Natus®, AABR®, ABaer ®, ALGO®, AOAE®, AuDX ®, Balance Manager®, Balance Master®, Biliband ®, Bio-logic®, Ceegraph®, CHAMP ®, Cochlea Scan®, Cool Cap®, Ear Couplers ®, Echo Screen®, Embla®, Embletta ®, Enterprise®, EquiTest®, Fischer-Zoth ®, Flexicoupler®, Gumdrop®, Keypoint ®, Keypoint AU®, Keypoint EU®, Keypoint JP ®, MASTER®, Medix®, MedixI.C.S.A ®, Navigator®, Neatnick®, neoBLUE ®, Neuromax®, NeuroWorks®, Oxydome ®, REMbrandt®, REMlogic®, Sandman ®, Sleeprite®, Sleepscan®, Smart Scale ®, Tootsweet®, Traveler®, Warmette ® and VAC PAC®, Xact Trace®, are registered trademarks of Natus Medical Incorporated and its subsidiaries. Accuscreen™, Bili Lite Pad™, Bili-Lite™, Biomark™, Circumstraint™, Coherence™, Deltamed™, inVision™, Medix MediLED™, MiniMuffs™, NATUS NatalCare™, Neometrics™ and Smartpack™ are non-registered trademarks of Natus and its subsidiaries. Solutions for Newborn CareSM is a non-registered service mark of Natus.

Overview

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") supplements the MD&A in the Annual Report on Form 10-K for the year ended December 31, 2011 of Natus Medical Incorporated ("Natus," "we," "us," or "our Company"), and presumes that readers have read or have access to the discussion and analysis in our Annual Report. Management's discussion and analysis should be read in conjunction with our condensed consolidated financial statements and accompanying footnotes, the discussion of certain risks and uncertainties contained in Part II, Item 1A of this report, and the cautionary information regarding forward-looking statements at the end of this section. MD&A includes the following sections:

• Our Business. A general description of our business;

• 2012 Second Quarter Overview. A summary of key information concerning the financial results for the three months ended June 30, 2012;

• Application of Critical Accounting Policies. A discussion of the accounting policies that are most important to the portrayal of our financial condition and results of operations and that require significant estimates, assumptions, and judgments;

• Results of Operations. An analysis of our results of operations for the periods presented in the financial statements;

• Liquidity and Capital Resources. An analysis of capital resources, sources and uses of cash, investing and financing activities, off-balance sheet arrangements, contractual obligations and interest rate hedging;

• Recent Accounting Pronouncements. See Note 1 to our Condensed Consolidated Financial Statements for a discussion of new accounting pronouncements that affect us; and

• Cautionary Information Regarding Forward-Looking Statements. Cautionary information about forward-looking statements.

Our Business

Natus is a leading provider of healthcare products used for the screening, detection, treatment, monitoring and tracking of common medical ailments in newborn care, hearing impairment, neurological dysfunction, epilepsy, sleep disorders, and balance and mobility disorders. Product offerings include computerized neurodiagnostic systems for audiology, neurology, polysomnography, and neonatology, as well as newborn care products such as hearing screening systems, phototherapy devices for the treatment of newborn jaundice, head-cooling products for the treatment of brain injury in newborns, incubators to control the newborn's environment, and software systems for managing and tracking disorders and diseases for public health laboratories.

We have completed a number of acquisitions since 2003, consisting of either the purchase of a company, substantially all of the assets of a company, or individual products or product lines. The businesses we have acquired are Neometrics in 2003, Fischer-Zoth in 2004, Bio-logic, Deltamed, and Olympic Medical in 2006, Xltek in 2007, Sonamed, Schwarzer Neurology, and Neurocom in 2008, Hawaii Medical and Alpine Biomed in 2009, Medix in 2010, and Embla in 2011. We completed the acquisition of Nicolet on July 2, 2012.

Product Families

We categorize our products into the following product families, which are more fully described in our Annual Report on Form 10-K for the year ended December 31 2011:

• Neurology-Includes products for diagnostic electroencephalography (EEG), electromyography (EMG), intra-operative monitoring (IOM), diagnostic sleep analysis, or polysomnography (PSG), newborn brain monitoring, and assessment of balance and mobility disorders.

• Hearing-Includes products for newborn hearing screening and diagnostic hearing assessment.

• Newborn Care-Includes thermoregulation devices and products for the treatment of brain injury and jaundice in newborns.

Segment and Geographic Information

We operate in one reportable segment in which we provide healthcare products used for the screening, detection, treatment, monitoring and tracking of common medical ailments in newborn care, hearing impairment, neurological dysfunction, epilepsy, sleep disorders and balance and mobility disorders.

Our end-user customer base includes hospitals, clinics, laboratories, physicians, nurses, audiologists, and governmental agencies. Most of our international sales are to distributors who resell our products to end-users or sub-distributors.

Information regarding our sales and long-lived assets in the U.S. and in countries outside the U.S. is contained in Note 16- Segment, Customer and Geographic Information of our condensed consolidated financial statements included in this report.

Revenue by Product Category

We generate our revenue either from sales of Devices and Systems, which are generally non-recurring, and from related Supplies and Services, which are generally recurring. Other revenue consists primarily of freight revenue. The products that are attributable to these categories are described in our Annual Report on Form 10-K for the year ended December 31, 2011. Revenue from Devices and Systems and Supplies and Services, as a percent of total revenue for the three and six months ended June 30, 2012 and 2011 is as follows:

                                   Three Months Ended           Six Months Ended
                                        June 30,                    June  30,
                                   2012            2011         2012          2011
         Devices and Systems           63 %           63 %          64 %         65 %
         Supplies and Services         36 %           35 %          35 %         33 %
         Other                          1 %            2 %           1 %          2 %

         Total                        100 %          100 %         100 %        100 %

During the three and six months ended June 30, 2012 and 2011, no single customer or foreign country contributed to more than 10% of revenue, and revenue from services was less than 10% of revenue.

2012 Second Quarter Overview

Our business and operating results have been and continue to be affected by worldwide economic conditions. Our sales are significantly dependent on both capital spending by hospitals in the United States and healthcare spending by ministries of health within the European Union.

Our consolidated revenue increased $2.9 million in the second quarter ended June 30, 2012 to $61.0 million compared to $58.1 million in the second quarter of the previous year. Embla, acquired in September 2011, contributed to $8.0 million of incremental revenue in the second quarter of 2012. We experienced revenue declines across other business units in Europe, Canada and South America.

Net income was $445,000 or $0.01 per diluted share in the three months ended June 30, 2012, compared with net income of $2.4 million or $0.08 per diluted share in the same period in 2011. The decline in net income related to direct costs of acquisitions, including costs associated with the Nicolet acquisition completed in July 2012 of

$1.8 million and accelerated ERP system depreciation of $451,000. Gross profit was 0.8 percentage points lower for the second quarter of 2012 compared to the second quarter of 2011, reflecting declining profit margins from Xltek, Medix, and Natus France products.

Application of Critical Accounting Policies

We prepare our financial statements in accordance with accounting principles generally accepted in the United States 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, or judgments could have a material effect 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

• Inventory is carried at the lower of cost or market value

• Carrying value of intangible assets and goodwill

• Liability for product warranties

• Share-based compensation

These critical accounting policies are described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2011, under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes to these policies during the three and six months ended June 30, 2012.

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.



                                                Three Months               Six Months
                                                   Ended                     Ended
                                                  June 30,                  June 30,
                                             2012         2011         2012         2011
   Revenue                                    100.0 %      100.0 %      100.0 %      100.0 %
   Cost of revenue                             43.9         43.1         43.8         42.1

   Gross profit                                56.1         56.9         56.2         57.9

   Operating expenses:
   Marketing and selling                       26.1         27.1         27.3         25.7
   Research and development                    10.8         10.6         11.1         10.6
   General and administrative                  17.9         13.7         17.0         14.5

   Total operating expenses                    54.8         51.4         55.4         50.8

   Income from operations                       1.3          5.5          0.8          7.1

   Other income (expense), net                  0.5         (0.1 )        0.4         (0.2 )

   Income before provision for income tax       1.8          5.4          1.2          6.9

   Provision for income tax                     1.1          1.2          0.5          2.1

   Net income                                   0.7 %        4.2 %        0.7 %        4.8 %

We acquired Embla in September 2011. Where significant, we have noted the impact of this acquisition on our results of operations for the three and six months ended June 30, 2012, as compared to the same periods in 2011.

Three Months Ended June 30, 2012 and 2011

Our revenue increased $2.9 million, or 5%, to $61.0 million for the three months ended June 30, 2012 compared to $58.1 million in the comparable 2011 period. Embla contributed $8.0 million of revenue during the 2012 quarter. Revenue from our newborn care products decreased $2.3 million while revenue from neurology products other than from Embla decreased $3.1 million and revenue from our hearing and other products increased $300,000 in the quarter.

Revenue from devices and systems increased $1.9 million, or 5% to $38.4 million in the second quarter of 2012 compared to $36.5 million in the same period in 2011. Embla contributed $4.6 million of device and system revenue during the 2012 quarter. Devices and systems revenue from our neurology and other diagnostic products other than Embla decreased $3.0 million or 15% to $17.6 million and devices and systems revenue from newborn hearing screening coupled with newborn care and other device products increased $300,000, reflecting continued weakness in worldwide capital spending coupled with pricing pressures. Revenue from devices and systems was 63% of total revenue in each of the three months ended June 30, 2012 and 2011.

Revenue from supplies and services increased $1.0 million, or 5%, to $21.7 million in the second quarter of 2012 compared to $20.7 million in the same period in 2011. Embla contributed $3.4 million of supplies and services revenue in the second quarter of 2012. Revenue from newborn care and hearing supplies decreased by $400,000, revenue from neurology supplies other than Embla decreased by $400,000 and service fee revenue other than Embla decreased by $1.6 million, primarily related to newborn care. Revenue from supplies and services was 36% of total revenue in the three months ended June 30, 2012 compared to 35% of total revenue for the second quarter of 2011.

Revenue from sales outside the U.S. increased 4.8%, or $1.2 million to $26.9 million in the second quarter of 2012 compared to $25.7 million for the same period in 2011. Embla contributed $3.8 million of international revenue, while revenue from neurology and hearing products other than Embla increased by $900,000 and international revenue from newborn care and other products decreased by $3.5 million.

Gross profit as a percentage of revenue was 56.1% for the three months ended June 30, 2012 compared to 56.9% for the corresponding 2011 period, reflecting higher cost of trade materials and manufacturing overhead predominately impacting Xltek products. Gross profit increased $1.2 million or 4% to $34.2 million in 2012 from $33.0 million in 2011.

Total operating costs increased by $3.5 million or 12%, to $33.4 million in the three months ended June 30, 2012, compared to $29.9 million in the same period in 2011. Operating expenses of Embla were $2.8 million.

Marketing and selling expenses increased $200,000, or 1%, to $15.9 million in the three months ended June 30, 2012, compared to $15.7 million in the same period in 2011. Marketing and selling expenses of Embla were $1.2 million. Excluding Embla, the $1.0 million decrease was primarily attributable to lower employee compensation costs resulting from restructuring activities and other cost reduction initiatives.

Research and development expenses increased $400,000 or 7%, to $6.6 million for the three months ended June 30, 2012, compared to $6.2 million in the same period of 2011. Research and development expenses of Embla were $1.0 million. Excluding Embla, the $600,000 decrease was primarily attributable to lower employee compensation costs resulting from restructuring activities.

General and administrative expenses increased $2.9 million, or 37%, to $10.9 million in the three months ended June 30, 2012, compared to $8.0 million in the same period in 2011. General and administrative expenses of Embla were $500,000. Excluding Embla, the increase was the result of direct costs of acquisitions of $2.0 million for which there was no comparable cost in the same period of 2011 and accelerated ERP system depreciation of $450,000 for which there was no comparable cost in the second quarter of 2011.

Other income (expense), net, consists of investment income from our investment portfolio, interest expense, net currency exchange gains and losses, and other miscellaneous income and expenses. We reported net other income of $285,000 in the three months ended June 30, 2012, compared to net other expense of $69,000 in the same period in 2011. We incurred other income of $205,000 and $79,000 during the three months ended June 30, 2012 and 2011,

respectively. The increase was attributable to VAT tax income generated by a subsidiary. In addition, interest expense was lower by $56,000 for the three months ended June 30, 2012 quarter compared to the same quarter in 2011 resulting from decreased short-term borrowings by a subsidiary.

We recorded a provision for income tax of $645,000 in the three months ended June 30, 2012, compared to a provision for income tax expense of $726,000 in the same period in 2011. Our effective tax rate was 59.2 % and 23.5% for the three months ended June 30, 2012 and 2011, respectively. The increase of our effective tax rate for the three months ended June 30, 2012 compared to the same period in the prior year is primarily the result of foreign withholding taxes that were paid in conjunction with funding the Nicolet acquisition for which a valuation allowance was recorded against associated foreign tax credits, partially offset by the reversal of tax reserves upon settlement of a foreign income tax audit. We expect additional unrecognized tax benefits may be recognized or released in the remainder of 2012 upon settlement of audits of tax returns currently in progress and the expiration of the statute of limitations on other returns.

Six Months Ended June 30, 2012 and 2011

Our revenue increased $3.3 million, or 3%, to $120.5 million for the six month period ended June 30, 2012 compared to $117.2 million in the comparable 2011 period. Embla contributed $14.8 million of revenue during 2012. Revenue from our newborn care products decreased $1.3 million, revenue from neurology products other than from Embla decreased $7.2 million and revenue from our hearing and other products decreased $3.0 million in the six month period in 2012.

Revenue from devices and systems increased $400,000, or 0.5% to $76.5 million in the six month period of 2012 compared to $76.1 million in the same period in 2011. Embla contributed $7.8 million of device and system revenue during the 2012. Devices and systems revenue from our neurology and other diagnostic products other than Embla decreased $6.6 million or 16% to $33.8 million and devices and systems revenue from newborn hearing screening coupled with newborn care and other device products decreased $800,000, reflecting continued weakness in worldwide capital spending coupled with pricing pressures. Revenue from devices and systems was 64% of total revenue in the six months ended June 30, 2012 compared to 65% of total revenue for 2011.

Revenue from supplies and services increased $3.2 million, or 8%, to $42.4 million in the six month period of 2012 compared to $39.2 million in the same period in 2011. Embla contributed $6.9 million of supplies and services revenue in 2012. Revenue from newborn care and hearing supplies decreased by $1.1 million, revenue from neurology supplies other than Embla decreased by $900,000 and service fee revenue other than Embla decreased by $1.7 million, primarily related to newborn care. Revenue from supplies and services was 35% of total revenue in the six months ended June 30, 2012 compared to 33% of total revenue for 2011.

Revenue from sales outside the U.S. increased 7%, or $3.9 million to $56 million in the six month period of 2012 compared to $52.1 million for the same period in 2011. Embla contributed $7.5 million of international revenue, while revenue from neurology and hearing products other than Embla decreased by $400,000 and international revenue from newborn care products decreased by $3.2 million.

Gross profit as a percentage of revenue was 56.2% for the six months ended June 30, 2012 compared to 57.9% for the corresponding 2011 period, with the reduction primarily the result of increases in materials costs. Gross profit decreased $100,000 to $67.7 million in 2012 from $67.8 million in 2011.

Total operating costs increased by $7.1 million or 12%, to $66.7 million in the six months ended June 30, 2012, compared to $59.6 million in the same period in 2011. Operating expenses of Embla were $5.5 million.

Marketing and selling expenses increased $2.8 million, or 9%, to $32.9 million in the six months ended June 30, 2012, compared to $30.1 million in the same period in 2011. Marketing and selling expenses of Embla were $2.3 million. The remainder of the increase was primarily attributable to increased travel and other compensation costs.

Research and development expenses increased $900,000, or 7%, to $13.3 million for the six months ended June 30, 2012, compared to $12.4 million in the same period of 2011. Research and development expenses of Embla were $1.8 million, partially offset by lower employee compensation costs resulting from restructuring.

General and administrative expenses increased $3.4 million, or 20%, to $20.4 million in the three months ended June 30, 2012, compared to $17 million in the same period in 2011. General and administrative expenses of Embla were

$1.3 million. General and administrative expenses included direct costs of acquisitions of $2 million and accelerated ERP system depreciation of $900,000 for which there was no comparable costs in the same period of 2011. We had an increase in restructuring costs in the first six months of 2012 of $400,000 over the comparable prior period. These costs were offset by $1.2 million of reduced costs related to employee compensation and outside services.

Other income (expense), net, consists of investment income from our investment portfolio, interest expense, net currency exchange gains and losses, and other miscellaneous income and expenses. We reported net other income of $454,000 in the six months ended June 30, 2012, compared to net other expense of $214,000 in the same period in 2011. We recognized $333,000 of foreign exchange gains and $107,000 of net foreign currency exchange losses during the six months ended June 30, 2012 and 2011, respectively.

We recorded a provision for income tax of $617,000 in the six months ended June 30, 2012, compared to a provision for income tax of $2.5 million in the same period in 2011. Our effective tax rate was 43.4 % and 31.5% for the six months ended June 30, 2012 and 2011, respectively. The increase of our effective tax rate for the six months ended June 30, 2012 compared to the same period in the prior year is primarily the result of foreign withholding taxes that were paid in connection with funding the Nicolet acquisition, partially offset by the reversal of tax reserves upon settlement of a foreign income tax audit. The Company may receive a foreign tax credit that will offset the withholding tax, but a valuation allowance has been recorded against the benefit. We expect additional unrecognized tax benefits may be recognized or released in the remainder of 2012 upon settlement of audits of tax returns currently in progress and the expiration of the statute of limitations on other returns.

Liquidity and Capital Resources

Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate financing and to raise capital. Therefore, liquidity cannot be considered separately from capital resources that consist of our current funds and the potential to increase those funds in the future. We plan to use these resources in meeting our commitments and in achieving our business objectives.

As of June 30, 2012, we had cash and cash equivalents of $17 million, stockholders' equity of $259.3 million, and working capital of $110.9 million, compared with cash and cash equivalents of $32.8 million, stockholders' equity of $257.7 million, and working capital of $90.5 million as of December 31, 2011.

As of June 30, 2012, we had cash and cash equivalents outside the U.S. in certain of our foreign operations of approximately $10.9 million. We currently intend to permanently reinvest the cash held by our foreign subsidiaries. If, however, a portion of these funds were needed for and distributed to our operations in the United States, we would be subject to additional U.S. income taxes and foreign withholding taxes. The amount of taxes due would depend on the amount and manner of repatriation, as well as the location from where the funds are repatriated.

We have a $50 million revolving credit facility with Wells Fargo Bank, National Association ("Wells Fargo"). The revolving credit facility contains covenants, including covenants relating to liquidity and other financial measurements, and provides for events of default, including failure to pay any interest when due, failure to perform or observe covenants, bankruptcy or insolvency events and the occurrence of a material adverse effect, and restricts our ability to pay dividends. We have granted Wells Fargo a security interest in substantially all of our assets. We have no other significant credit facilities. We did not draw on the credit facility in 2011.

In July 2012, we acquired for a cash purchase price of $57.9 million all of the outstanding common shares of CareFusion subsidiaries comprising the Nicolet business in the United States, Ireland, and the United kingdom, and certain assets and liabilities of Nicolet sales divisions principally in China, Brazil, Germany, Italy, the Netherlands, and Spain. We funded this acquisition with a combination of cash on hand and a $31 million borrowing under the Wells Fargo credit facility.

We believe that our current cash and cash equivalents and any cash generated from operations will be sufficient to meet our ongoing operating requirements for the foreseeable future. In addition to the Nicolet acquisition, we acquired Embla in 2011 and Medix in 2010, and completed two acquisitions in 2009, four acquisitions in 2008, one in 2007, and three in 2006. We intend to continue to acquire additional technologies, products, or businesses and these acquisitions could be significant. These actions would

likely affect our future capital requirements and the adequacy of our available funds. In order to finance future acquisitions, we may be required to raise additional funds through public or private financings, strategic relationships or other arrangements. Any equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants and increase our cost of capital.

Cash provided by operations increased by $7.2 million for the six months ended June 30, 2012 to $14.1 million, compared to $6.9 million for the same period in 2011. The sum of our net income and certain non-cash expense items, such as reserves, depreciation and amortization, and share based compensation was approximately $11 million in the 2012 period, compared to $14.5 million in 2011. The overall impact of changes in certain operating assets and liabilities on total operating cash flows resulted in a cash inflow of $3.3 million in 2012 . . .