP, independent accountants, and the consolidated financial statements for the year ended December 31, 2000 and the related report of KPMG LLP, independent auditors, are included on the following pages.

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and

Stockholders of Symphonix Devices, Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 42, present fairly, in all material respects, the financial position of Symphonix Devices, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) on page 42, presents fairly, in all material respects, the information set forth therein for each of the two years in the period ended December 31, 2002 when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and operating cash flow deficiencies that raise substantial doubt about its ability to continue as a going concern. On November 13, 2002, the Company’s Board of Directors approved a plan of complete dissolution and liquidation, subject to approval by the Company’s stockholders at a special meeting to be held at a future date set by the Company’s Board of Directors. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/    PRICEWATERHOUSECOOPERS LLP

San Jose, California

January 24, 2003, except as to Note 12,

which is as of March 20, 2003

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and

Stockholders of Symphonix Devices, Inc.:

We have audited the accompanying consolidated statements of operations, stockholders’ equity, comprehensive loss, and cash flows of Symphonix Devices, Inc. for the year ended December 31, 2000 as listed in the accompanying index appearing under Item 15(a)(1) on Page 42. In connection with our audit of the consolidated financial statements, we have also audited the related consolidated financial statement schedule as it relates to the year ended December 31, 2000 as listed in the index appearing under Item 15(a)(2). These consolidated financial statements and the related financial statement schedule are the responsibility of Symphonix’s management. Our responsibility is to express an opinion on the related consolidated financial statements and the financial statement schedule based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations of Symphonix Devices, Inc. and subsidiaries and their cash flows for the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related consolidated financial statement schedule as it relates to the year ended December 31, 2000, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/    KPMG LLP

San Francisco, California

February 14, 2001

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SYMPHONIX DEVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

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

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SYMPHONIX DEVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

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

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SYMPHONIX DEVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

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

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SYMPHONIX DEVICES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the three years ended December 31, 2002

(in thousands, except per share data)