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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2004

For the transition period from                          to                         

Commission file number: 000-33001

NATUS MEDICAL INCORPORATED

(Exact name of registrant as specified in its charter)

1501 Industrial Road, San Carlos, CA 94070

(Address of principal executive offices) (Zip Code)

(650) 802-0400

(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 and Exchange Act of 1934 during the preceding 12 months (or for 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨    No x

The number of issued and outstanding shares of the registrant’s Common Stock, $0.001 par value, as of November 8, 2004, was 17,059,561.

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NATUS MEDICAL INCORPORATED

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PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

NATUS MEDICAL INCORPORATED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

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

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NATUS MEDICAL INCORPORATED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

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

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NATUS MEDICAL INCORPORATED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

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

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NATUS MEDICAL INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1—Basis of Presentation

The accompanying interim condensed consolidated financial statements of Natus Medical Incorporated (“Natus,” “we,” “us,” or “the Company”) have been prepared in accordance with accounting principles generally accepted in the United Sates of America (“GAAP”). The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Interim financial reports are prepared in accordance with the rules and regulations of the Securities and Exchange Commission, accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The interim financial information is unaudited, but reflects all normal adjustments that are, in the opinion of management, necessary for fair presentation of our financial position, results of operations, and cash flows for the periods presented. Operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries; significant intercompany transactions have been eliminated. Certain prior period amounts have been reclassified to conform to current period presentation, including segregation of results of discontinued operations.

Comprehensive Loss

Following are the components of comprehensive income (loss) (in thousands):

2—Inventories

Inventories consisted of (in thousands):

Inventory is valued at the lower of cost or market. The Company regularly evaluates the value of its inventory based on a combination of factors, including historical usage rates, forecasted sales, product life cycles, and market acceptance of new products. Inventory that is obsolete or in excess of anticipated usage is written down to realizable value through inventory valuation reserves or direct write off.

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NATUS MEDICAL INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3—Reserve For Product Warranties

The Company provides a one-year warranty on its medical device products. The Company also sells extended service agreements on its medical device products. Service for domestic customers is provided by a company-owned service center that performs all service, repair, and calibration services. Service for international customers is provided by a combination of company-owned facilities and third-party vendors on a contract basis.

The Company has accrued a warranty reserve, included in accrued liabilities on the accompanying balance sheets, for the expected future costs of servicing products during the initial one-year warranty period. Amounts are added to the reserve on a per-unit basis by reference to historical experience in honoring warranty obligations. On new products, where the Company does not have historical experience, additions to the reserve are based on a combination of factors including the standard cost of the product and other judgments, such as the degree to which the product incorporates new technology. As warranty costs are incurred, they are relieved from the reserve.

Activity in the warranty reserve during the three and nine months ended September 30, 2004 and 2003 (in thousands):

4—Basic and Diluted Net Loss Per Common Share

The Company computes net income (loss) per share in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share. Basic net income (loss) per share is based upon the weighted average number of common shares outstanding during the period. Diluted net income per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalents during the period. Common stock equivalents are options under the Company’s stock option plan and are calculated under the treasury stock method. Common equivalent shares from unexercised stock options are excluded from the computation when there is a loss, as their effect is anti-dilutive.

For the three months ended September 30, 2004, common stock equivalents of approximately 888,000 shares were included in the weighted average shares outstanding used to calculate diluted income per share. For the nine months ended September 30, 2004, common stock equivalents of approximately 770,000 shares were not used to calculate diluted net loss per share because of their anti-dilutive effect. For the three and nine months ended September 30, 2003, common stock equivalents of approximately 471,000 and 466,000 shares, respectively, were not used to calculate net loss per share because of their anti-dilutive effect.

5—Stock-Based Compensation

The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (“APB”) No. 25, Accounting for Stock Issued to Employees, as interpreted by

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NATUS MEDICAL INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5—Stock-Based Compensation (continued)

Financial Accounting Standards Board (“FASB”) Interpretation No. 44, Accounting for Transactions Involving Stock Compensation—an Interpretation of APB Opinion No. 25. The Company accounts for stock-based awards to non-employees in accordance with SFAS No. 123, Accounting for Stock-Based Compensation and Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

The Company typically grants stock option awards at market value; consequently, no compensation expense is recorded. In 2001, options were granted at an exercise price deemed to be less than their fair market value which resulted in the recording of deferred stock compensation of $2,659,000, based on the difference between the exercise price and the deemed fair value of the options. The difference was recorded as deferred stock-based compensation in stockholders’ equity and is being amortized on a straight-line basis over the vesting period of the related options, with prior period charges being reversed in the current period to the extent that unvested options for which expense had been recorded are cancelled due to a break in employment.

During the nine months ended September 30, 2004, we recorded stock compensation expense totaling $362,000, including $352,000 recorded in the three months ended June 30, 2004 related to a modification of the terms of certain stock options granted to the Company’s former chief executive officer, that extended the exercise date of the options.

Stock-based compensation during the three and nine months ended September 30, 2004 and 2003 (in thousands) consisted of the following:

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NATUS MEDICAL INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Had compensation expense for the Company’s stock option awards been determined based on the Black-Scholes fair value method at the grant dates, consistent with the fair value method of SFAS No. 123, Accounting for Stock-Based Compensation, the Company would have recorded additional compensation expense and its net income and earnings per share (“EPS”) would have been reduced to the pro forma amounts presented in the following table:

6—Segment, Customer, and Geographic Information

The Company currently operates in one reportable segment, developing, manufacturing, and marketing products used by clinicians for the detection, monitoring, treatment, and tracking of common medical disorders that may occur during the time from conception to a baby’s first birthday. With the exception of the Neometrics data management system, the nature of the Company’s products and production processes as well as the type of customers and distribution methods are consistent among all of the Company’s product lines. While the Neometrics data management system is not a medical device or related supply, we believe over time it will become highly integrated with our other products in tracking information generated through detection, monitoring, and treatment. We acquired our Neometrics data management system product line on July 1, 2003.

Revenue from customers by geographic area is as follows (in thousands):

For the three and nine month periods ended September 30, 2004 and 2003, sales to no single end-user customer or distributor accounted for greater than 10% of total revenue.

7—Restructuring Charges

In June 2004, the Company recorded a restructuring charge of approximately $776,000 relating to an operating cost reduction plan that resulted in an immediate reduction of 25 employees and the accrual of associated employee termination-related benefits of $629,000 primarily for severance compensation and salary continuation. The remainder of the charge was associated with the liquidation of the Company’s subsidiary in Japan, which was initiated in June 2004, including the write-down of capital assets, inventory, and prepaid

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NATUS MEDICAL INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7—Restructuring Charges

expenses of $80,000, facilities related costs of $38,000, and liquidation service fees of $29,000. Employees involved in the workforce reduction were not required to render additional services to the company and their employment with the company ceased on June 30, 2004. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, these costs were accrued as incurred. The Company did not record any additional restructuring costs in the three months ended September 30, 2004.

During the three months ended September 30, 2004 substantially all of the accrued costs associated with the liquidation of our Japanese subsidiary were paid out, and approximately $523,000 of severance compensation was paid out, leaving approximately $267,000 of employee termination costs unpaid. Amounts unpaid relate primarily to severance agreements with two former officers of the company that contain provisions for salary continuation payments through June 2005. This amount is included as a component of accrued expenses on the balance sheet.

8—Discontinued Operations

In June 2004 the Company announced its intent to divest its Neogenesis line of products, which it acquired in July 2003. This component is accounted for as a discontinued operation in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets for all periods presented.

On September 30, 2004 the Company sold its Neogenesis line of products to Genesis Northwest, Inc. Assets with a book value of approximately $300,000 were sold for $10,000 cash and a $364,000 promissory note payable in equal monthly payments of approximately $3,500 beginning April 2005 and continuing through October 2009, at which time the balance of $200,000 becomes due. The Company has reserved for the entire promissory note because of the uncertainty of its collectability.

Amounts reported in discontinued operations are as follows (in thousands):

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NATUS MEDICAL INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9—Business Combinations

In September 2004, the Company purchased for $5.6 million in cash, including direct costs of the acquisition, all the common stock of privately held Fischer-Zoth GmbH and affiliated entities (Fischer-Zoth), as well as intangible assets held individually by the owners of Fischer-Zoth. In addition, there is the potential for additional purchase consideration contingent upon the purchased entities achieving certain performance objectives. The maximum amount of additional purchase consideration payable related to completed technology is 1.5 million Euro in total, based on the annual results of sales during the three twelve-month periods ending September 30, 2007. Additional purchase consideration related to in process research and development technology is not capped, however, the Company has reasonable expectations that the amount will not exceed 410,000 Euro in total, payable at the end of each of the six twelve-month periods ending December 31, 2010. If any additional purchase consideration is paid, it will be recorded as goodwill at the time such payment is made.

Founded in 1995, Fischer-Zoth develops, manufacturers, and markets Otoacoustic Emissions (OAE) products for the detection and assessment of hearing disorders. With headquarters near Munich, Germany, Fischer-Zoth markets and sells its products worldwide through distributors in over 50 countries. Fischer-Zoth’s OAE products utilize proprietary, patented signal processing analysis software and are used in conjunction with a disposable supply. The Company plans to retain Fischer-Zoth’s sales channels in Europe and Asia. Fischer-Zoth’s results of operations are included in the financial statements from September 28, 2004 forward.

The following table summarizes the preliminary estimated fair value of the net assets acquired in the acquisition:

Net assets acquired are as follows (in thousands):

The final determination of the purchase price allocation will be based on the fair values of the assets and liabilities on the date of the acquisition. The purchase price allocation will remain preliminary until the Company is able to complete a third party valuation of significant intangible assets acquired and evaluate the fair value of the other assets and liabilities acquired. The final amounts allocated to assets and liabilities acquired could differ significantly from the amounts presented in the unaudited pro forma condensed consolidated financial information above.

Pro forma financial information for the three and nine months ended September 30, 2004 and 2003, as though the acquisition of Fischer-Zoth had been completed as of the earliest of these periods are presented below.

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NATUS MEDICAL INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9—Business Combinations (continued)

There were no extraordinary items or changes in accounting principles in the pro forma results, nor were there any material, nonrecurring items.

In July 2003, the Company purchased substantially all of the assets of Neometrics, Inc. for $3.6 million in cash plus the assumption of certain liabilities. The purchase agreement provides for additional consideration to be paid, subject to Neometrics achieving certain financial goals during the three twelve-month periods following the acquisition date. The Company has determined that no additional consideration was payable for first twelve-month period following the date of the acquisition. Based on the terms of the purchase agreement, the maximum amount of remaining additional purchase consideration to be paid is now $800,000.

10—Indemnifications

Under its bylaws, the Company has agreed to indemnify its directors and officers for certain events or occurrences arising as a result of their serving in such capacities. The Company has a directors and officers’ liability insurance policy that mitigates the Company’s exposure. In addition, the Company enters into indemnification agreements with other parties in the ordinary course of business. In some cases the Company has obtained liability insurance providing coverage that mitigates its exposure for these other indemnified matters. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. The Company believes the estimated fair value of these indemnification agreements is minimal and has not recorded a liability for these agreements as of September 30, 2004.

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ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Natus^®, AABR^®, ALGO^®, ALGO 1e^®, ALGO 2^®, ALGO DataBook^®, 70/40^®, Ear Couplers^®, Flexicoupler^®, Jelly Tab^®, Jelly Button^®, and MiniMuffs^® are registered trademarks of Natus. Natus Elite^™, Convert2Natus^™, neoBLUE^™, neoBLUE mini^™, Neometrics^™, Metabolic Screening Database System (MSDS)^™, Case Management System (CMS)^™, Voice Response System (VRS)^™, Web Electronic Birth Page (Web-EBP)^™, and Accuscreen^™ are non-registered trademarks of Natus. Solutions for Newborn CareSM is a non-registered service mark of Natus. Echo-Screen^®, AOAE^®, and Cochlea-Scan^® are registered trademarks of Fischer-Zoth GmbH, a subsidiary of Natus.

Overview

The following discussion and analysis supplement the management’s discussion and analysis in the company’s Annual Report on Form 10-K for the year ended December 31, 2003, and presume that readers have read or have access to the discussion and analysis in the company’s Annual Report. Management’s discussion and analysis should be read in conjunction with the Company’s condensed consolidated financial statements and accompanying footnotes, the discussion below of certain risks and uncertainties, and the cautionary forward-looking statements at the end of this section.

Natus Medical is dedicated to addressing the needs of the newborn medical market, or as we define it, the period from conception to a child’s first birthday. Within that interval, we have initially focused on products used by clinicians as they provide care to newborns in the critical minutes and hours after delivery and prior to discharge from the hospital. We call this space the “delivery-to-discharge” segment of the newborn medical market. Natus currently develops, manufactures, and markets products used by clinicians for the detection, monitoring, treatment, and tracking of common medical disorders in newborns.

Our products are designed for use by clinicians as they provide care to newborns in the critical minutes and hours after delivery and prior to discharge from the hospital. We have identified the following six areas of assessment of the newborn performed by clinicians prior to discharge:

We currently sell products that address clinical needs of newborns in five of these six areas of neonatal clinical assessment. Additionally, our Neometrics data management applications are designed to allow clinicians, hospitals, and state and federal governments to better manage information on each newborn’s care, including in particular the information pertaining to metabolic and hearing screening results. Our research and development efforts have identified other product opportunities for us in this market segment and we intend to develop and acquire technologies, products, or businesses that enable us to market additional products and services in the “delivery-to-discharge” market segment.

Our principal product lines consist of our ALGO screening products for newborn hearing screening, our Echoscreen OAE devices for hearing screening, our neoBLUE LED Phototherapy devices for the treatment of jaundice, our Neometrics newborn screening data management products, our MiniMuffs Neonatal Noise Attenuators (“MiniMuffs”) products for the attenuation of noise for newborns, and our line of neonatal oxygen delivery hoods and heatshields.

Our revenue is generated almost exclusively from the sale of supplies and services, which are generally recurring, and related devices and systems. Supplies and services revenue results from sales of supplies used with

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our ALGO and Echoscreen medical devices, our product line of oxygen delivery hoods and heatshields, software maintenance agreements for our Neometrics data management system, and extended service agreements on our medical devices. Devices and systems revenue results from the sale of our ALGO, Echoscreen, and neoBLUE medical devices, and our Neometrics’ newborn screening data management products.

Domestic sales accounted for 78% and 85% of our revenue during the three months ended September 30, 2004 and 2003, respectively, and 76% and 78% of our revenue during the nine months ended September 30, 2004 and 2003, respectively. We intend to continue expansion of our international operations because we believe international markets represent a significant growth opportunity. We anticipate that international revenue will increase as a percent of revenue in the future. If international sales increase, we may not experience corresponding growth in operating income due to the higher cost of selling outside of the United States (U.S.). We sell our products through a direct sales force in the U.S., through our subsidiary in the United Kingdom (U.K.), and to distributors in over 50 other countries. International sales made to distributors are characterized by lower gross profits due to the discount the distributors receive from our list prices.

Our net income or loss can be markedly impacted by our decisions regarding the level of resources applied to our business. We make these decisions on the basis of sales forecasts, expected customer orders, economic conditions, and other factors. These costs are primarily personnel and facilities costs that are relatively fixed in the short-term and directly impact net income.

In September 2004, we purchased privately held Fischer-Zoth GmbH and affiliated entities (Fischer-Zoth), a manufacturer of Otoacoustic Emissions (“OAE”) products for $5.6 million in cash, including direct costs of the acquisition, with the potential for additional purchase consideration contingent upon the purchased entities achieving certain performance objectives. Founded in 1995, Fischer-Zoth develops, manufacturers, and markets products for the detection and assessment of hearing disorders. With headquarters near Munich, Germany, Fischer-Zoth markets and sells its products worldwide through distributors in over 50 countries. Fischer-Zoth’s OAE products utilize proprietary, patented signal processing analysis software and are used in conjunction with a disposable supply. The Company plans to retain Fischer-Zoth’s sales channels in Europe and Asia.

Application of Critical Accounting Policies

We prepare our financial statements in accordance with accounting principles generally accepted in the United Sates of America (“GAAP”). In so doing, we must often make estimates and use assumptions that can be subjective, and consequently our actual results could differ from those estimates. For any given individual estimate or assumption we make, there may also be other estimates or assumptions that are reasonable.

We believe that the following critical accounting policies require the use of significant estimates, assumptions, and judgments. The use of different estimates, assumptions, and judgments could have a material affect on the reported amounts of assets, liabilities, revenue, expenses, and related disclosures as of the date of the financial statements and during the reporting period.

Revenue Recognition

We recognize revenue, net of discounts, from sales of medical devices and related supplies, including sales to distributors, when a purchase order has been received, when title transfers (generally upon shipment), when the selling price is fixed or determinable, and when collection of the resulting receivable is probable. Terms of sales to distributors are EXW, an international incoterm, reflecting that goods are shipped “ex works,” in which title and risk of loss are assumed by the distributor at the shipping point. Payment terms are either open trade credit or export letter of credit. Revenue from our Neometrics newborn screening data management system, which is generally highly customized, is recognized on the percentage of completion basis over the development and implementation period of the associated installation, which typically ranges from six to eighteen months. Revenue from extended service and maintenance agreements, for both medical devices and data management

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systems, is recognized ratably over the service period. Payments received from customers prior to revenue recognition are recorded as deferred revenue and recognized as revenue as otherwise described above. We generally do not provide rights of return or price protection on products, whether sold by our direct sales force or distributors. We accept trade-ins of our own and competitive medical devices. Trade-ins are recorded as a reduction of the replacement medical device sale. Provisions are made for initial standard warranty obligations of one year, and post-sale training and customer support at the time the related revenue is recognized.

We must exercise judgment when assessing the sufficiency of our allowance for estimated uncollectible accounts receivable. Our estimates are based on our historical collection experience within the markets in which we operate as well as assessment of our average accounts receivable aging days and any other specific information of which we may be aware, such as bankruptcy filings or liquidity problems of our customers. Any future determination that our allowance for estimated uncollectible accounts receivable is understated could result in increased operating expense and adversely affect our results of operations. Our allowance for estimated uncollectible accounts receivable was $461,000 at September 30, 2004.

At September 30, 2004 our deferred revenue under extended service and maintenance agreements, and billings in excess of recognized revenue on percentage-of-completion contracts was approximately $301,000. Other advance payments from customers were not material at September 30, 2004.

Inventory is carried at the lower of cost or market value

We may be exposed to a number of factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, technological changes in our markets, competitive pressures in products and prices, and our own introduction of new product lines.

We regularly evaluate our ability to realize the value of our inventory based on a combination of factors, including historical usage rates, forecasted sales, product life cycles, and market acceptance of new products. When we identify inventory that is obsolete or in excess of anticipated usage we write it down to realizable salvage value or provide for inventory valuation reserves. The estimates we use in projecting future product demand may prove to be incorrect. Any future determination that our inventory is overvalued could result in increases to our cost of sales and decreases to our operating margins and results of operations.

Carrying value of intangible assets

We amortize intangible assets with finite lives over their useful lives, which range from 5 to 15 years for licensed technology, customer relationships, and tradenames, and 21 years for patents. Any event that would limit their useful lives or any determination that these assets are carried at amounts greater than their fair value could result in additional charges. We carry goodwill and any other intangible assets with indefinite lives at original cost but do not amortize them; any future determination that these assets are carried at amounts greater than their fair value could result in additional charges.

We test our goodwill and indefinite-lived intangible assets for impairment at least annually on October 1st of each year; in addition, this assessment may take place at any time in the event of changes in circumstances that indicate the carrying value of these assets may be impaired. Similarly, we test our definite-lived intangible assets whenever changes in circumstances indicate the carrying value of these assets may be impaired. Impairment indicators include, but are not limited to, net book value exceeding market capitalization, significant negative industry and economic trends, and significant underperformance relative to historical and projected future operating results. Impairment is considered to have occurred when the estimated undiscounted future cash flows related to the asset are less than its carrying value. Estimates of future cash flows involve consideration of many factors including the marketability of new products, product acceptance and lifecycle, competition, appropriate discount rates, and operating margins. If these estimates or their related assumptions change in the future, we may be required to record impairment charges which could have a significant impact on our operating results.

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Our impairment testing is done at a level below the reportable segment level, and currently consists of three components: the Neometrics and Fischer-Zoth components, and the U.S. operations of Natus exclusive of the other two components.

A portion of our goodwill is denominated in the local currency of our foreign subsidiaries, and may fluctuate in carrying amount from period to period as the result in the changes in exchange rates between the U.S. dollar and the respective local currency.

At September 30, 2004 we had goodwill and intangible assets with a carrying value of approximately $9.1 million.

Liability for product warranties

Our medical device products are covered by standard one-year product warranty plans. A liability has been established for the expected cost of servicing our medical device products during these service periods. We base the liability in part upon our historical experience; however, estimates of the costs to honor our warranties are often difficult to determine due to uncertainty surrounding the extent to which new products will require servicing and the costs that will be incurred to service those products. Until we have historical experience of the cost to honor warranties on new products, we base additions to the reserve on a combination of factors including the standard cost of the product and other judgments, such as the degree to which the product incorporates new technology. The estimates we use in projecting future product warranty costs may prove to be incorrect. Any future determination that our product warranty reserves are understated could result in increases to our cost of sales and reductions in our operating margins and results of operations.

At September 30, 2004 our reserve for product warranties was approximately $203,000.

Valuation allowance for deferred tax assets

We record a valuation allowance against our deferred tax assets, which result primarily from net operating loss and credit carryforwards that expire over time, and temporary differences between book and tax results that are expected to be reversed in the future. In evaluating whether we would more likely than not recover these deferred tax assets, we have not assumed any future taxable income in the tax jurisdictions in which we operate. To the extent we establish a valuation allowance, or increase this allowance in a period, we include an offsetting expense within the tax provision in the consolidated statement of operations. Future income generation in these tax jurisdictions could lead to the reversal of these valuation allowances and additional income recognition.

At December 31, 2003, our net deferred tax assets had a carrying value of zero.

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Results of Operations

The following table sets forth, for the periods indicated, selected consolidated statements of operations data as a percentage of total revenue. Our historical operating results are not necessarily indicative of the results for any future period.