8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 8-K/A

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (date of earliest event reported): January 4, 2006

Natus Medical Incorporated

(Exact name of registrant as specified in its charter)

000-33001

(Commission File Number)

Delaware	77-0154833
(State or other jurisdiction of Incorporation)	(I.R.S. Employer Identification No.)

1501 Industrial Road

San Carlos, CA 94070

(Address of principal executive offices)

650-802-0400

(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4^© under the Exchange Act (17 CFR 240.13e-4^©)

TABLE OF CONTENTS

Item 9.01 Financial Statements and Exhibits	1
Signature	2
Exhibit Index	3
Exhibit 99.1
Exhibit 99.2
Exhibit 99.3

On January 9, 2006, Natus Medical Incorporated (“Natus”) filed a current report on Form 8-K to report the completion of its acquisition of Bio-logic Systems Corp. (“Bio-logic”), pursuant to an Agreement and Plan of Merger dated as of October 16, 2005 (the “Merger Agreement”) by and among Natus, Bio-logic and Summer Acquisition Corporation, a wholly-owned subsidiary of Natus (“Merger Sub”). Pursuant to the Merger Agreement, Merger Sub merged with and into Bio-logic (the “Merger”), and Bio-logic became a wholly-owned subsidiary of Natus. The merger closed and became effective on January 5, 2006. This Form 8-K/A is being filed to provide the financial statements described under Item 9.01 below. These financial statements are filed as Exhibits 99.1, 99.2 and 99.3 of this Form 8-K/A.

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements of Businesses Acquired

The required financial statements of Bio-logic as of and for the years ended February 28, 2005, February 29, 2004 and February 28, 2003 are attached hereto as Exhibit 99.1 and are incorporated in there entirety herein by reference.

The required financial statements of Bio-logic as of and for the three and nine months ended November 30, 2005 and 2004 are attached hereto as Exhibit 99.2 and are incorporated in their entirety herein by reference.

(b) Pro Forma Financial information

The required pro forma financial information as of and for the year ended December 31, 2005 as attached hereto as Exhibit 99.3 and is incorporated in its entirety herein by reference.

(c) Exhibits

Exhibit Number	Exhibit Description
99.1	Bio-logic Systems Corp. and Subsidiaries Financial Statements as of and for the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003
99.2	Bio-logic Systems Corp. and Subsidiaries Financial Statements as of and for the Three and Nine Months Ended November 30, 2005 and 2004
99.3	Unaudited Pro Forma Condensed Combined Financial Statements

1

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	NATUS MEDICAL INCORPORATED
	/s/ Steven J. Murphy
Date: March 23, 2006	Steven J. Murphy
	Vice President Finance and Chief Financial Officer

2

EXHIBIT INDEX

Exhibit Number	Exhibit Description
99.1	Bio-logic Systems Corp. and Subsidiaries Financial Statements as of and for the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003
99.2	Bio-logic Systems Corp. and Subsidiaries Financial Statements as of and for the Three and Nine Months Ended November 30, 2005 and 2004
99.3	Unaudited Pro Forma Condensed Combined Financial Statements

3

EX-99.1

Exhibit 99.1

BIO-LOGIC SYSTEMS CORP. AND SUBSIDIARIES

FINANCIAL STATEMENTS AS OF AND FOR THE

YEARS ENDED FEBRUARY 28, 2005,

FEBRUARY 29, 2004 AND FEBRUARY 28, 2003.

Table of Contents

	Page
Report of Independent Registered Public Accounting Firm	2
Financial Statements:
Consolidated Balance Sheets, February 28, 2005 and February 29, 2004	3
Consolidated Statements of Earnings for the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003	4
Consolidated Statements of Stockholders’ Equity for the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003	5
Consolidated Statements of Cash Flows for the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003	6
Notes to Consolidated Financial Statements	7

1

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of

Bio-logic Systems Corp.:

We have audited the accompanying consolidated balance sheets of Bio-logic Systems Corp. and subsidiaries as of February 28, 2005, February 29, 2004 and February 28, 2003, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the three years in the period ended February 28, 2005. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bio-logic Systems Corp. and subsidiaries as of February 28, 2005 and February 29, 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended February 28, 2005, in conformity with accounting principles generally accepted in the United States of America.

GRANT THORNTON LLP

Chicago, IL

April 15, 2005

2

Bio-logic Systems Corp. and Subsidiaries

Consolidated Balance Sheets

February 28, 2005 and February 29, 2004

(In Thousands)

	2005		2004
ASSETS
Current Assets:
Cash and cash equivalents	$	14,866	$	12,750
Accounts receivable, net		6,361		6,279
Inventories, net		2,251		1,908
Prepaid expenses		244		498
Deferred income taxes		1,688		1,520
Total current assets		25,410		22,955
Property, Plant and Equipment, Net		2,432		2,051
Intangible Assets, Net		1,897		1,584
Other Assets		128		78
Other Receivables		340		526
Total Assets	$	30,207	$	27,194
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,949	$	1,357
Accrued salaries and payroll taxes		1,476		1,519
Accrued interest and other expenses		1,551		1,740
Accrued income taxes		318		358
Deferred revenue		1,242		1,269
Total current liabilities		6,536		6,243
Long Term Liabilities:
Long term liabilities		33		—
Deferred income taxes		877		672
Total long term liabilities		910		672
Total Liabilities		7,446		6,915
Commitments		—		—
Stockholders’ Equity:
Capital stock, $.01 par value; authorized, 10,000,000 shares; 6,573,625 issued and outstanding at February 28, 2005; 6,370,381 issued and 6,257,881 outstanding at February 29, 2004		66		43
Additional paid-in capital		5,369		5,159
Retained earnings		17,326		15,444
Stockholders’ equity before treasury stock		22,761		20,646
Less treasury stock, at cost: 75,000 shares at February 29, 2004		—		367
Total stockholders’ equity		22,761		20,279
Total Liabilities and Stockholders’ Equity	$	30,207	$	27,194

The accompanying notes are an integral part of these statements.

3

Bio-logic Systems Corp. and Subsidiaries

Consolidated Statements of Earnings

Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

(In Thousands)

	2005			2004		2003
Net Sales	$	30,549		$	28,101	$	29,264
Cost of Sales		10,261			9,479		10,011
Gross profit		20,288			18,622		19,253
Operating Expenses:
Selling, general, and administrative		13,601			12,189		12,786
Research and development		4,304			4,622		4,469
Total operating expenses		17,905			16,811		17,255
Operating Income		2,383			1,811		1,998
Other Income (Expense):
Interest income		152			129		139
Interest expense		(14	)		—		(27	)
Miscellaneous		(6	)		4		(4	)
Total Other Income		132			133		108
Income Before Income Taxes		2,515			1,944		2,106
Provision for Income Taxes		633			62		656
Net Income	$	1,882		$	1,882	$	1,450
Net Income Per Share:
Basic	$	0.29		$	0.30	$	0.23
Diluted	$	0.27		$	0.28	$	0.23
Average Number of Shares Outstanding:
Basic		6,440,035			6,309,545		6,294,543
Diluted		7,066,390			6,670,095		6,476,334

The accompanying notes are an integral part of these statements.

4

Bio-logic Systems Corp. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

(Dollars in Thousands)

	Capital Stock					Additional Paid-in Capital			Retained Earnings		Treasury Stock			Total
	Number of Shares		Amount
Balance, March 1, 2002	4,191,656		$	42		$	5,035		$	12,112	$	—		$	17,189
Purchase of treasury stock	—			—			—			—		(390	)		(390	)
Retirement of treasury stock	(5,700	)		—			(23	)		—		23			—
Exercise of stock options and gifts	12,650			—			37			—		—			37
Net income	—			—			—			1,450		—			1,450
Balance, February 28, 2003	4,198,606		$	42		$	5,049		$	13,562	$	(367	)	$	18,286
Exercise of stock options and gifts	66,327			1			209			—		—			210
Surrender and cancellation of shares	(18,012	)		—			(99	)		—		—			(99	)
Net income	—			—			—			1,882		—			1,882
Balance, February 29, 2004	4,246,921		$	43		$	5,159		$	15,444	$	(367	)	$	20,279
Retirement of treasury stock	(75,000	)		(1	)		(366	)		—		367			—
Surrender and cancellation of shares	(67,468	)		(1	)		11			—		—			10
Exercise of stock options and gifts	299,416			3			525			—		—			528
Three-for-two stock split	2,169,756			22			(22	)		—		—			—
Disqualifying disposition on incentive stock options	—			—			62			—		—			62
Net income	—			—			—			1,882		—			1,882
Balance, February 28, 2005	6,573,625		$	66		$	5,369		$	17,326	$	—		$	22,761

The accompanying notes are an integral part of these statements.

5

Bio-logic Systems Corp. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

(In Thousands)

	2005			2004			2003
Cash Flows From Operating Activities:
Net income	$	1,882		$	1,882		$	1,450
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		755			635			620
Deferred income tax provision		38			(162	)		(190	)
(Increases) decreases in assets:
Accounts receivable		(83	)		(710	)		1,490
Inventories		(343	)		1,153			1,066
Prepaid expenses		254			(144	)		74
Increases (decreases) in liabilities:
Accounts payable		591			(537	)		91
Accrued liabilities and deferred revenue		(259	)		981			929
Accrued income taxes		(40	)		(423	)		73
Net cash flows provided by operating activities		2,795			2,675			5,603
Cash Flows From Investing Activities:
Capital expenditures		(708	)		(318	)		(161	)
Intangible assets		(741	)		(350	)		(568	)
Other assets		(50	)		482			(228	)
Other receivables		186			(526	)		—
Net cash flows used in investing activities		(1,313	)		(712	)		(957	)
Cash Flows From Financing Activities:
Proceeds from exercise of stock options		234			109			14
Purchase of treasury stock, net of retirement		367			—			(367	)
Long-term liabilities		33			—			—
Net cash flows provided by (used in) financing activities		634			109			(353	)
Increase In Cash And Cash Equivalents		2,116			2,072			4,293
Cash And Cash Equivalents—Beginning Of Year		12,750			10,678			6,385
Cash And Cash Equivalents—End of year	$	14,866		$	12,750		$	10,678
Supplemental Disclosures Of Cash Flows:
Cash paid during the period for:
Interest	$	14		$	—		$	27
Income taxes, net of refunds	$	400		$	372		$	560

The accompanying notes are an integral part of these statements.

6

Bio-logic Systems Corp. and Subsidiaries

Notes to Consolidated Financial Statements

For the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

1. Business

Bio-logic Systems Corp. (the “Company”) develops and markets computer-assisted medical diagnostic equipment. The Company sells primarily to the health care industry in North America, Europe and the Far East.

2. Summary of Significant Accounting Policies

Consolidation—The consolidated financial statements include the Company and its wholly owned domestic subsidiary, Bio-logic Holding Inc., and its wholly owned foreign subsidiary, Bio-logic Systems Corp., Ltd. All significant intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents—Cash equivalents include all highly liquid investments purchased with maturities of three months or less.

Concentration of Credit Risk—The Company maintains cash balances at several financial institutions located in the United States, Israel and Poland. Accounts in the United States are insured by the Federal Deposit Insurance Corporation up to $100,000. Cash in foreign bank accounts is not insured. Uninsured balances aggregate approximately $15,174,000 and $12,895,000 at February 28, 2005 and February 29, 2004, respectively. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk on cash and cash equivalents.

Accounts Receivable—The majority of the Company’s accounts receivable are due from companies in the medical and health care industries. Credit is extended based on evaluation of a customer’s financial condition. New non-institutional customers are generally subject to a deposit. Accounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts, and are generally due within 30 days for domestic customers and 60 days for international customers. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due and the Company’s previous loss history. The Company writes off accounts receivable when they become uncollectable, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Charges for doubtful accounts are recorded in selling, general and administrative expenses.

Inventories—Inventories, consisting principally of components, parts and supplies, are stated at the lower of cost, determined by the first-in first-out method, or market.

Property, Plant and Equipment—Property, plant and equipment are stated at cost. The cost of maintenance and repairs is charged to income as incurred, and significant renewals and betterments are capitalized. Depreciation is provided using the straight-line method over the estimated useful lives of the assets ranging from three years to forty years.

Intangible Assets—Intangible assets consist primarily of capitalized software costs for research and development, as well as certain patent, trademark and license costs. Capitalized software development costs are recorded in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,” with costs being amortized using the straight-line method over a five-year period. Patent, trademark and license costs are amortized using the straight-line method over their estimated useful lives of five years. On an ongoing basis, management reviews the valuation of intangible assets to determine if there has been impairment by comparing the related assets’ carrying value to the undiscounted estimated future cash flows and/or operating income from related operations.

7

Bio-logic Systems Corp. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

Long-Lived Assets—The Company regularly reviews long-lived assets for impairment in accordance with SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets.” No impairment was realized for the fiscal years 2005, 2004 and 2003.

Other Assets—Other assets consist mainly of long-term trade receivables. Any required reserves for long-term trade receivables are recorded as part of the allowance for doubtful accounts. There are currently no reserve requirements for long-term receivables.

Other Receivables— Other receivables at February 28, 2005 consist primarily of an amount related to the partial reimbursement of expenses associated with certain corporate development activities that was subsequently received in fiscal 2006. Other receivables at February 29, 2004 consist of a medical claim that was settled with the Company’s stop-loss insurance carrier during fiscal 2005.

Revenue Recognition—The Company derives revenue from the sales of electrodiagnostic systems, disposable supplies, extended warranty contracts, non-warranty repair, and governmental research and development contracts. With the exception of domestic customers associated with certain group purchasing contracts, the terms of sale for systems and related supplies are generally FOB shipping point.

Domestically, the Company sells its neurology and sleep systems through a direct sales force, and uses a dealer network to sell its hearing screening and diagnostic systems. Internationally, the entire line of electrodiagnostic systems and supplies is sold through distributors located in various countries. There is no general right for a customer, dealer or distributor to return product. All sales are final, regardless of the distribution channel; returns are rare and are usually allowed due to order error or quality concerns.

The Company recognizes revenue when it is realized or realizable and earned, in accordance with Statement of Position No. 97-2, Software Revenue Recognition; specifically, when there is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Set-up and training revenue related to system sales is not recognized until the service is completed. Revenue from the performance of non-warranty repair activities is recognized in the period in which the work is performed. Revenue from extended warranty contracts is recognized over the life of the warranty.

Revenue from research and development contracts relate to governmental grants awarded by the National Institute of Health. The grant covers reimbursement of specific expenses related to the feasibility and development of projects for which the grants were given, and the Company recognizes revenue in the same period the qualifying costs are incurred. The Company’s obligation is to perform these feasibility and development activities in accordance with the terms of the grant, with no obligation for the work to result in a successful outcome such as a new product or successful discovery.

The Company carries a sales reserve that reduces revenue for potential future product returns as well as unperformed set-up and training, and reviews its adequacy quarterly. To date, this reserve has been insignificant.

Advertising—Advertising costs are expensed as incurred.

Research and Development Costs—Research and development (R&D) costs are expensed as incurred. Capitalized research and development costs reflect internally generated software development costs associated with bringing new products to market, or significantly adding new features and functions to existing products. Accounting for the capitalization of software development costs is in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, Or Otherwise Marketed; specifically, (a) R&D costs incurred in determining technological feasibility are expensed; (b) all material costs from the point where

8

Bio-logic Systems Corp. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

technological feasibility is determined up to the point when the product is available for general release to customers are capitalized; and (c) capitalization ceases when the developed product is available for general release to customers.

Income Taxes—Deferred tax assets and liabilities are computed annually for differences between financial statement basis and tax basis of assets and liabilities using enacted tax rates for the years in which the differences are expected to become recoverable. A valuation allowance is established where necessary to reduce deferred tax assets to the amount expected to be realized.

Deferred Federal income taxes are not provided for the undistributed earnings of the Company’s foreign subsidiary. Undistributed foreign earnings were $2,913,835 and $2,876,107 as of February 28, 2005 and February 29, 2004, respectively.

Use of Estimates—In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments—The Company’s financial instruments include cash equivalents, accounts receivable and accounts payable. The carrying value of cash equivalents, accounts receivable and accounts payable approximate their fair value because of the short-term nature of these instruments.

Shipping and Handling Costs—In accordance with Emerging Issues Task Force 00-10, “Accounting for Shipping and Handling Fees and Costs,” the Company has reflected billings to customers for freight and handling as net sales and associated freight-out as cost of sales.

Stock-Based Compensation—The Company maintains a stock incentive plan. See Note 10 for additional information regarding this plan. The Company accounts for this plan under the recognition and measurement principles of Accounting Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No compensation costs are recognized for stock option grants. All options granted under the Company’s plan have an exercise price equal to or greater than the market value of the underlying common stock on the date of the grant.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (FASB) SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based compensation. The following table also provides the amount of stock-based compensation cost included in net income as reported.

		2005		2004		2003
Net Income
As reported		$	1,882	$	1,882	$	1,450
Pro forma			1,160		1,253		865
Net Income Per Share
As reported	—Basic	$	0.29	$	0.30	$	0.23
	—Diluted		0.27		0.28		0.23
Pro forma	—Basic	$	0.18	$	0.20	$	0.14
	—Diluted		0.16		0.19		0.13

9

Bio-logic Systems Corp. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

Executive Compensation

The Company has entered into an employment agreement with its CEO that will provide salary and other benefits upon his termination, currently amounting to $1,102,000 after the initial term of the agreement, subject to his performing certain non-compete and non-solicitation activities. The initial term of this agreement ends February 29, 2008.

Earnings per Share (EPS)—Basic EPS is based on the weighted average number of shares outstanding during the year. Diluted EPS is based on the combination of weighted average number of shares outstanding and dilutive potential shares.

Comprehensive Income—SFAS No. 130 requires disclosure of the components of and total comprehensive income in the period in which they are recognized in the financial statements. Comprehensive income is defined as the change in equity (net assets) of a business enterprise arising from transactions and other events and circumstances from non-owner sources. It includes all changes in stockholders’ equity during the reporting period, except those resulting from investments by owners and distributions to owners. The Company does not have changes in stockholders’ equity other than those resulting from investments by and distributions to owners. The functional currency for the Company’s international operations is the U.S. dollar.

Recent Accounting Pronouncements

In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) (FIN 46R), “Consolidation of Variable Interest Entities.” It is an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” which replaces FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” and revises the requirements for consolidation by business enterprises of variable interest entities with specific characteristics. Our adoption of this revised interpretation did not have a material effect on our results of operations or financial position.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 123R supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123R is similar to that described in SFAS 123. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro forma disclosure will no longer be allowed. Public companies, other than those filing as small business issuers, will be required to apply SFAS 123R as of the first annual reporting period of the registrant’s fiscal year beginning on or after June 15, 2005. We expect to adopt SFAS 123R in fiscal 2007.

SFAS 123R permits public companies to adopt its requirement using one of two methods: (1) A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123R for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date; or (2) A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

10

Bio-logic Systems Corp. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

As permitted by SFAS 123, we currently account for share-based payments to employees using the intrinsic value method under APB Opinion No. 25, and as such, we generally recognize no compensation cost for employee stock options. We intend to continue applying APB Opinion No. 25 to equity-based compensation awards until the first quarter of fiscal 2007. Upon our adoption of SFAS 123R, we expect to use the modified prospective application transition method without restatement of prior interim or annual periods. This will result in the recognition of compensation cost based on the requirements of SFAS 123R for all equity-based compensation awards issued after March 1, 2006. For all equity-based compensation awards that are unvested as of March 1, 2006, compensation cost will be recognized for the unamortized portion of compensation cost not previously included in the SFAS 123 pro forma footnote disclosure. We are currently evaluating the impact that adoption of SFAS 123R may have on our results of operations and financial position. We expect that although the adoption could have a material effect on our results of operations, depending on the level and form of future equity-based compensation awards issued, it should not have a material effect on our financial position.

Stock Split—On January 7, 2005, our Board of Directors declared a 3-for-2 stock split on our Common Stock, to be effected as a 50% stock dividend. The new shares and cash payments in lieu of fractional shares were distributed on February 11, 2005 to stockholders of record on January 26, 2005. The total number of authorized Common Stock shares and associated par value were unchanged by this action. As a result of the split, stockholders received one additional share of our Common Stock for every two shares owned on January 26, 2005. Cash payments in lieu of fractional shares were based on the closing price of the Common Stock on the record date. All per-share amounts in the financial statements reflect the impact of the stock split for all periods presented.

Reclassifications—Certain reclassifications were made to the Consolidated Statement of Earnings for fiscal 2004 and 2003 to conform to the statement’s presentation for fiscal 2005.

3. Accounts Receivable

Receivables (in thousands) consist of the following:

	2005			2004
Trade receivables	$	6,641		$	6,595
Allowance for doubtful accounts		(280	)		(316	)
Net receivables	$	6,361		$	6,279

Changes (in thousands) in allowance for doubtful accounts are as follows:

	2005			2004			2003
Beginning balance	$	316		$	500		$	578
Bad debt expense/(benefit)		44			(96	)		93
Accounts written-off		(119	)		(145	)		(204	)
Recoveries		39			57			33
Ending balance	$	280		$	316		$	500

11

Bio-logic Systems Corp. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

4. Inventories

Inventories (in thousands) consist of the following:

	2005		2004
Raw materials	$	1,587	$	1,245
Work in process		974		1,060
Finished goods		414		263
Gross inventory		2,975		2,568
Less reserves		724		660
Net inventory	$	2,251	$	1,908

Inventories for which obsolescence reserves are established are raw materials and assembled components, as well as valuation adjustments for the Company’s demonstration equipment. The proprietary nature of many of the raw materials and components does not lend themselves for sale to outside parties, especially once newer technologies have been developed. It is rare that the Company would sell obsolete inventory; such sales when they do occur have a negligible impact on margins. Demonstration inventory is sold at a discount, thus generating no material impact on margins.

Changes (in thousands) in inventory reserves are as follows:

	2005			2004			2003
Beginning balance	$	660		$	562		$	743
Provisions		195			841			728
Write-offs		(131	)		(743	)		(909	)
Ending balance	$	724		$	660		$	562

12

Bio-logic Systems Corp. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

5. Property, Plant and Equipment

Property, plant and equipment (in thousands) is comprised of the following at February 28, 2005 and February 29, 2004:

	2005		2004		Estimated Useful Lives (in Years)
Land	$	676	$	676
Building		1,118		1,118	40
Building improvements		223		205	15
Machinery and equipment		2,067		1,582	7
ERP system		524		524	5
Booths and exhibits		187		181	7
Furniture and fixtures		344		305	7
Computers		2,020		1,954	3
Autos and trucks		101		209	3
Total		7,260		6,754
Less accumulated depreciation		4,828		4,703
Property, plant and equipment—net	$	2,432	$	2,051

Depreciation expense (in thousands) amounted to $327, $342 and $391 for 2005, 2004 and 2003, respectively.

6. Intangible Assets

The following table (in thousands) summarizes the components of gross and net intangible asset balances:

	February 28, 2005							February 29, 2004
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Capitalized research and development	$	2,446	$	(678	)	$	1,768	$	1,771	$	(382	)	$	1,389
Patents and trademarks		182		(106	)		76		181		(76	)		105
Licenses		174		(121	)		53		177		(87	)		90
Total amortizable intangible assets	$	2,802	$	(905	)	$	1,897	$	2,129	$	(545	)	$	1,584

13

Bio-logic Systems Corp. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

Expected annual amortization expense (in thousands) related to amortizable intangible assets is as follows:

As of the last day of February,
2006	$	548
2007		521
2008		385
2009		272
Thereafter		171
Total expected annual amortization expense	$	1,897

Amortization expense (in thousands) related to amortizable intangible assets is as follows:

	2005		2004		2003
Capitalized research and development	$	296	$	210	$	172
Patents and trademarks		30		28		48
Licenses		34		55		59
Total amortization expense	$	360	$	293	$	279

7. Operating Leases

The Company leases office and assembly facilities under long-term operating leases expiring from 2005 to 2007. Total rental expense (in thousands) amounted to $128, $120 and $113 for 2005, 2004 and 2003, respectively.

Future minimum annual rental commitments (in thousands) under these leases for the years ending after February 28, 2005 are as follows:

2006	$	96
2007		7

8. Line of Credit

The Company has obtained a commitment, renewed annually, for an unsecured $1.0 million bank line of credit with interest at the bank’s prime rate. No borrowings were made under the line of credit as of either February 28, 2005 or February 29, 2004.

9. Income Taxes

The provision for income taxes (in thousands) is as follows:

	2005		2004			2003
Current:
Federal	$	277	$	66		$	677
State		129		158			130
Foreign		189		—			39
Total current expense		595		224			846
Deferred expense/(benefit)		38		(162	)		(190	)
Total income tax provision	$	633	$	62		$	656

14

Bio-logic Systems Corp. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

The provision for income taxes differs from the U.S. Federal statutory rate as follows:

	2005		2004		2003
U.S. Federal statutory rate	34.0	%	34.0	%	34.0	%
Difference in foreign tax rate	0.1		0.1		—
Permanent differences:
Meals and entertainment	1.1		1.3		1.3
Foreign operations	(1.8	)	(3.5	)	(3.6	)
Other permanent differences	(1.0	)	(5.5	)	0.6
Federal tax credits	(4.0	)	(27.4	)	—
State income taxes, net of Federal income tax benefits	3.4		5.4		4.0
Deferred taxes
State	1.5		(1.6	)	(1.1	)
Foreign	—		—		(4.0	)
Reduction of accrual for tax contingencies for closed years	(7.4	)	—		—
Other	(0.7	)	0.4		(0.2	)
Effective income tax rate	25.2	%	3.2	%	31.0	%

Deferred tax assets and liabilities (in thousands) as of February 28, 2005, February 29, 2004 and February 28, 2003 consist of the following:

	2005		2004		2003
Deferred tax assets:
Accounts receivable	$	154	$	162	$	223
Inventory		296		265		244
Accrued expenses		510		591		399
Warranty		518		502		500
International inflation adjustment		12		—		—
Foreign NOL and credit carryforwards		202		18		—
Total deferred tax assets		1,692		1,538		1,366
Deferred tax liabilities:
Depreciation & amortization		187		151		166
R&D		694		539		514
Total deferred tax liabilities		881		690		680
Net deferred tax asset	$	811	$	848	$	686

The foreign net operating loss can be carried forward indefinitely.

15

Bio-logic Systems Corp. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

The net deferred tax asset is classified in the balance sheet as follows:

	2005		2004		2003
Deferred tax current assets	$	1,688	$	1,520	$	1,366
Deferred tax long-term liabilities		877		672		680
Net deferred tax asset	$	811	$	848	$	686

10. Stock Options

The Company’s 2004 Stock Incentive Plan (the “Plan”) provides the Compensation Committee of the Company’s Board of Directors broad discretion to issue awards in a variety of forms, including nonqualified and qualified stock options, stock appreciation rights, restricted stock and restricted stock units, other stock-based awards and performance awards. The Plan provides for the issuance of up to 1,200,000 shares of Common Stock. As of May 25, 2005, 241,000 shares of Common Stock underlying options granted by the Company under the Plan were outstanding. The exercise price per share of Common Stock purchasable under a stock option issued under the Plan shall not be less than the fair market value per share on the date of grant, or in the case of an incentive stock option granted to an individual who is a ten percent holder, not less than 110% of such fair market value per share. The Compensation Committee fixes the term of each stock option, but no incentive stock option shall be exercisable more than 10 years after the date of grant. Currently, outstanding options become exercisable one to five years from the grant date and expire five to ten years after the grant date.

During fiscal 2005 we accelerated the vesting period for our two retiring Board members. Any options that were unvested at the dates of their retirement became immediately vested. The expiration date on these remaining option grants was also accelerated to February 28, 2005.

As of May 25, 2005, 1,103,313 shares of Common Stock granted by the Company under its 1994 Stock Option Plan, as amended (the “1994 Plan”), remain outstanding. However, the Company does not intend to make any other grants under the 1994 Plan.

The Company has adopted the disclosure provisions only of SFAS No. 123, “Accounting for Stock-Based Compensation.” It applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans when options are granted at fair value at the date of grant. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed by SFAS No. 123, the Company’s net income and earnings per share would be reduced to the pro forma amounts indicated below:

		2005		2004		2003
Net Income
As reported		$	1,882	$	1,882	$	1,450
Pro forma			1,160		1,253		865
Net Income Per Share
As reported	—Basic	$	0.29	$	0.30	$	0.23
	—Diluted		0.27		0.28		0.23
Pro forma	—Basic	$	0.18	$	0.20	$	0.14
	—Diluted		0.16		0.19		0.13

16

Bio-logic Systems Corp. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

The fair values of these options were estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the years ended February 28, 2005, February 29, 2004, and February 28, 2003:

	2005		2004		2003
Expected dividend yield	—		—		—
Expected stock price volatility	67.8	%	74.3	%	60.1	%
Risk free interest rate	3.6	%	3.1	%	3.5	%
Expected life of options (years)	5.4		5.7		5.7

The following table summarizes information about stock options, weighted average exercise price, and fair value:

	2005		2004		2003
Where exercise price exceeds market price:
Exercise price	$	4.29	$	3.61	$	3.22
Fair value		2.19		2.01		1.51
Where exercise price equals market price:
Exercise price		4.32		3.22		2.40
Fair value		2.64		2.09		1.37
Where exercise price is below market price:
Exercise price		—		—		—
Fair value		—		—		—

The following tables summarize information concerning outstanding and exercisable stock options as of February 28, 2005:

Range of Exercise Price	Number Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
$1.25-$2.00	67,050	$	1.91	3.28
$2.01-$3.00	466,039	$	2.40	6.53
$3.01-$4.00	527,158	$	3.38	6.56
$4.01-$6.50	323,625	$	4.68	6.04
	1,383,872
Range of Exercise Price	Number Exercisable	Weighted Average Exercise Price
$1.25-$2.00	67,050	$	1.91
$2.01-$3.00	269,615	$	2.42
$3.01-$4.00	172,351	$	3.22
$4.01-$6.50	148,219	$	4.76
	657,235

17

Bio-logic Systems Corp. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

Additional information with respect to the Company’s Plan at February 28, 2005, February 29, 2004 and February 28, 2003 is as follows:

FISCAL 2005

	Shares		Weighted Average Exercise Price
Shares under option:
Outstanding at beginning of year	1,579,385		$	2.93
Granted	272,625		$	4.31
Exercised	(401,650	)	$	2.71
Forfeited	(66,488	)	$	2.62
Outstanding at end of year	1,383,872		$	3.28
Options exercisable at year-end	657,235		$	3.11
Weighted average fair value for stock options granted during fiscal 2005					$	2.52

FISCAL 2004

	Shares		Weighted Average Exercise Price
Shares under option:
Outstanding at beginning of year	1,483,088		$	2.77
Granted	254,850		$	3.33
Exercised	(99,003	)	$	2.10
Forfeited	(52,800	)	$	2.37
Expired	(6,750	)	$	1.83
Outstanding at end of year	1,579,385		$	2.93
Options exercisable at year-end	717,147		$	2.95
Weighted average fair value for stock options granted during fiscal 2004					$	2.07

FISCAL 2003

	Shares		Weighted Average Exercise Price
Shares under option:
Outstanding at beginning of year	1,210,763		$	2.81
Granted	381,150		$	2.61
Exercised	(18,375	)	$	1.94
Forfeited	(90,450	)	$	2.95
Outstanding at end of year	1,483,088		$	2.77
Options exercisable at year-end	561,882		$	2.88
Weighted average fair value for stock options granted during fiscal 2003					$	1.43

18

Bio-logic Systems Corp. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

11. Produce Line, Customer and Geographic Information

Revenue (in thousands) by product line is as follows:

	2005		2004		2003
Electrodiagnostic products and systems	$	22,042	$	20,252	$	21,986
Supplies, service and other		8,507		7,849		7,278
Total	$	30,549	$	28,101	$	29,264

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

	2005		2004		2003
United States	$	23,915	$	21,706	$	23,762
Europe and Asia		4,066		3,900		3,082
All other		2,568		2,495		2,420
Total	$	30,549	$	28,101	$	29,264

In 2005, 2004 and 2003, no sales to a single customer accounted for more than 10% of revenue.

Long-lived assets include fixed assets (property, plant and equipment) and intangible assets. The Company has fixed assets in the United States and overseas. All intangible assets are domiciled in the United States. Long-lived assets in the United States and all foreign countries, in total (in thousands) are as follows:

	2005		2004		2003
United States	$	4,308	$	3,589	$	3,531
All other		21		46		71
Total	$	4,329	$	3,635	$	3,602

12. 401(k) Plan

The Company has a retirement plan under Section 401(k) of the Internal Revenue Code, which allows employees to defer a portion of their income on a pretax basis through contributions to the plan. The Company matches employee contributions at varying rates, and may also make discretionary contributions to the plan. Total expense (in thousands) for fiscal 2004, 2003 and 2002 was $124, $112 and $98, respectively.

13. Contingencies

From time to time third parties have made claims that Company products infringe their third-party proprietary rights. In the event of a successful claim of infringement against the Company, it may be required to pay substantial damages, stop using certain technologies and methods, develop non-infringing products or methods and/or obtain one or more licenses from third parties. As of February 28, 2005, February 29, 2004 and February 28, 2003, there were no specific unaccrued loss contingencies that the Company believes could have a material negative impact on its financial statements.

On April 22, 2004, two plaintiffs filed a product liability claim against us and certain other defendants seeking specific damages of $12,300,000, as well as unspecified damages for future loss of income earning

19

Bio-logic Systems Corp. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended February 28, 2005, February 29, 2004 and February 28, 2003

capacity. We intend to vigorously defend against the claims brought before us in this suit. Although the outcome of any litigation is inherently uncertain, we believe that our product liability insurance coverage is adequate to cover liabilities resulting from this litigation, and therefore the results of this litigation should not have a material adverse effect on our business, assets, financial condition, liquidity and results of operations. There are no other material liabilities or gain or loss contingencies that are required to be accrued or disclosed by FASB Statement No. 5.

14. Selected Quarterly Financial Data (Unaudited)

Set forth below is a summary of our unaudited quarterly results for each quarter during fiscal 2005 and 2004. It is our opinion that these results have been prepared on the same basis as the audited financial statements contained elsewhere herein and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the information for the periods when read in conjunction with the financial statements and notes thereto.

	Fiscal 2005 by Quarter
	First		Second		Third		Fourth
	(In thousands except per share amounts)
Net sales	$	6,251	$	8,242	$	7,765	$	8,291
Gross profit		4,192		5,532		4,990		5,574
Operating income		136		975		713		559
Net income		114		703		672		393
Basic earnings per share	$	0.02	$	0.11	$	0.11	$	0.06
Diluted earnings per share		0.02		0.10		0.10		0.05
	Fiscal 2004 by Quarter
	First		Second		Third		Fourth
	(In thousands except per share amounts)
Net sales	$	6,319	$	6,927	$	6,962	$	7,893
Gross profit		4,238		4,676		4,526		5,182
Operating income		379		459		614		359
Net income		274		400		582		626
Basic earnings per share	$	0.05	$	0.06	$	0.09	$	0.10
Diluted earnings per share		0.04		0.06		0.09		0.09

15. Subsequent Event

On April 15, 2005 we entered into an agreement to sell approximately fourteen acres of vacant, unimproved land adjoining our corporate headquarters in Mundelein, Illinois to a residential developer. The purchase price for the property is approximately $2,828,500. This purchase price is based on the developer’s receiving approval to build a minimum of 90 attached single-family residences on the property. The purchase price will increase if the developer receives permission to build more than 90 residences.

20

EX-99.2

EXHIBIT 99.2

BIO-LOGIC SYSTEMS CORP. FINANCIAL STATEMENTS

AS OF AND FOR THE THREE AND NINE MONTHS

ENDED NOVEMBER 30, 2005 AND 2004

Table of Contents

Condensed Consolidated Balance Sheets at November 30, 2005 (Unaudited) and February 28, 2005	2
Condensed Consolidated Statements of Operations and Retained Earnings for the three months and nine months ended November 30, 2005 and 2004 (Unaudited)	3
Condensed Consolidated Statements of Cash Flows for the nine months ended November 30, 2005 and 2004 (Unaudited)	4
Notes to Unaudited Condensed Consolidated Financial Statements (Unaudited)	5

1

Bio-logic Systems Corp.

Condensed Consolidated Balance Sheets

(In Thousands)

	November 30, (unaudited) 2005			February 28, 2005
ASSETS
Current Assets:
Cash and cash equivalents	$	15,866		$	14,866
Accounts receivable, net		6,107			6,361
Inventories, net		2,717			2,251
Prepaid expenses		220			244
Deferred income taxes		1,505			1,688
Total current assets		26,414			25,410
Property, Plant and Equipment, Net		2,022			1,940
Intangible Assets, Net		2,620			2,389
Other Assets		80			128
Other Receivables		135			340
Total Assets	$	31,272		$	30,207
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,783		$	1,949
Accrued salaries and payroll taxes		1,874			1,476
Accrued interest and other expenses		1,429			1,551
Accrued income taxes		(263	)		318
Deferred revenue		1,126			1,242
Total current liabilities		5,948			6,536
Long-Term Liabilities:
Long-term liabilities		33			33
Deferred income taxes		1,149			877
Total liabilities		7,130			7,446
COMMITMENTS		—			—
STOCKHOLDERS’ EQUITY:
Common stock, $.01 par value; authorized, 40,000,000 shares; 6,741,245 issued and outstanding at November 30, 2005; 6,573,625 issued and outstanding at February 28, 2005;		67			66
Additional paid-in capital		5,940			5,369
Deferred compensation expense		(243	)		—
Retained earnings		18,377			17,326
Total stockholders’ equity		24,141			22,761
Total Liabilities and Stockholders’ Equity	$	31,272		$	30,207

The accompanying notes are an integral part of these statements.

2

Bio-logic Systems Corp.

Condensed Consolidated Statement of Operations and Retained Earnings

(Unaudited)

(In Thousands, Except Share and Per Share Data)

	Three Months Ended November 30,					Nine Months Ended November 30,
	2005			2004		2005		2004
Net Sales	$	8,707		$	7,765	$	23,972	$	22,257
Cost of Sales		3,201			2,775		8,459		7,542
Gross Profit		5,506			4,990		15,513		14,715
Operating Expenses:
Selling, general & administrative		4,619			3,183		10,921		9,518
Research & development		1,155			1,094		3,499		3,372
Total operating expenses		5,774			4,277		14,420		12,890
Operating Income		(268	)		713		1,094		1,825
Other Income		143			26		339		79
Income Before Income Taxes		(125	)		739		1,432		1,904
Provision for Income Taxes		(93	)		67		381		415
Net Income	$	(32	)	$	672	$	1,051	$	1,489
Retained Earnings, Beginning of Period		18,409			16,261		17,326		15,444
Retained Earnings, End of Period	$	18,377		$	16,933	$	18,377	$	16,933
Earnings Per Share:
Basic	$	(0.01	)	$	0.11	$	0.16	$	0.23
Diluted	$	(0.00	)	$	0.10	$	0.14	$	0.21
Average Number of Shares Outstanding:
Basic		6,732,089			6,326,526		6,664,831		6,368,604
Diluted		7,503,775			6,949,472		7,358,226		6,882,857

The accompanying notes are an integral part of these statements.

3

Bio-logic Systems Corp.

Condensed Consolidated Statement of Cash Flows

(Unaudited)

(In Thousands)

	Nine Months Ended November 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,051		$	1,489
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		591			521
Deferred income tax provision		455			371
Deferred compensation expense		35			—
(Increases) decreases in assets:
Accounts receivable		255			530
Inventories		(466	)		(400	)
Prepaid expenses		24			216
Increases (decreases) in liabilities:
Accounts payable and overdrafts		(166	)		588
Accrued liabilities and deferred revenue		160			(269	)
Accrued income taxes		(582	)		(358	)
Net cash flows provided by operating activities		1,357			2,688
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		191			(420	)
Intangible assets		(1,094	)		(434	)
Other assets		47			(288	)
Other receivables		205			526
Net cash flows provided by (used in) investing activities		(651	)		(616	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options		294			215
Net cash flows provided by financing activities		294			215
INCREASE IN CASH AND CASH EQUIVALENTS		1,000			2,287
CASH AND CASH EQUIVALENTS - Beginning of period		14,866			12,750
CASH AND CASH EQUIVALENTS - End of period	$	15,866		$	15,037
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS:
Cash paid during the period for:
Income taxes (net of refunds)	$	508		$	418

The accompanying notes are an integral part of these statements.

4

Bio-logic Systems Corp. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(Unaudited)

These unaudited interim condensed consolidated financial statements of Bio-logic Systems Corp. (the “Company”) were prepared under the rules and regulations for reporting on Form 10-Q. Accordingly, the Company omitted some information and footnote disclosures normally accompanying the annual financial statements. You should read these interim financial statements and notes in conjunction with the Company’s audited consolidated financial statements and their notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2005, as filed with the Securities and Exchange Commission on May 27, 2005 (the “Annual Report”). In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments necessary for a fair statement of the results of operations, financial position and cash flows for the interim periods. All adjustments were of a normal recurring nature. The results for the interim periods presented are not necessarily indicative of the results that may be expected for any future period. The following information should be read in conjunction with the consolidated financial statements and accompanying notes included in Bio-logic Systems Corp.’s Annual Report on Form 10-K for the year ended February 28, 2005.

Consolidation—The consolidated financial statements include the Company and its wholly owned domestic subsidiary, Bio-logic Holding Inc., and its wholly owned foreign subsidiary, Bio-logic Systems Corp., Ltd. All significant intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents—Cash equivalents include all highly liquid investments purchased with maturities of three months or less.

Concentration of Credit Risk—The Company maintains cash balances at several financial institutions located predominantly in the United States, as well as in Israel and Poland. The majority of the Company’s investments is in money market accounts in the United States, and is insured by the Federal Deposit Insurance Corporation up to $100,000. Cash in foreign bank accounts is not insured. Uninsured balances in the aggregate were approximately $15,628,000 and $15,174,000 at November 30, 2005 and February 28, 2005, respectively. The Company has not experienced any losses in such accounts, and management believes it is not exposed to any significant risk of loss of cash and cash equivalents.

Accounts Receivable—The majority of the Company’s accounts receivable are due from companies in the medical and health care industries. Credit is extended based on an evaluation of a customer’s financial condition. New customers not affiliated with governments, hospitals or universities are generally subject to a deposit. Accounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts, and are generally due within 30 days for domestic customers and 60 days for international customers. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due and the Company’s previous loss history. The Company writes off accounts receivable when the Company determines that they are not collectable, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Charges for doubtful accounts are recorded in selling, general and administrative expenses.

Inventories—Inventories consist principally of components, parts and supplies, and are stated at the lower of cost, determined by the first in, first out method, or market. Inventories (in thousands) consist of the following:

	November 30, 2005		February 28, 2005
Raw Materials	$	1,728	$	1,587
Work In process		1,418		974
Finished Goods		434		414
Gross Inventory		3,580		2,975
Less Reserves		863		724
Net Inventory	$	2,717	$	2,251

5

Property, Plant and Equipment—Property, plant and equipment are stated at cost. The cost of maintenance and repairs is charged to income as incurred, and significant renewals and betterments are capitalized. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, ranging from three years to forty years.

Intangible Assets—Intangible assets consist primarily of capitalized software costs for research and development, as well as certain patent, trademark and license costs. Capitalized software development costs are recorded in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,” with costs being amortized using the straight-line method over a five-year period. Patent, trademark and license costs are amortized using the straight-line method over their estimated useful lives of five years. On a periodic basis, management reviews the valuation of intangible assets to determine if there has been impairment by comparing the related assets’ carrying value to the undiscounted estimated future cash flows and/or operating income from related operations.

The following table (in thousands) summarizes the components of gross and net intangible asset balances:

	November 30, 2005							February 28, 2005
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Capitalized research and development	$	3,515	$	(1,007	)	$	2,508	$	2,938	$	(678	)	$	2,260
Patents and trademarks		182		(128	)		55		182		(106	)		76
Licenses		199		(142	)		57		174		(121	)		53
Total amortizable intangible assets	$	3,896	$	(1,276	)	$	2,620	$	3,294	$	(905	)	$	2,389

Long-Lived Assets—The Company regularly reviews long-lived assets for impairment in accordance with SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets.” No impairment was realized for the nine-month periods ended November 30, 2005 and 2004.

Other Assets—Other assets consist mainly of long-term trade receivables. Any required reserves for long-term trade receivables are recorded as part of the allowance for doubtful accounts. There are currently no reserve requirements for long-term receivables.

Revenue Recognition—The Company derives revenue from the sales of electrodiagnostic systems, disposable supplies, extended warranty contracts, non-warranty repair, and governmental research and development contracts. With the exception of domestic customers associated with certain group purchasing contracts, the terms of sale for systems and related supplies are generally FOB shipping point.

Domestically, the Company sells its neurology and sleep systems through a direct sales force, and uses a dealer network to sell its hearing screening and diagnostic systems. Internationally, the entire line of electrodiagnostic systems and supplies is sold through distributors located in various countries. There is no general right for a customer, dealer or distributor to return product. All sales are final, regardless of the distribution channel; returns are rare and are usually allowed only due to order error or quality concerns.

The Company recognizes revenue when it is realized or realizable and earned, in accordance with Statement of Position No. 97-2, Software Revenue Recognition; specifically, when there is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Set-up and training revenue related to system sales is not recognized until the service is completed. Revenue from the performance of non-warranty repair activities is recognized in the period in which the work is performed. Revenue from extended warranty contracts is recognized over the life of the warranty. The Company carries a sales reserve that reduces revenue for potential future product returns, as well as unperformed set-up and training, and reviews its adequacy quarterly. To date, this reserve has been insignificant.

Revenue from research and development contracts relate to governmental grants awarded by the National Institute of Health. The grants cover reimbursement of specific expenses related to the feasibility and development

6

of projects for which the grants were given, and the Company recognizes revenue in the same period the qualifying costs are incurred. The Company’s obligation is to perform these feasibility and development activities in accordance with the terms of the grants, with no obligation for the work to result in a successful outcome such as a new product or successful discovery.

Advertising—Advertising costs are expensed as incurred.

Research and Development Costs—Research and development (R&D) costs are expensed as incurred. Capitalized research and development costs reflect internally generated software development costs associated with bringing new products to market, or significantly adding new features and functions to existing products. Accounting for software development costs is in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, Or Otherwise Marketed.” Specifically, (a) R&D costs incurred in determining technological feasibility are expensed; (b) all material costs from the point where technological feasibility is determined up to the point when the product is available for general release to customers are capitalized; and (c) capitalization ceases when the developed product is available for general release to customers.

Income Taxes—Deferred tax assets and liabilities are computed annually for differences between the financial statement bases and tax bases of assets and liabilities using enacted tax rates for the years in which the differences are expected to become recoverable. A valuation allowance is established where necessary to reduce deferred tax assets to the amount expected to be realized.

Deferred Federal income taxes are not provided for the undistributed earnings of the Company’s foreign subsidiary. Undistributed foreign earnings were $2,430,000 and $2,913,835 as of November 30, 2005 and February 28, 2005, respectively.

Use of Estimates—In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments—The Company’s financial instruments include cash equivalents, accounts receivable and accounts payable. The carrying value of cash equivalents, accounts receivable and accounts payable approximate their fair value because of the short-term nature of these instruments.

Shipping and Handling Costs—In accordance with Emerging Issues Task Force 00-10, “Accounting for Shipping and Handling Fees and Costs,” the Company has reflected billings to customers for freight and handling as net sales and for associated freight-out as cost of sales.

Stock-Based Compensation—The Company maintains a stock incentive plan under which it makes stock and option grants to employees and non-employee directors. The Company accounts for the option grants under this plan under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. All options granted under the Company’s plan have an exercise price equal to or greater than the market value of the underlying common stock on the date of the grant. No compensation costs are recognized for these stock option grants.

In July 2005 the Company granted restricted stock to the members of its Board of Directors. In accordance with Financial Accounting Standards Board (FASB) SFAS No. 123, “Accounting for Stock-Based Compensation,” the fair value on the date of the grant was used to determine the amount of associated compensation expense to be initially recorded by the Company as deferred compensation expense in the equity section of the balance sheet. This amount will be charged to operating expense over the vesting period associated with each individual grant. Recognized compensation expense associated with the vesting of restricted shares was approximately $26,000 for the quarter ended November 30, 2005.

7

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (FASB) SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based compensation.

	Three Months Ended November 30,						Nine Months Ended November 30,
	2005			2004			2005			2004
Net income, as reported	$	(32	)	$	672		$	1,051		$	1,489
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(116	)		(182	)		(395	)		(530	)
Pro-forma net income	$	(148	)	$	490		$	656		$	959
Earnings per share:
Basic    - as reported	$	(0.01	)	$	0.11		$	0.16		$	0.23
- pro forma	$	(0.02	)	$	0.08		$	0.10		$	0.15
Diluted - as reported	$	(0.00	)	$	0.10		$	0.14		$	0.21
- pro forma	$	(0.02	)	$	0.07		$	0.09		$	0.13

8

See “Recent Accounting Pronouncements” below for a discussion of SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123.

Earnings per Share (EPS)—Basic EPS is based on the weighted average number of shares outstanding during the year. Diluted EPS is based on the combination of weighted average number of shares outstanding and dilutive potential shares.

Comprehensive Income—SFAS No. 130, “Reporting Comprehensive Income,” requires disclosure of the components of and total comprehensive income in the period in which they are recognized in the financial statements. Comprehensive income is defined as the change in equity (net assets) of a business enterprise arising from transactions and other events and circumstances from non-owner sources. It includes all changes in stockholders’ equity during the reporting period, except those resulting from investments by owners and distributions to owners. The Company does not have changes in stockholders’ equity other than those resulting from investments by and distributions to owners. The functional currency for the Company’s international operations is the U.S. dollar.

Product Line, Customer and Geographic Information

Revenue (in thousands) by product line is as follows:

	Three Months Ended November 30,				Nine Months Ended November 30,
	2005		2004		2005		2004
Electrodiagnostic products and systems	$	6,150	$	5,558	$	16,570	$	16,106
Supplies, service, and repair		2,557		2,207		7,402		6,151
Total	$	8,707	$	7,765	$	23,972	$	22,257

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

	Three Months Ended November 30,				Nine Months Ended November 30,
	2005		2004		2005		2004
United States	$	7,395	$	6,246	$	20,174	$	17,867
Europe and Asia		735		1,166		2,097		3,012
All other		577		353		1,701		1,378
Total	$	8,707	$	7,765	$	23,972	$	22,257

For the fiscal quarters ended November 30, 2005 and 2004, there were no sales to a single customer that accounted for greater than 10% of revenue.

Long-lived assets include fixed assets (property, plant and equipment) and intangible assets. The Company has fixed assets in the United States and overseas. All intangible assets are domiciled in the United States. Long-lived assets in the United States and all foreign countries, in total (in thousands), are as follows:

	November 30,		February 28,
	2005		2005
United States	$	4,633	$	4,308
All other		9		21
Total	$	4,642	$	4,329

9

Contingencies

On April 22, 2004, two plaintiffs filed a product liability claim against us and certain other defendants seeking specific damages of $12,300,000, as well as unspecified damages for future loss of income earning capacity. A brief description of this lawsuit may be found in Part II, Item 1 to this Form 10-Q. On July 11, 2005, the attorneys for the plaintiff signed a stipulated limited judgment of dismissal, dismissing the Company from the lawsuit.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123R is similar to that described in SFAS 123. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro forma disclosure will no longer be allowed. Public companies, other than those filing as small business issuers, will be required to apply SFAS 123R as of the first reporting period of the registrant’s first fiscal year beginning on or after June 15, 2005. The Company expects to adopt SFAS 123R in fiscal 2007.

SFAS 123R permits public companies to adopt its requirement using one of two methods: (1) a “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123R for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date; or (2) a “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using the intrinsic value method under APB Opinion No. 25, and as such, the Company generally recognizes no compensation cost for employee stock options. The Company intends to continue to apply APB Opinion No. 25 to equity-based compensation awards until the first quarter of fiscal 2007. Upon the Company’s adoption of SFAS 123R, the Company expects to use the modified prospective application transition method without restatement of prior interim or annual periods. This will result in the recognition of compensation cost based on the requirements of SFAS 123R for all equity-based compensation awards issued after March 1, 2006. For all equity-based compensation awards that are unvested as of March 1, 2006, compensation cost will be recognized for the unamortized portion of compensation cost not previously included in the SFAS 123 pro forma footnote disclosure. The Company is currently evaluating the impact that adoption of SFAS 123R may have on the Company’s results of operations and financial position. The Company expects that the adoption could have a material effect on the Company’s results of operations, depending on the level and form of future equity-based compensation awards issued, but it should not have a material effect on the Company’s financial position.

Stock Split—On January 7, 2005, the Company’s Board of Directors declared a 3-for-2 stock split on the Company’s Common Stock, that was effected as a 50% stock dividend. The new shares and cash payments in lieu of fractional shares were distributed on February 11, 2005 to stockholders of record on January 26, 2005. The total number of authorized Common Stock shares and associated par value were unchanged by this action. As a result of the split, the Company’s stockholders received one additional share of the Company’s Common Stock for every two shares owned on January 26, 2005. Cash payments in lieu of fractional shares were based on the closing price of the Common Stock on the record date. All share and per-share amounts in the financial statements reflect the impact of the stock split for all periods presented.

Reclassification—Certain reclassifications were made to the fiscal 2005 balance sheet amounts to conform to current year financial presentation.

10

EX-99.3

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined balance sheet as of December 31, 2005 and the unaudited pro forma condensed combined statement of income for the year ended December 31, 2005 are based on the historical financial statements of Natus Medical Incorporated (“Natus”, the “Company”), and Bio-logic Systems Corp. (“Bio-logic”) after giving effect to the acquisition of Bio-logic by Natus using the purchase method of accounting and applying the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements.

Natus and Bio-logic have different fiscal year ends. Accordingly, the unaudited pro forma condensed combined balance sheet combines the historical condensed consolidated balance sheet of Natus as of December 31, 2005 with the historical condensed consolidated balance sheet of Bio-logic as of December 31, 2005, giving effect to the acquisition as if it had occurred on December 31, 2005. The unaudited pro forma condensed combined statement of income combines the historical consolidated statement of income of Natus for the year ended December 31, 2005, with the historical monthly, consolidated statements of income of Bio-logic for the twelve calendar months ended December 31, 2005, giving effect to the acquisition as though it had occurred on January 1, 2005.

The acquisition has been accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations. Under the purchase method of accounting, the total estimated purchase price, calculated as described in Note 1 to these unaudited pro forma condensed combined financial statements, is allocated to the net tangible and intangible assets of Bio-logic acquired in connection with the acquisition, based on their estimated fair values. Management has made a preliminary allocation of the estimated purchase price to the tangible and intangible assets acquired and liabilities assumed based on various preliminary estimates. The allocation of the estimated purchase price is preliminary pending finalization of various estimates and analyses.

The unaudited pro forma condensed combined financial statements have been prepared by management for illustrative purposes only and are not necessarily indicative of the condensed consolidated financial position or results of operations in future periods or the results that actually would have been realized had Natus and Bio-logic been a combined company during the specified periods. The pro forma adjustments are based on the preliminary information available at the time of the preparation of this document. The unaudited pro forma condensed combined financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with the historical consolidated financial statements of Natus included in its Annual Report on Form 10-K for the year ended December 31, 2005. In addition, the unaudited proforma condensed combined financial statements, including the notes thereto, are based on the historical consolidated financial statements of Bio-logic for the year ended February 28, 2005 and for the nine months ended November 30, 2005, which are included in Exhibits 99.1 and 99.2, respectively, to this Form

8-K/A.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

OF NATUS AND BIO-LOGIC

As of December 31, 2005

(in thousands)

	Historical						Pro Forma Adjustments			Pro Forma Combined
	Natus			Bio-logic
ASSETS
Current assets:
Cash and equivalents	$	40,046		$	15,449		$	(56,995	) b	$	8,500
		—			—			10,000	a
Short-term investments		12,163			—			(11,810	) b		353
Accounts receivable, net		8,460			4,609			—			13,069
Inventories		3,482			2,751			—			6,233
Deferred income taxes		—			1,204			—			1,204
Prepaid expenses and other current assets		1,041			170			(625	) c		586
Total current assets		65,192			24,183			(59,430	)		29,945
Property and equipment, net		2,116			2,033			3,500	e		7,649
Deposits and other assets		78			227			—			305
Intangible assets		6,174			2,579			(2,579	) f		29,974
		—			—			23,800	g
Goodwill		3,836			—			18,359	i		22,195
Total assets	$	77,396		$	29,022		$	(16,350	)	$	90,068
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable	$	1,817		$	1,088		$	—		$	2,905
Accrued liabilities		5,441			2,413			3,000	d		10,854
Deferred revenues		439			1,102			—			1,541
Total current liabilities		7,697			4,603			3,000			15,300
Long-term debt		—			33			10,000	a		10,033
Deferred tax		734			175			761	h		1,670
Total liabilities		8,431			4,811			13,761			27,003
Stockholders' equity:
Common stock		99,634			67			(67	) k		99,634
Additional paid-in capital		—			5,940			(5,940	) k		—
Accumulated deficit/retained earnings		(30,750	)		18,438			(18,438	) k		(36,650	)
		—			—			(5,900	) j
Deferred compensation expense		—			(234	)		234	k		—
Accumulated other comprehensive income		81			—			—			81
Total stockholders' equity		68,965			24,211			(30,111	)		63,065
Total liabilities and stockholders' equity	$	77,396		$	29,022		$	(16,350	)	$	90,068

The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements

are an integral part of these financial statements.

Memo:

a To record the Wells Fargo senior credit facility

b To record the purchase cost of $68,805

c To record direct costs of the acquisition

d To record Bio-logic's change of control costs

e To record the fair value of real estate owned by Bio-logic

f To eliminate Bio-logic's historical intangible assets

g To record the fair value of Bio-logic's identifiable intangible assets

h To record deferred taxes associated with Bio-logic's identifiable intangible assets

i To record goodwill

j To record the effect of the write off of in-process research and development

k To eliminate Bio-logic's equity

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

OF NATUS AND BIO-LOGIC

For the Year Ended December 31, 2005

(in thousands, except per share amounts)

	Historical				Pro Forma Adjustments			Pro Forma Combined
	Natus		Bio-logic
Revenue	$	43,045	$	32,254	$	—		$	75,299
Cost of revenue		16,092		11,157		(524	) l		27,226
		—		—		501	n		—
Gross profit		26,953		21,097		23			48,073
Operating expenses:
Marketing and selling		11,396		10,595		—			21,991
Research and development		4,318		4,530		1,095	n		9,943
General and administrative		5,806		4,703		(43	) m		10,466
Total operating expense		21,520		19,828		1,052			42,400
Income/(Loss) from operations		5,433		1,269		(1,029	)		5,673
Other income and expense, net		1,228		425		—			1,653
Income before provision for income tax		6,661		1,694		(1,029	)		7,326
Provision for income tax expense (benefit)		509		506		(406	) o		609
Net income	$	6,152	$	1,188	$	(623	)	$	6,717
Earnings per share:
Basic	$	0.35						$	0.39
Diluted	$	0.33						$	0.36
Weighted average shares used in the calculation of net income per share:
Basic		17,429							17,429
Diluted		18,693							18,693

The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements

are an integral part of these financial statements.

Memo:

l To eliminate Bio-logic's historical amortization of developed technology

m To eliminate Bio-logic's historical write off of deferred stock-based compensation

n To amortize acquired identified intangible assets

o To adjust the tax provision to reflect the effect of the pro forma adjustments

p See additional explanatory footnote relating to expected expense reductions related to an integration plan

NOTES TO UNAUDITED PRO FORMA

CONDENSED COMBINED FINANCIAL STATEMENTS

1 - Basis of Presentation

On January 5, 2006, Natus completed its acquisition of Bio-logic whereby Bio-logic became a wholly owned subsidiary of Natus in a transaction accounted for using the purchase method. Pursuant to the terms of the Agreement and Plan of Merger, each outstanding share of Bio-logic common stock was converted into the right to receive $8.77 in cash. Additionally, each outstanding option to acquire Bio-logic common stock was cancelled, with the holder of the option receiving, for each share covered by the option, an amount equal to the excess (if any) of $8.77 over the exercise price per share of the option.

The preliminary estimated total purchase price of the acquisition is as follows (in thousands):

Cash paid for outstanding stock and options	$	68,805
Direct transaction costs		625
Total preliminary estimated purchase cost	$	69,430

Under the purchase method of accounting, the total estimated purchase price as shown in the table above is allocated to the net tangible and intangible assets of Bio-logic based on their estimated fair values as of January 5, 2006. Management has allocated the preliminary estimated purchase price based on preliminary estimates based on various factors as described in the introduction to these unaudited pro forma condensed combined financial statements. The allocation of the purchase price is preliminary, pending the completion of various analyses and the finalization of estimates. The allocation of the preliminary purchase price, and estimated useful lives and first year amortization on an annualized basis associated with the amortizable identifiable intangible assets, is as follows (in thousands):

	Amount			Annualized First Year Amortization		Estimated Useful Life
Net tangible assets	$	22,132		$	—
Identifiable intangible assets:
Core technology		17,100			1,095	5 - 20 years
Developed technology		4,200			501	10 years
Tradenames		2,500			—	Indefinite
Goodwill		18,359			—	n/a
Net deferred tax liability		(761	)		—	n/a
In-process research and development		5,900			—	n/a
Totals	$	69,430		$	1,700

Net tangible assets. A preliminary estimate of $22.1 million has been allocated to net tangible assets, including $15.4 million of cash acquired and approximately $5.5 million of real estate for which approximately $2.8 million is currently subject to a contingent sales contract. The Company has not completed its analysis of the fair market value of other tangible assets acquired and any adjustment to the fair market value will be offset by a corresponding adjustment to goodwill.

Identifiable intangible assets. Acquired identifiable intangible assets include core technology, developed technology, and tradenames. Core technology represents a combination of Bio-logic processes, patents, and trade secrets developed through years of experience in design and development of their products, which will be amortized on a graded basis over periods from 5 to 20 years. Developed technology relates to Bio-logic’s products across all of their product lines that have reached technological feasibility, which will be amortized on a graded basis over 10 years. Tradenames relates to the Bio-logic tradename and the tradenames of specific product lines; they have an indefinite life and will not be amortized.

NOTES TO UNAUDITED PRO FORMA

CONDENSED COMBINED FINANCIAL STATEMENTS

Goodwill. Approximately $18.4 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). In the event that management of the Company determines that the value of goodwill has become impaired, the Company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.

Net Deferred Tax Liability. A preliminary estimate of $761,000 has been allocated to a long-term deferred tax liability, which primarily results from the tradenames that have indefinite lives as well as adjustments to other items associated with net deferred tax liabilities. This amount is offset by an increase in goodwill.

In addition, the preliminary valuation of amortizable identified intangible assets will result in an approximate $8.7 million long-term deferred tax liability that will be offset by the reversal of the historical valuation allowance associated with deferred tax assets of Natus.

In-process research and development. A preliminary estimate of $5.9 million has been allocated to in-process research and development and will be charged to expense in the quarter ending March 31, 2006. Due to its non-recurring nature, the in-process research and development expense has been excluded from the unaudited pro forma condensed combined statements of income.

Bio-logic is currently developing new products in several product areas that qualify as in-process research and development. Projects that qualify as in-process research and development represent those that have not yet reached technological feasibility. Technological feasibility is defined as being equivalent to completion of a beta-phase working prototype in which there is no remaining risk relating to the development. The Company believes there is a risk that these development efforts and enhancements will not achieve technological feasibility, or if they do, may not be competitive with other products using alternative technologies that offer comparable functionality.

The value assigned to in-process research and development was determined by considering the importance of each project to the overall development plan, estimating costs to develop the purchased in-process research and development into commercially viable products, estimating the resulting net cash flows from the projects when completed, and discounting the net cash flows to their present value. The revenue estimates used to value the purchased in-process research and development were based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by Bio-logic and its competitors.

The estimates used in valuing in-process research and development were based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Accordingly, actual results may vary from these estimates.

2 - Pro Forma Adjustments

Pro forma adjustments are described on the face of the respective financial statements.

Pro forma adjustments are necessary to reflect the estimated purchase price, the estimated value of acquired identified intangible assets, goodwill, the amortization expense related to the estimated amortizable intangible assets and deferred stock-based compensation, and the income tax effect related to the pro forma adjustments based on statutory rates in effect in the United States.

There were no intercompany balances or transactions between Natus and Bio-logic as of the dates and for the periods of these pro forma condensed combined financial statements.

The pro forma combined provision for income taxes does not necessarily reflect the amounts that would have resulted had Natus and Bio-logic filed consolidated income tax returns during the periods presented.

NOTES TO UNAUDITED PRO FORMA

CONDENSED COMBINED FINANCIAL STATEMENTS

3 – Integration Plan

As more fully described in a Current Report on Form 8-K filed with the Securities and Exchange Commission by Natus on January 12, 2006, Natus initiated an Integration Plan (the “Plan”) subsequent to the acquisition, pursuant to which the Company announced it would be reducing the size of its combined workforce by approximately 23 employees, representing approximately 10% of the combined workforce of Natus and Bio-logic. The Company expects that total employee severance costs related to the staff reductions will be approximately $3.0 million, including costs related to change of control provisions in the employment contracts of the chief executive officer, chief operating officer, and two vice-presidents of Bio-logic totaling approximately $2.7 million. Such amount has been recorded as a liability on the balance sheet as of December 31, 2005.

Other than costs associated with the Plan mentioned above, the unaudited pro forma condensed combined financial statements do not include any adjustments for liabilities that may result from further integration activities, as management is in the process of making these assessments and estimates of these costs are not currently known. However, liabilities may ultimately be recorded related to integration activities, including additional costs related to the Plan. Any such adjustments to liabilities will be recorded as an adjustment to the purchase price and a corresponding offsetting adjustment to goodwill.

Although not reflected in the pro forma adjustments, the Company believes that on an annual basis the Plan will result in a reduction of personnel-related costs of approximately $3.2 million. The Company also believes that it will benefit from other synergies of the acquisition that should result in an additional annual reduction of non-personnel-related operating expenses of approximately $1.0 million.

4 - Pro Forma Net Income Per Share

The Company computes net income per share in accordance with SFAS No. 128, Earnings per Share. Basic net income per share is based upon the weighted average number of common shares outstanding during the year ended December 31, 2005. Diluted net income per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalents outstanding during the same period. Common stock equivalents are shares underlying options under the Company’s stock option plans and are calculated using the treasury stock method.