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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission File No. 000-30335





OTIX GLOBAL, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 87-0494518                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

2795 East Cottonwood Parkway, Suite 660

Salt Lake City, UT 84121-7036

(Address of principal executive offices)

(801) 365-2800

(Registrants telephone number, including area code)





Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    x  Yes     ̈  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     ̈  Yes     ̈  No

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check One):

Large accelerated filer ̈            Accelerated filerx            Non-accelerated filer   ̈            Small reporting company   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):      ̈  Yes    x  No

As of August 4, 2009, there were 27,702,217 shares of the registrants $0.001 par value common
stock outstanding.









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##### Table of Contents

OTIX GLOBAL, INC.

TABLE OF CONTENTS



|                              |  |          |  |                                                                                                           |  |     
|----------------------------- |  | -------- |  | --------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |          |  |                                                                                                           |  | Page
|PART I. FINANCIAL INFORMATION |  |         
|                              |  |          | 
|                              |  | ITEM 1.  |  | Condensed Consolidated Financial Statements (Unaudited):                                                  |  |     
|                              |  |          | 
|                              |  |          |  | Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008                           |  | 3   
|                              |  |          | 
|                              |  |          |  | Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008 |  | 4   
|                              |  |          | 
|                              |  |          |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008           |  | 5   
|                              |  |          | 
|                              |  |          |  | Notes to Condensed Consolidated Financial Statements                                                      |  | 6   
|                              |  |          | 
|                              |  | ITEM 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 15  
|                              |  |          | 
|                              |  | ITEM 3.  |  | Quantitative and Qualitative Disclosures about Market Risks                                               |  | 25  
|                              |  |          | 
|                              |  | ITEM 4.  |  | Controls and Procedures                                                                                   |  | 26  
|                              | 
|PART II. OTHER INFORMATION    |  |         
|                              |  |          | 
|                              |  | ITEM 1.  |  | Legal Proceedings                                                                                         |  | 26  
|                              |  |          | 
|                              |  | ITEM 1A. |  | Risk Factors                                                                                              |  | 26  
|                              |  |          | 
|                              |  | ITEM 6.  |  | Exhibits                                                                                                  |  | 28  
|                              | 
|SIGNATURE                     |  | 29      
|CERTIFICATIONS                |  |         



2



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PART I. FINANCIAL INFORMATION



|ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|------- | -------------------------------------------------------

OTIX GLOBAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)



|                                                                                                                        |  |              |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                        |  | June 30,2009 |         |   | December 31,2008 |  
|ASSETS                                                                                                                  |  |              |         |   |                  |   |         |  
|Current assets:                                                                                                         |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                               |  | $            | 8,633   |   |                  | $ | 13,129  |  
|Restricted cash and cash equivalents                                                                                    |  |              | 64      |   |                  |   | 284     |  
|Accounts receivable, net of allowance for doubtful accounts of $1,337 and $1,497                                        |  |              | 17,280  |   |                  |   | 17,524  |  
|Inventories                                                                                                             |  |              | 12,756  |   |                  |   | 10,129  |  
|Prepaid expenses and other                                                                                              |  |              | 4,011   |   |                  |   | 4,114   |  
|                                                                                                                        |  |              |         |   |                  |   |         |  
|Total current assets                                                                                                    |  |              | 42,744  |   |                  |   | 45,180  |  
|Property and equipment, net of accumulated depreciation and amortization of $18,489 and $20,641                         |  |              | 7,711   |   |                  |   | 6,869   |  
|Definite-lived intangible assets, net                                                                                   |  |              | 7,219   |   |                  |   | 8,504   |  
|Indefinite-lived intangible assets                                                                                      |  |              | 7,168   |   |                  |   | 7,242   |  
|Goodwill                                                                                                                |  |              | 21,437  |   |                  |   | 35,564  |  
|Other assets                                                                                                            |  |              | 3,962   |   |                  |   | 3,587   |  
|                                                                                                                        |  |              |         |   |                  |   |         |  
|Total assets                                                                                                            |  | $            | 90,241  |   |                  | $ | 106,946 |  
|                                                                                                                        |  |              |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                    |  |              |         |   |                  |   |         |  
|Current liabilities:                                                                                                    |  |              |         |   |                  |   |         |  
|Current portion of long-term debt                                                                                       |  | $            | 5,938   |   |                  | $ | 4,673   |  
|Payable for earn-out on acquisitions                                                                                    |  |              | 417     |   |                  |   | 417     |  
|Accounts payable                                                                                                        |  |              | 7,974   |   |                  |   | 7,562   |  
|Accrued payroll and related expenses                                                                                    |  |              | 4,475   |   |                  |   | 4,488   |  
|Accrued restructuring                                                                                                   |  |              | 977     |   |                  |   | 848     |  
|Accrued warranty                                                                                                        |  |              | 4,013   |   |                  |   | 3,727   |  
|Deferred revenue                                                                                                        |  |              | 4,349   |   |                  |   | 4,158   |  
|Other accrued liabilities                                                                                               |  |              | 4,438   |   |                  |   | 4,411   |  
|                                                                                                                        |  |              |         |   |                  |   |         |  
|Total current liabilities                                                                                               |  |              | 32,581  |   |                  |   | 30,284  |  
|Long-term debt, net of current portion                                                                                  |  |              | 1,241   |   |                  |   | 2,182   |  
|Deferred revenue, net of current portion                                                                                |  |              | 5,560   |   |                  |   | 5,460   |  
|Other liabilities                                                                                                       |  |              | 709     |   |                  |   | 1,109   |  
|                                                                                                                        |  |              |         |   |                  |   |         |  
|Total liabilities                                                                                                       |  |              | 40,091  |   |                  |   | 39,035  |  
|Shareholders equity:                                                                                                   |  |              |         |   |                  |   |         |  
|Preferred stock, $0.001 par value; 5,000 shares authorized; zero issued and outstanding                                 |  |              |        |   |                  |   |        |  
|Common stock, $0.001 par value; 70,000 shares authorized; 27,702 and 27,544 shares issued and outstanding, respectively |  |              | 29      |   |                  |   | 29      |  
|Additional paid-in-capital                                                                                              |  |              | 144,753 |   |                  |   | 143,965 |  
|Accumulated deficit                                                                                                     |  |              | (98,452 | ) |                  |   | (78,892 | )
|Accumulated other comprehensive income                                                                                  |  |              | 7,593   |   |                  |   | 6,582   |  
|Treasury stock; 974 shares at cost                                                                                      |  |              | (3,773  | ) |                  |   | (3,773  | )
|                                                                                                                        |  |              |         |   |                  |   |         |  
|Total shareholders equity                                                                                              |  |              | 50,150  |   |                  |   | 67,911  |  
|                                                                                                                        |  |              |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                              |  | $            | 90,241  |   |                  | $ | 106,946 |  
|                                                                                                                        |  |              |         |   |                  |   |         |  

See accompanying notes to condensed consolidated financial statements.



3



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OTIX GLOBAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per
share data)

(unaudited)



|                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|--------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                |  | Three months ended June 30, |        |   | Six months ended June 30, |  
|                                                                |  | 2009                        |        |   | 2008                      |   |        | 2009 |  |   | 2008    |  
|Net sales                                                       |  | $                           | 25,420 |   |                           | $ | 34,837 |      |  | $ | 49,852  |   |  | $ | 66,287 |  
|Cost of sales                                                   |  |                             | 9,956  |   |                           |   | 13,020 |      |  |   | 20,225  |   |  |   | 24,388 |  
|                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Gross profit                                                    |  |                             | 15,464 |   |                           |   | 21,817 |      |  |   | 29,627  |   |  |   | 41,899 |  
|Selling, general and administrative expense                     |  |                             | 15,298 |   |                           |   | 19,507 |      |  |   | 29,619  |   |  |   | 37,000 |  
|Research and development expense                                |  |                             | 1,929  |   |                           |   | 2,157  |      |  |   | 3,908   |   |  |   | 4,382  |  
|Goodwill and definite-lived intangibles impairment charges      |  |                             |       |   |                           |   |       |      |  |   | 14,658  |   |  |   |       |  
|Restructuring charges                                           |  |                             | 525    |   |                           |   | 828    |      |  |   | 525     |   |  |   | 1,329  |  
|                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Operating loss                                                  |  |                             | (2,288 | ) |                           |   | (675   | )    |  |   | (19,083 | ) |  |   | (812   | )
|Interest expense                                                |  |                             | (137   | ) |                           |   | (182   | )    |  |   | (277    | ) |  |   | (364   | )
|Other income (expense), net                                     |  |                             | (22    | ) |                           |   | 98     |      |  |   | 86      |   |  |   | 611    |  
|                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Loss before income taxes                                        |  |                             | (2,447 | ) |                           |   | (759   | )    |  |   | (19,274 | ) |  |   | (565   | )
|Provision for income taxes                                      |  |                             | 180    |   |                           |   | 295    |      |  |   | 276     |   |  |   | 589    |  
|                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Loss from continuing operations                                 |  |                             | (2,627 | ) |                           |   | (1,054 | )    |  |   | (19,550 | ) |  |   | (1,154 | )
|Income (loss) from discontinued operations, net of income taxes |  |                             | 35     |   |                           |   | (2,948 | )    |  |   | (10     | ) |  |   | (3,380 | )
|                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Net loss                                                        |  | $                           | (2,592 | ) |                           | $ | (4,002 | )    |  | $ | (19,560 | ) |  | $ | (4,534 | )
|                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Basic and diluted loss per common share:                        |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Continuing operations                                           |  | $                           | (0.09  | ) |                           | $ | (0.04  | )    |  | $ | (0.71   | ) |  | $ | (0.04  | )
|Discontinued operations                                         |  |                             |       |   |                           |   | (0.11  | )    |  |   |        |   |  |   | (0.13  | )
|                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Net loss                                                        |  | $                           | (0.09  | ) |                           | $ | (0.15  | )    |  | $ | (0.71   | ) |  | $ | (0.17  | )
|                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Weighted average number of common shares outstanding:           |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Basic and diluted                                               |  |                             | 27,667 |   |                           |   | 27,336 |      |  |   | 27,626  |   |  |   | 27,093 |  

See accompanying notes to condensed consolidated financial statements.



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OTIX GLOBAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                          |  |                                  |         |   |      |   |        |  
|----------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                          |  | For the six months endedJune 30, |        
|                                                                                          |  | 2009                             |         |   | 2008 |  
|Cash flows from operating activities:                                                     |  |                                  |         |   |      |   |        |  
|Net loss                                                                                  |  | $                                | (19,560 | ) |      | $ | (4,534 | )
|Loss from discontinued operations, net of tax                                             |  |                                  | 10      |   |      |   | 3,380  |  
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                                  |         |   |      |   |        |  
|Depreciation and amortization                                                             |  |                                  | 2,046   |   |      |   | 2,484  |  
|Stock-based compensation                                                                  |  |                                  | 808     |   |      |   | 989    |  
|Foreign currency (gain) loss, net                                                         |  |                                  | 160     |   |      |   | (280   | )
|Deferred income taxes                                                                     |  |                                  | (10     | ) |      |   |       |  
|Imputed interest on long-term debt                                                        |  |                                  | 76      |   |      |   | 184    |  
|Non-cash restructuring charge                                                             |  |                                  |        |   |      |   | 211    |  
|Goodwill and definite-lived intangible impairment charges                                 |  |                                  | 14,658  |   |      |   |       |  
|Loss on disposal of long-lived assets                                                     |  |                                  |        |   |      |   | 132    |  
|Changes in assets and liabilities, net of effect of acquisitions:                         |  |                                  |         |   |      |   |        |  
|Accounts receivable                                                                       |  |                                  | 410     |   |      |   | 1,745  |  
|Inventories                                                                               |  |                                  | (2,145  | ) |      |   | 925    |  
|Other assets                                                                              |  |                                  | 380     |   |      |   | 110    |  
|Withholding taxes remitted on share-based awards                                          |  |                                  | (37     | ) |      |   | (215   | )
|Accrued restructuring                                                                     |  |                                  | 208     |   |      |   | 844    |  
|Accounts payable, accrued expenses and deferred revenue                                   |  |                                  | (57     | ) |      |   | (1,112 | )
|                                                                                          |  |                                  |         |   |      |   |        |  
|Net cash provided by (used in) operating activities from continuing operations            |  |                                  | (3,053  | ) |      |   | 4,863  |  
|Net cash provided by (used in) discontinued operations                                    |  |                                  | 22      |   |      |   | (1,004 | )
|                                                                                          |  |                                  |         |   |      |   |        |  
|Net cash provided by (used in) operating activities                                       |  |                                  | (3,031  | ) |      |   | 3,859  |  
|Cash flows from investing activities:                                                     |  |                                  |         |   |      |   |        |  
|Acquisitions of businesses and contingent consideration, net of cash acquired             |  |                                  |        |   |      |   | (3,270 | )
|Purchase of property and equipment                                                        |  |                                  | (1,706  | ) |      |   | (1,293 | )
|Customer advances, net                                                                    |  |                                  | (358    | ) |      |   | (2,014 | )
|                                                                                          |  |                                  |         |   |      |   |        |  
|Net cash used in investing activities from continuing operations                          |  |                                  | (2,064  | ) |      |   | (6,577 | )
|Net cash provided by discontinued operations in investing activities                      |  |                                  |        |   |      |   | 11     |  
|                                                                                          |  |                                  |         |   |      |   |        |  
|Net cash used in investing activities                                                     |  |                                  | (2,064  | ) |      |   | (6,566 | )
|Cash flows from financing activities:                                                     |  |                                  |         |   |      |   |        |  
|Proceeds from exercise of stock options and tax collected on restricted stock             |  |                                  | 20      |   |      |   | 8      |  
|Reduction in cash and cash equivalents used to collateralize letter or credit             |  |                                  | 261     |   |      |   | 5,215  |  
|Proceeds from borrowing on line of credit                                                 |  |                                  | 2,750   |   |      |   |       |  
|Principal payments on long-term loans                                                     |  |                                  | (2,492  | ) |      |   | (3,080 | )
|                                                                                          |  |                                  |         |   |      |   |        |  
|Net cash provided by financing activities                                                 |  |                                  | 539     |   |      |   | 2,143  |  
|Effect of exchange rate changes on cash and cash equivalents from continuing operations   |  |                                  | 70      |   |      |   | 251    |  
|Effect of exchange rate changes on cash and cash equivalents from discontinued operations |  |                                  | (10     | ) |      |   | 2      |  
|                                                                                          |  |                                  |         |   |      |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                              |  |                                  | 60      |   |      |   | 253    |  
|Net decrease in cash and cash equivalents                                                 |  |                                  | (4,496  | ) |      |   | (311   | )
|Cash and cash equivalents, beginning of the period                                        |  |                                  | 13,129  |   |      |   | 15,214 |  
|                                                                                          |  |                                  |         |   |      |   |        |  
|Cash and cash equivalents, end of the period                                              |  | $                                | 8,633   |   |      | $ | 14,903 |  
|                                                                                          |  |                                  |         |   |      |   |        |  
|Supplemental cash flow information:                                                       |  |                                  |         |   |      |   |        |  
|Cash paid for interest expense                                                            |  | $                                | 206     |   |      | $ | 311    |  
|Cash paid for income taxes                                                                |  |                                  | 889     |   |      |   | 522    |  

See accompanying notes to condensed consolidated financial statements.



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OTIX GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except
per share data)

(unaudited)

1.
BASIS OF PRESENTATION

Otix Global, Inc. (the Company or Otix) was previously named Sonic Innovations, Inc. (Sonic).
At the May 2009 annual meeting, the shareholders of Sonic voted to change the name to Otix Global, Inc. The change was to create a holding company that will allow the Sonic Innovations brand and Sonics other brands to operate independently
from each other. Sonic will continue as a company and brand, developing and distributing leading hearing instruments and services, and Otix will serve as the parent company of Sonic and Sonics other legal entities.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. The results of operations for the three and six months ended June 30, 2009
are not necessarily indicative of results that may be expected for the full year ending December 31, 2009. For further information, refer to the consolidated financial statements and footnotes thereto included in the Sonic Annual Report on Form
10-K for the year ended December 31, 2008 as filed with the U.S. Securities and Exchange Commission (SEC).

On September 1, 2008, the
Company sold one European operation and closed a second European operation. As of June 30, 2009, there were no material balances related to these operations remaining in the Condensed Consolidated Balance Sheets. These operations have been
classified as discontinued operations in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009
and 2008.

As further discussed in Note 2, in June 2009, the German government passed a law that became effective July 23, 2009. The key implication to the
Companys business model was to impose additional costs on the doctors and insurance companies that conduct business with the Companys German operation. The Company is currently renegotiating contracts in light of the new legislative
requirements and is working to contract with other insurance companies as well. The lack of signed insurance contracts and the imposition of new and costly requirements on the ENT doctors and the insurance companies are expected to put further
strain on sales beyond what the Company experienced in the second quarter of 2009. The long term prospects for the Companys German subsidiary remain uncertain. The German situation will impact the Companys liquidity, as well as other
factors including, general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

Principles of
Consolidation.The condensed consolidated financial statements include the accounts of Otix and its wholly owned subsidiaries. Intercompany balances and transactions are eliminated in consolidation.

Use of Estimates.The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The most significant estimates affecting the financial statements are those related to allowance for doubtful accounts, sales returns, inventory obsolescence, long-lived asset impairment, warranty accruals, legal contingency accruals and deferred
income tax asset valuation allowances. Actual results could differ from those estimates.

Revenue Recognition.Sales of hearing aids are recognized
when (i) products are shipped, except for retail hearing aid sales, which are recognized upon acceptance by the consumer, (ii) persuasive evidence of an arrangement exists, (iii) title and risk of loss has transferred, (iv) the
price is fixed or determinable, (v) contractual obligations have been satisfied, and (vi) collectibility is reasonably assured. Revenues related to sales of separately priced extended service contracts are deferred and recognized on a
straight-line basis over the contractual periods. Deferred revenue also includes cash received prior to all revenue recognition criteria being met (for example, customer acceptance). Net sales consist of product sales less provisions for sales
returns and rebates, which are made at the time of sale. The Company generally has a 60 day return policy for wholesale and 30 days for retail hearing aid sales, and allowances for sales returns are reflected as a reduction of sales and accounts
receivable. If actual sales returns differ from the Companys estimates, revisions to the allowance for sales returns will be required. Allowances for sales returns were as follows:



|                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|---------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                             |  | Three months endedJune 30, |        |   | Six months endedJune 30, |  
|                             |  | 2009                       |        |   | 2008                     |   |        | 2009 |  |   | 2008   |  
|Balance, beginning of period |  | $                          | 2,070  |   |                          | $ | 2,486  |      |  | $ | 1,994  |   |  | $ | 2,389  |  
|Provisions                   |  |                            | 2,028  |   |                          |   | 2,986  |      |  |   | 4,335  |   |  |   | 5,896  |  
|Returns processed            |  |                            | (2,032 | ) |                          |   | (2,966 | )    |  |   | (4,263 | ) |  |   | (5,779 | )
|                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Balance, end of period       |  | $                          | 2,066  |   |                          | $ | 2,506  |      |  | $ | 2,066  |   |  | $ | 2,506  |  
|                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  

For the three months ended June 30, 2009 and 2008, sales to the Australian Governments Office of
Hearing Services, a division of the Department of Health and Aging, accounted for 13.1% and 11.9%, respectively, of the Companys consolidated net sales. For the six months ended June 30, 2009 and 2008, such sales accounted for 12.7% and
11.8%, respectively. No other customer accounted for 10% or more of consolidated net sales.

Taxes Collected from Customers and Remitted to Governmental
Authorities.The Company recognizes taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer on a net basis (excluded from net sales).



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Warranty Costs.The Company provides for the cost of remaking and repairing products under warranty at the time of
sale, typically for periods of one to three years depending upon product and geography. These costs are included in cost of sales. When evaluating the adequacy of the warranty reserve, the Company analyzes the amount of historical and expected
warranty costs by geography, by product family, by model and by warranty period as appropriate. If actual product failure rates or repair and remake costs differ from the Companys estimates, revisions to the warranty accrual will be required.

Accrued warranty costs were as follows:



|                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|---------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                             |  | Three months endedJune 30, |        |   | Six months endedJune 30, |  
|                             |  | 2009                       |        |   | 2008                     |   |        | 2009 |  |   | 2008   |  
|Balance, beginning of period |  | $                          | 3,572  |   |                          | $ | 4,724  |      |  | $ | 3,727  |   |  | $ | 5,249  |  
|Provisions                   |  |                            | 1,457  |   |                          |   | 1,227  |      |  |   | 2,192  |   |  |   | 2,096  |  
|Costs incurred               |  |                            | (1,016 | ) |                          |   | (1,301 | )    |  |   | (1,906 | ) |  |   | (2,695 | )
|                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Balance, end of period       |  | $                          | 4,013  |   |                          | $ | 4,650  |      |  | $ | 4,013  |   |  | $ | 4,650  |  
|                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  

Cash Equivalents. The Company considers all short-term investments purchased with an original maturity of
three months or less to be cash equivalents. As of June 30, 2009 and December 31, 2008, cash equivalents consisted of money market funds totaling $4,878 and $8,001, respectively. As of June 30, 2009 and December 31, 2008, the
Company had pledged $64 and $284 of cash and cash equivalents, respectively, as a security deposit for banking arrangements.

Fair Value Measurements.Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standard (SFAS) SFAS 157, Fair Value Measurements (SFAS 157) with respect to its financial assets and
liabilities and for applicable non-financial assets and non-financial liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value
measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair
value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:



| |  |  | Level 1 - Quoted prices in active markets for identical assets or liabilities.
| | - |  | ------------------------------------------------------------------------------



| |  |  | Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

The Companys money market funds totaling $4,878 and hedging instruments on intercompany balances totaling $6 as of June 30,
2009 were considered to have level 1 observable inputs and are recorded at fair value.

SFAS 159 The Fair Value Option for Financial Assets and
Financial Liabilities became effective January 1, 2008, which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract
basis. The Company did not elect to adopt the fair value option under this Statement for any assets and liabilities that are not otherwise required.

In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1), which requires public entities to disclose in their interim financial
statements the fair value of all financial instruments within the scope of FASB Statement 107, Disclosures about Fair Value of Financial Instruments (SFAS 107), as well as the method(s) and significant assumptions used
to estimate the fair value of those financial instruments. The Company has adopted the provisions of FSP FAS 107-1 and APB 28-1 by including the required additional financial statement disclosures as of June 30, 2009. The adoption of FSP FAS
107-1 and APB 28-1 had no impact on the Companys financial position or results of operations.

Derivative Instruments and Hedging
Activities. The Company follows SFAS 133, Accounting for Derivative Instruments and Hedging Activities, (SFAS 133), as amended, and SFAS 161, Disclosures about Derivative Instruments and
Hedging Activitiesan amendment of FASB Statement 133 (SFAS 161) for its derivative and hedging activities.

In March 2008,
the FASB issued SFAS 161, which is effective for fiscal years beginning after November 15, 2008. SFAS 161 amends SFAS 133 and requires enhanced disclosures about a companys derivative and hedging activities. The adoption of this standard
did not have material impact on our financial statements.



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The Company employs derivative financial instruments to manage risks, including the short term impact of foreign currency
fluctuations on certain intercompany balances, or variable interest rate exposures. The Company has not designated these contracts as hedging instruments under SFAS 133, nor does the Company enter into these contracts for trading or speculation
purposes. Gains and losses on the contracts are included in the results of operations and offset foreign exchange gains or losses recognized on the revaluation of certain intercompany balances, or interest expense due to movement in variable
interest rates, as applicable.

The Company uses foreign currency forward contracts to manage the foreign exchange risk associated with its intercompany
balances. As a result of foreign currency fluctuations, the U.S. dollar equivalent values of the foreign currency-denominated intercompany balances change. Foreign currency forward contracts represent agreements to exchange the currency of one
country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. The Company entered into two foreign currency forward contracts during the three months ended June 30, 2009. The Company held forward
contract hedges on 2,000 ($2,809) and Australian $2,400 ($1,931) at June 30, 2009. As of June 30, 2009, the Company recognized an unrealized gain of $6 in connection with its foreign currency forward contracts. The unrecognized gain
is recorded in Other income (expense), net in the Condensed Consolidated Statements of Operations, and in Prepaid expenses and other in the Condensed Consolidated Balance Sheets. The contracts will expire in the third quarter of 2009.

The Company has variable-rate debt related to its German operations. These obligations expose the Company to variability in interest payments and therefore fluctuations
in interest expense and cash flows due to changes in interest rates. Interest rate swap contracts are used in the Companys risk management activities in order to minimize significant fluctuations in earnings that are caused by interest rate
volatility. Interest rate swaps involve the exchange of variable-rate interest payments for fixed-rate interest payments based on the contractual underlying notional amount. Gains and losses on the interest rate swaps that are linked to the debt
being hedged are expected to substantially offset this variability in earnings. Effective in the second quarter 2008, the Company entered into an interest rate swap agreement. The contract effectively fixes the interest rate of the long term debt
associated with the German acquisition at 9.59%. The fair value of the Companys debt obligations approximates the carrying value as of June 30, 2009.

Inventories.Inventories are stated at the lower of cost or market using the first-in, first-out method. The Company includes material, labor and manufacturing overhead in the cost of inventories. Provision is made (i) to reduce
excess and obsolete inventories to their estimated net realizable values and (ii) for estimated product (inventory) returns in those countries that sell on a retail basis and recognize a sale only upon acceptance by the consumer. Inventories,
net of reserves consisted of the following:



|                             |  |              |        |                  |   |       
|---------------------------- |  | ------------ | ------ | ---------------- | - | ------
|                             |  | June 30,2009 |        | December 31,2008
|Raw materials and components |  | $            | 4,438  |                  | $ | 4,445 
|Work in progress             |  |              | 84     |                  |   | 218   
|Finished goods               |  |              | 8,234  |                  |   | 5,466 
|                             |  |              |        |                  |   |       
|Total                        |  | $            | 12,756 |                  | $ | 10,129
|                             |  |              |        |                  |   |       

Inventory reserves were $1,157 and $1,343 as of June 30, 2009 and December 31, 2008, respectively.

Comprehensive Loss.Comprehensive loss includes net loss plus the results of certain changes in shareholders equity that are not reflected in
the results of operations. Comprehensive loss consisted solely of changes in foreign currency translation adjustments, which were not adjusted for income taxes as they related to specific indefinite investments in foreign subsidiaries and net loss.



|                                         |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|---------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                         |  | Three months endedJune 30, |        |   | Six months endedJune 30, |  
|                                         |  | 2009                       |        |   | 2008                     |   |        | 2009 |  |   | 2008    |  
|Net loss                                 |  | $                          | (2,592 | ) |                          | $ | (4,002 | )    |  | $ | (19,560 | ) |  | $ | (4,534 | )
|Foreign currency translation adjustments |  |                            | 2,430  |   |                          |   | 648    |      |  |   | 1,011   |   |  |   | 2,653  |  
|                                         |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Comprehensive loss                       |  | $                          | (162   | ) |                          | $ | (3,354 | )    |  | $ | (18,549 | ) |  | $ | (1,881 | )
|                                         |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  

Stock-Based Compensation.Stock-based compensation cost is measured at the grant date, based on the fair
value of the award and is recognized over the employee requisite service period. For further information, refer to the footnotes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the
SEC.

Share-based compensation expense pertaining to stock options and restricted stock awards was $340 and $521 for the three months ended June 30,
2009 and 2008, respectively. Share-based compensation expense pertaining to stock options and restricted stock awards was $808 and $989 for the six months ended June 30, 2009 and 2008, respectively. For the three months ended June 30, 2009
and 2008, respectively, share-based compensation expense of $48 and $45 was recorded in cost of sales, $246 and $389 in selling



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general and administrative expense and $46 and $87 in research and development expense. For the six months ended June 30, 2009 and 2008, respectively,
share-based compensation expense of $101 and $84 was recorded in cost of sales, $588 and $741 in selling, general and administrative expense and $119 and $164 in research and development expense. In addition, share-based compensation expense
pertaining to stock options and restricted stock awards of $38 was recognized in connection with the Companys restructuring activities which were recorded as a component of the restructuring charges recorded as of June 30, 2008.

During the three months ended June 30, 2009, the Company granted 54 restricted stock awards to members of the board of directors with an aggregate
fair value of $33. The Company did not grant any stock options or stock awards in the first quarter of 2009. During the three months ended June 30, 2008, the Company granted 63 restricted stock awards to members of the board of directors with
an aggregate fair value of $246. During the six months ended June 30, 2008, the Company granted 560 stock option awards to employees with an aggregate fair value of $1,382. The fair value of options issued during the six months ended
June 30, 2008 was estimated on the date of grant based on a risk free rate of return of 3.9%, an expected dividend yield of 0.0%, volatility of 58.3%, and an expected life of 5 years. During the six months ended June 30, 2008, the Company
granted 76 restricted stock awards to employees with an aggregate fair value of $368.

As June 30, 2009, there was $1,386 and $1,156 of unrecognized
share-based compensation expense relating to options and restricted stock awards that will be recognized over a weighted-average period of 2.4 and 2.9 years, respectively.

Loss Per Common Share.Basic loss per common share is calculated based upon the weighted average shares of common stock outstanding during the period. Diluted loss per share is calculated based upon the
weighted average number of shares of common stock outstanding, plus the dilutive effect of common stock equivalents calculated using the treasury stock method.

Antidilutive common stock equivalents of 3,218 and 3,271 for the three months ended June 30, 2009 and six months ended June 30, 2009, respectively were excluded from the diluted loss per share calculation. Antidilutive common
stock equivalents and restricted stock of 4,311 and 3,868 for the three months ended June 30, 2008 and the six months ended June 30, 2008, respectively, were excluded from the diluted loss per share calculation.

Income Taxes.In some jurisdictions net operating loss carry-forwards reduce or offset tax provisions. The Companys income tax provision for the three
months ended June 30, 2009 and 2008 was $180 and $295, respectively and for the six months ended June 30, 2009 and 2008 was $276 and $589, respectively. The current year income tax provision was principally the result of pre-tax profits in
certain foreign geographies, alternative minimum tax in the U.S., amortization of goodwill, and state taxes. Income taxes on profits in the U.S. and a number of our foreign subsidiaries are currently negated by our net operating loss carry-forwards.

Recent Accounting Pronouncements.In December 2007, the FASB issued SFAS 141(R), Business Combinations, (SFAS
141(R)) effective for fiscal years beginning after December 15, 2008. This standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction,
establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand
the nature and financial effect of the business combination. The adoption of SFAS 141 (R) did not have a material impact on the condensed consolidated financial statements.

Also in December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, (SFAS 160) effective for fiscal years beginning after
December 15, 2008. This standard requires all entities to report non-controlling (minority) interests in subsidiaries in the same way as equity in the condensed consolidated financial statements. The adoption of SFAS 160 effective
January 1, 2009 did not have a material impact on the condensed consolidated financial statements.

In May 2009, the FASB issued SFAS 165,
Subsequent Events(SFAS 165), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are
issued or are available to be issued. SFAS 165 is effective for interim or fiscal periods ending after June 15, 2009. The adoption of SFAS 165 did not have a material impact on the Companys consolidated financial statements. The Company
evaluated the effects of all subsequent events from the end of the second quarter through August 7, 2009, the date the Company filed its financial statements with the SEC.

In June 2009, the FASB issued SFAS 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles- a replacement of FASB Statement 162 (SFAS
168), which became the source of authoritative non-SEC U.S. GAAP for nongovernmental entities. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not
expect the adoption of SFAS 168 will have a material impact on its consolidated financial statements.

2. INTANGIBLE ASSETS

Definite-lived intangible assets are amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS 144, Accounting
for Impairment or Disposal of Long-Lived Assets. Goodwill represents the excess of the cost of businesses acquired over the fair value of the assets acquired and liabilities assumed. In accordance with the provisions of SFAS 142,
Goodwill and Other Intangible Assets (SFAS 142), the Company does not amortize goodwill, but tests it for impairment annually using a fair value approach at the reporting unit level. In accordance with SFAS
142 paragraph 30, a reporting unit is the operating segment, or a business one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by senior management. However,
components are aggregated as a single reporting unit if they have similar economic characteristics.



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SFAS 142 also stipulates that goodwill of a reporting unit shall be tested for impairment between annual tests if an
event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below the carrying amount. To measure the amount of an impairment loss, SFAS 142 prescribes a two-step method. The first step
requires the Company to determine the fair value of the reporting unit and compare that fair value to the net book value of the reporting unit. The fair value of the reporting unit is determined using the income approach (discounted cash flow
analysis). The Company also considers market information (market approach) when such information is available to validate the more detailed discounted cash flow calculations. Market information typically includes the Companys general knowledge
of sale transaction multiples and/or previous discussions the Company has had with third parties regarding the value of a similar reporting unit or the Companys specific reporting unit. The Company relies on the income approach because it
reflects the reporting units expected cash flows and incorporates managements detailed knowledge of products, pricing, competitive environment, global economic conditions, industry conditions, interest rates, and management actions,
whereas market information may not be available, or may be less precise due to a lack of comparability to the Companys particular reporting unit. The second step requires the Company to determine the implied fair value of goodwill and measure
the impairment loss as the difference between the book value of the goodwill and the implied fair value of the goodwill. The implied fair value of goodwill must be determined in the same manner as if the Company had acquired those reporting units.

Legislation passed by the Federal Council of Germany in November 2008 and which became effective on April 1, 2009, resulted in sweeping changes to
the way doctors and healthcare providers interact and are reimbursed from insurance companies. These changes require the Companys German subsidiary to renegotiate contracts with insurance companies and ENT doctors on a new basis. In the first
three months of 2009, the Company believed its German subsidiary was making progress, having successfully renegotiated contracts representing approximately 27% of its 2008 German revenue. However, on April 1, 2009, the Company was notified by
one large insurance company representing approximately 25% of its German revenue that, despite several months of favorable negotiations, due to political headwinds, they were refusing to enter into a contract; therefore, the
Companys German subsidiary filed a lawsuit in the Social Court in Hamburg, Germany against this insurance company, requesting that the court compel the insurance company to enter into a contract with its German subsidiary. On April 28,
2009, the Court rejected these claims. The Companys German subsidiary has subsequently filed an appeal of this decision. In addition, a number of other insurance companies were unsure if they should sign a contract because there were rumors
that the newly enacted law could potentially change again, thus requiring the need to renegotiate again. Without renegotiated insurance contracts, and the ability to pay customary fitting fees to the ENT doctors, the Company expected revenue to
decline substantially and cash flow of the operation would not be sufficient to support its intangibles balances.

The Company determined that an interim
impairment test was necessary at the end of the first quarter of 2009 in this reporting unit. In the step one calculation, the Company assumed a full year revenue of approximately 45% of 2008 levels (which resulted from a full first quarter 2009 and
approximately 27% of revenue thereafter) and operating expenses of approximately 90% of 2008 levels as the Company continued to attempt to renegotiate additional contracts and service existing contracts. However, renegotiation was expected to be
difficult given the political pressures posed by local acousticians, our larger competitors, and the new precedent of the social court case. Accordingly, the Company could not reasonably expect revenue in excess of those contracts which had already
been renegotiated for one year terms. For those renegotiated contracts there was a high risk that they would not renew their contracts with the Company upon expiration in April 2010 given the political climate and social court case. Accordingly, we
estimated that we would maintain the 27% of revenue for one year and would be unable to successfully renegotiate with additional insurers. The Company used a discount rate of 14.5%. A sensitivity analysis was not performed given the significant
disparity between the estimated fair value and carrying value. Reasonable changes to the assumptions used, based on then-existing facts and circumstances, would not have changed the outcome. After completing step one of the prescribed test, the
Company determined that the estimated fair value of the reporting unit was less than its book value on March 31, 2009. The Company performed the step two test and concluded that the reporting units goodwill and trade name were impaired.
As a result, an impairment loss of $14,205 for goodwill and $453 for definite lived intangibles was recorded in the first quarter of 2009 in the Companys European segment. The Companys goodwill and trade names were classified using level
3 inputs of the fair value hierarchy as defined in SFAS 157, Fair Value Measurements.

Changes in goodwill and indefinite-lived
intangible assets for the six months ended June 30, 2009 were as follows:



|                                |  |               |        |        |   |         |               |  |       |       |  |   |         |  
|------------------------------- |  | ------------- | ------ | ------ | - | ------- | ------------- |  | ----- | ----- |  | - | ------- | -
|                                |  | North America |        | Europe |   |         | Rest-of-World |  | Total |      
|Balance, December 31, 2008      |  | $             | 13,922 |        | $ | 21,642  |               |  | $     | 7,242 |  | $ | 42,806  |  
|Goodwill impairment             |  |               |       |        |   | (14,205 | )             |  |       |      |  |   | (14,205 | )
|Effect of exchange rate changes |  |               |       |        |   | (1,195  | )             |  |       | 1,199 |  |   | 4       |  
|                                |  |               |        |        |   |         |               |  |       |       |  |   |         |  
|Balance, June 30, 2009          |  | $             | 13,922 |        | $ | 6,242   |               |  | $     | 8,441 |  | $ | 28,605  |  
|                                |  |               |        |        |   |         |               |  |       |       |  |   |         |  



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Definite-lived intangible assets were as follows:



|                                  |  |              |  |                     |        |                         |   |                     |  |                         |        |  |   |      
|--------------------------------- |  | ------------ |  | ------------------- | ------ | ----------------------- | - | ------------------- |  | ----------------------- | ------ |  | - | -----
|                                  |  |              |  | June 30, 2009       |        | December 31, 2008      
|                                  |  | Useful Lives |  | Gross CarryingValue |        | AccumulatedAmortization |   | Gross CarryingValue |  | AccumulatedAmortization
|Purchased technology and licenses |  | 3-13 years   |  | $                   | 1,976  |                         | $ | 1,281               |  | $                       | 1,976  |  | $ | 1,214
|Brand and trade names             |  | 1-10 years   |  |                     | 127    |                         |   | 127                 |  |                         | 1,948  |  |   | 1,368
|Customer databases                |  | 2-10 years   |  |                     | 7,468  |                         |   | 2,018               |  |                         | 7,445  |  |   | 1,527
|Non-compete agreements            |  | 1-5 years    |  |                     | 2,172  |                         |   | 1,098               |  |                         | 2,171  |  |   | 927  
|                                  |  |              |  |                     |        |                         |   |                     |  |                         |        |  |   |      
|Total                             |  |              |  | $                   | 11,743 |                         | $ | 4,524               |  | $                       | 13,540 |  | $ | 5,036
|                                  |  |              |  |                     |        |                         |   |                     |  |                         |        |  |   |      

3. LONG-TERM DEBT

The Company obtained a loan from a German bank in 2003 to fund the acquisition of its German business. On June 13, 2008, Sonic Innovations GmbH, a German subsidiary of Otix, entered into a Second Amendment to the long-term loan with a
German bank. The Second Amendment states that all current loan utilization will bear interest at a rate of the EURIBOR rate plus 4.0%. As of June 30, 2009, the balance of the loan was 1,750 ($2,458). The loan payments are 250 ($351
as of June 30, 2009) per quarter. The effective interest rate on this loan for the period and year ended June 30, 2009 and December 31, 2008 were 9.59% and 8.54%, respectively. In June 2008, the Company entered into an interest
rate swap agreement with an initial notional amount of 2,500 to be reduced 250 per quarter through January 2011. Under this agreement the Company receives a floating rate based on EURIBOR interest rate, and pays a fixed rate of
9.59% on the notional amount effectively fixing the interest rate on the Companys German loan.

Acquisition loans relate to the purchase of retail
audiology practices acquired under the Companys retail distribution initiative. Generally, these notes are secured by the acquired assets, subordinated to the revolving credit facility, and are due in annual installments from the acquisition
date.

In April 2007, the Company entered into a Loan and Security Agreement with Silicon Valley Bank, providing for a revolving credit facility,
under which borrowings of up to $6,000 were available. The credit facility is secured by substantially all tangible U.S. assets. The credit facility was amended in May 2008 to extend the term for one year to April 12, 2010, modify the adjusted
quick ratio, and consent to a guarantee by the Company of the loan from a German bank. Borrowings under the credit facility are subject to interest at the domestic prime rate or at a Euro dollar-based rate (LIBOR) plus 2.75% if the
adjusted quick ratio is greater than or equal to 0.75 or the domestic prime rate plus 0.25% or the LIBOR rate plus 3.0% if the adjusted quick ratio is less than 0.75. There is an annual fee of 0.375% on the average unused portion of the credit
facility. During the second quarter of 2009 the Company borrowed $2,750 on this line of credit. The line of credit bears interest at the Prime rate. The effective interest rate on this line of credit for the loan period ending June 30, 2009 was
4.25%. The Company is in the process of amending the debt agreement to clarify certain terms and expects that the borrowing capacity will approximate the current balance of $2,750. There were no outstanding borrowings on the credit facility as of
December 31, 2008.

As of June 30, 2009, the current portion of long-term debt was $5,938 and the long-term portion was $1,241. Future payments
on long-term debt consisted of the following as of June 30, 2009:



|                          |  |               |  |       |       |   |                 |   |       |      |  |   |       |   |  |      |     |   |  |   |    |  
|------------------------- |  | ------------- |  | ----- | ----- | - | --------------- | - | ----- | ---- |  | - | ----- | - |  | ---- | --- | - |  | - | -- | -
|                          |  |               |  |       |       |   | Future Payments |  
|                          |  | Interest Rate |  | Total |       |   | Rest of2009     |   |       | 2010 |  |   | 2011  |   |  | 2012 |    
|Foreign loan              |  | 9.59%         |  | $     | 2,458 |   |                 | $ | 702   |      |  | $ | 1,405 |   |  | $    | 351 |   |  | $ |   |  
|Acquisition loans & other |  | 0.0-7.75%     |  |       | 4,770 |   |                 |   | 1,531 |      |  |   | 3,137 |   |  |      | 68  |   |  |   | 34 |  
|                          |  |               |  |       |       |   |                 |   |       |      |  |   |       |   |  |      |     |   |  |   |    |  
|Total                     |  |               |  |       | 7,228 |   |                 |   | 2,233 |      |  |   | 4,542 |   |  |      | 419 |   |  |   | 34 |  
|Less imputed interest     |  |               |  |       | (49   | ) |                 |   | (26   | )    |  |   | (12   | ) |  |      | (6  | ) |  |   | (5 | )
|                          |  |               |  |       |       |   |                 |   |       |      |  |   |       |   |  |      |     |   |  |   |    |  
|Total carrying amount     |  |               |  | $     | 7,179 |   |                 | $ | 2,207 |      |  | $ | 4,530 |   |  | $    | 413 |   |  | $ | 29 |  
|                          |  |               |  |       |       |   |                 |   |       |      |  |   |       |   |  |      |     |   |  |   |    |  

Both the revolving credit facility and the German bank debt have a customary material adverse change clause that
allows the banks to call the loans, if invoked. Neither bank has invoked this clause. The fair value of the Companys debt obligations approximates the carrying value as of June 30, 2009.



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4. LEGAL PROCEEDINGS

In February 2006, the former owners of Sanomed, which the Company acquired in 2003, filed a lawsuit in German civil court claiming that certain deductions made by the Company against certain accounts receivable amounts and other payments
remitted to the former owners were improper. The former owners sought damages in the amount of approximately 2,600 ($3,600). The Company filed its statement of defense and presented its position during oral arguments. The court asked the
parties to attempt to settle the matter and on July 20, 2009, the Company and the former owners agreed to settle the claim. Under the terms of the settlement, the Company agreed to pay the former owners of Sanomed an aggregate sum of
1,050 ($1,471), approximately the amount reserved in the Companys balance sheet at March 31 and June 30, 2009 for this matter. The Company remitted the settlement payment on August 6, 2009.

As part of the Sanomed purchase agreement, the former owners were entitled to contingent consideration based on the achievement of certain revenue milestones. In certain
circumstances, the former owners were entitled to contingent consideration irrespective of the achievement of the revenue milestones. In addition to the above noted lawsuit, two of the former owners filed suits against the Company, one of which was
settled in 2007, and the other former owners contingent consideration claim against the Company for approximately 1,100 ($1,500) plus interest was dismissed in July 2008, with the German court rendering its decision in favor of the
Company. The former owner has appealed. The Company continues to strongly deny the allegations contained in the former owners appeal and intends to defend itself vigorously; however, litigation is inherently uncertain and an unfavorable result
could have a material adverse effect on the Company. The Company establishes liabilities when a particular contingency is probable and estimable.

See Note
2, above, regarding the Companys on-going litigation against a German insurance company.

From time to time the Company is subject to legal
proceedings, claims and litigation arising in the ordinary course of its business. Most of these legal actions are brought against the Company by others and, when the Company feels it is necessary, it may bring legal actions itself. Actions can stem
from disputes regarding the ownership of intellectual property, customer claims regarding the function or performance of the Companys products, government regulation or employment issues, among other sources. Litigation is inherently
uncertain, and therefore the Company cannot predict the eventual outcome of any such lawsuits. However, the Company does not expect that the ultimate resolution of any known legal action, other than as identified above, will have a material adverse
effect on its results of operations and financial position.



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5. RESTRUCTURING

During the three months ended June 30, 2009, the Company took actions to improve profitability of its operations by reducing the total number of employees in North America. Accordingly the Company has recorded restructuring charges of
$525 to be paid primarily during the third quarter of 2009. During the six months ended June 30, 2009, the Company made payments as listed in the following table in relation to its 2008 restructuring charges:



|                           |  |                 |      |   |                  |   |     |                     |  |   |       |   |  |   |      |  
|-------------------------- |  | --------------- | ---- | - | ---------------- | - | --- | ------------------- |  | - | ----- | - |  | - | ---- | -
|                           |  | EmployeeRelated |      |   | ExcessFacilities |   |     | Impairmentand Other |  |   | Total |  
|Balance, December 31, 2008 |  | $               | 440  |   |                  | $ | 283 |                     |  | $ | 125   |   |  | $ | 848  |  
|Payments                   |  |                 | (135 | ) |                  |   | (65 | )                   |  |   | (52   | ) |  |   | (252 | )
|                           |  |                 |      |   |                  |   |     |                     |  |   |       |   |  |   |      |  
|Balance, March 31, 2009    |  | $               | 305  |   |                  | $ | 218 |                     |  | $ | 73    |   |  | $ | 596  |  
|Restructuring Charge       |  |                 | 525  |   |                  |   |    |                     |  |   |      |   |  |   | 525  |  
|Payments                   |  |                 | (116 | ) |                  |   | (10 | )                   |  |   | (18   | ) |  |   | (144 | )
|                           |  |                 |      |   |                  |   |     |                     |  |   |       |   |  |   |      |  
|Balance, June 30, 2009     |  | $               | 714  |   |                  | $ | 208 |                     |  | $ | 55    |   |  | $ | 977  |  
|                           |  |                 |      |   |                  |   |     |                     |  |   |       |   |  |   |      |  

6. DISCONTINUED OPERATIONS

In the second quarter of 2008, a decision was made to divest certain European operations. During the second, third, and fourth quarters of 2008, the Company implemented restructuring actions, primarily in Europe, by
consolidating operations, reducing headcount, closing facilities, selling off assets and impairing certain intangible assets. On September 1, 2008, the Company sold one European operation unit for $706 in cash and closed a second operation.
These operations have been classified as discontinued operations in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008.

The following amounts relate to discontinued operations and have been segregated from continuing operations:



|                                                                        |  |                                    |    |      |                                  |        |      |  |   |      |   |  |   |        |  
|----------------------------------------------------------------------- |  | ---------------------------------- | -- | ---- | -------------------------------- | ------ | ---- |  | - | ---- | - |  | - | ------ | -
|                                                                        |  | For the three monthsended June 30, |    |      | For the six monthsended June 30, |       
|                                                                        |  | 2009                               |    | 2008 |                                  |        | 2009 |  |   | 2008 |  
|Net sales                                                               |  | $                                  | 17 |      | $                                | 512    |      |  | $ | (57  | ) |  | $ | 989    |  
|                                                                        |  |                                    |    |      |                                  |        |      |  |   |      |   |  |   |        |  
|Income (loss) from discontinued operations before restructuring charges |  | $                                  | 35 |      | $                                | (576   | )    |  | $ | (10  | ) |  | $ | (944   | )
|Restructuring charge, net of zero taxes                                 |  |                                    |   |      |                                  | (2,372 | )    |  |   |     |   |  |   | (2,436 | )
|                                                                        |  |                                    |    |      |                                  |        |      |  |   |      |   |  |   |        |  
|Income (loss) from discontinued operations, net of zero taxes           |  | $                                  | 35 |      | $                                | (2,948 | )    |  | $ | (10  | ) |  | $ | (3,380 | )
|                                                                        |  |                                    |    |      |                                  |        |      |  |   |      |   |  |   |        |  

As of June 30, 2009 and December 31, 2008, the Company has $417 accrued pertaining to earn-out payments
relating to the discontinued operations of Tympany, which was sold by the Company in the first quarter of 2007.



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7. SEGMENT INFORMATION

As of June 30, 2009, the Company has three operating segments for which separate financial information is available and evaluated regularly by management in deciding how to allocate resources and assess performance. The Company
evaluates performance principally based on net sales and operating profit.

The Companys three operating segments include North America, Europe and
Rest-of-World. Two of the Companys European divisions were classified as discontinued operations in 2008. Inter-segment sales are eliminated in consolidation. Manufacturing profit and distributors sales are recorded in the geographic
location where the sale occurred. This information is used by the chief operating decision maker to assess the segments performance and in allocating the Companys resources. The Company does not allocate research and development expenses
to its operating segments.



|                                                |  |               |        |   |        |   |         |               |  |             |        |  |       |        |   |  |   |         |  
|----------------------------------------------- |  | ------------- | ------ | - | ------ | - | ------- | ------------- |  | ----------- | ------ |  | ----- | ------ | - |  | - | ------- | -
|                                                |  | North America |        |   | Europe |   |         | Rest-of-World |  | Unallocated |        |  | Total |       
|Three months ended June 30, 2009                |  |               |        |   |        |   |         |               |  |             |        |  |       |        |   |  |   |         |  
|Net sales to external customers                 |  | $             | 9,696  |   |        | $ | 9,193   |               |  | $           | 6,531  |  | $     |       |   |  | $ | 25,420  |  
|Operating profit (loss)                         |  |               | (2,959 | ) |        |   | 1,792   |               |  |             | 808    |  |       | (1,929 | ) |  |   | (2,288  | )
|Income (loss) from continuing operations        |  |               | (3,086 | ) |        |   | 1,697   |               |  |             | 691    |  |       | (1,929 | ) |  |   | (2,627  | )
|Three months ended June 30, 2008                |  |               |        |   |        |   |         |               |  |             |        |  |       |        |   |  |   |         |  
|Net sales to external customers                 |  |               | 12,339 |   |        |   | 14,207  |               |  |             | 8,291  |  |       |       |   |  |   | 34,837  |  
|Operating profit (loss)                         |  |               | (2,362 | ) |        |   | 2,809   |               |  |             | 1,035  |  |       | (2,157 | ) |  |   | (675    | )
|Income (loss) from continuing operations        |  |               | (2,432 | ) |        |   | 2,617   |               |  |             | 918    |  |       | (2,157 | ) |  |   | (1,054  | )
|Six months ended June 30, 2009                  |  |               |        |   |        |   |         |               |  |             |        |  |       |        |   |  |   |         |  
|Net sales to external customers                 |  |               | 17,912 |   |        |   | 20,270  |               |  |             | 11,670 |  |       |       |   |  |   | 49,852  |  
|Operating profit (loss)                         |  |               | (6,193 | ) |        |   | (10,028 | )             |  |             | 1,046  |  |       | (3,908 | ) |  |   | (19,083 | )
|Income (loss) from continuing operations        |  |               | (6,372 | ) |        |   | (10,201 | )             |  |             | 931    |  |       | (3,908 | ) |  |   | (19,550 | )
|Six months ended June 30, 2008                  |  |               |        |   |        |   |         |               |  |             |        |  |       |        |   |  |   |         |  
|Net sales to external customers                 |  |               | 24,232 |   |        |   | 26,831  |               |  |             | 15,224 |  |       |       |   |  |   | 66,287  |  
|Operating profit (loss)                         |  |               | (3,924 | ) |        |   | 5,664   |               |  |             | 1,830  |  |       | (4,382 | ) |  |   | (812    | )
|Income (loss) from continuing operations        |  |               | (3,659 | ) |        |   | 5,258   |               |  |             | 1,629  |  |       | (4,382 | ) |  |   | (1,154  | )
|As of June 30, 2009                             |  |               |        |   |        |   |         |               |  |             |        |  |       |        |   |  |   |         |  
|Identifiable segment assets                     |  |               | 52,292 |   |        |   | 19,470  |               |  |             | 18,479 |  |       |       |   |  |   | 90,241  |  
|Goodwill and indefinite-lived intangible assets |  |               | 13,922 |   |        |   | 6,242   |               |  |             | 8,441  |  |       |       |   |  |   | 28,605  |  
|Long-lived assets                               |  |               | 4,390  |   |        |   | 419     |               |  |             | 2,902  |  |       |       |   |  |   | 7,711   |  
|As of December 31, 2008                         |  |               |        |   |        |   |         |               |  |             |        |  |       |        |   |  |   |         |  
|Identifiable segment assets                     |  |               | 55,158 |   |        |   | 36,081  |               |  |             | 15,707 |  |       |       |   |  |   | 106,946 |  
|Goodwill and indefinite-lived intangible assets |  |               | 13,922 |   |        |   | 21,642  |               |  |             | 7,242  |  |       |       |   |  |   | 42,806  |  
|Long-lived assets                               |  |               | 3,704  |   |        |   | 528     |               |  |             | 2,637  |  |       |       |   |  |   | 6,869   |  

Long-lived assets consist of property and equipment. The majority of the Companys assets as of June 30,
2009 and December 31, 2008 were attributable to its U.S. operations. In addition to the U.S., the Company operates in two countries, Germany and Australia, in which assets and sales were in excess of 10% of consolidated amounts.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in thousands, except per share data)
|------- | -----------------------------------------------------------------------------------------------------------------------------------

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175
promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve inherent risks and uncertainties. Any statements about our plans, objectives, expectations,
strategies, beliefs, or future performance or events constitute forward-looking statements. Such statements are identified as those that include words or phrases such as believes, expects, anticipates,
plans, trend, objective, continue or similar expressions or future or conditional verbs such as will, would, should, could, might,
may or similar expressions. Forward-looking statements involve known and unknown risks, uncertainties, assumptions, estimates and other important factors that could cause actual results to differ materially from any results, performance
or events expressed or implied by such forward-looking statements. All forward-looking statements are qualified in their entirety by reference to the factors discussed in this report and the following risk factors discussed more fully in
Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008: (i) deterioration of economic conditions could harm our business; (ii) we have a history of losses and negative cash flow; (iii) we face
aggressive competition in our business, and if we do not compete effectively our net sales and operating results will suffer; (iv) our financial results may fluctuate significantly, which may cause our stock price to decline; (v) recently
our common stock traded at prices below $1.00. If this continues in the future, our common stock could be subject to delisting by the NASDAQ Global Market; (vi) we have made a number of acquisitions and could make additional acquisitions, which
could be difficult to integrate, disrupt our existing business, dilute the equity of our shareholders, harm our operating results, and create tension within our existing customer bases; (vii) if we fail to maintain an effective system of
internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting, which could harm our business and the trading price
of our common stock; (viii) the loss of any large customer or a reduction in orders from any large customer or buying groups could reduce our net sales and harm our operating results; (ix) we rely on several suppliers and contractors, and
our business will be seriously harmed if these suppliers and contractors are not able to meet our requirements; (x) we have high levels of product returns, remakes and repairs, and our net sales and operating results will be lower if these
levels increase; (xi) if we fail to develop new and innovative products, our competitive position will suffer, and if our new products are not well accepted, our net sales and operating results will suffer; (xii) because of the complexity
of our products, there may be undiscovered errors or defects that could harm our business or reputation; (xiii) if we are subject to litigation and infringement claims, they could be costly and disrupt our business; (xiv) we may be unable
to adequately protect or enforce our proprietary technology, which may result in its unauthorized use or reduced sales or otherwise reduce our ability to compete; (xv) we are dependent on international operations, which exposes us to a variety
of risks, including the recent German legislative changes and adverse German court ruling in connection with our German operation, that could result in lower sales and operating results; (xvi) complications may result from hearing aid use, and
we may incur significant expense if we are sued for product liability; (xvii) if we fail to comply with Food and Drug Administration regulations or various sales-related laws, we may suffer fines, injunctions or other penalties;
(xviii) there may be sales of our stock by our directors and officers, and these sales could cause our stock price to fall; and (xix) provisions in our charter documents, our shareholders rights plan and Delaware law may deter takeover
efforts that shareholders feel would be beneficial to shareholder value.

Because the foregoing factors could cause actual results or outcomes to
differ materially from those expressed or implied in any forward-looking statements, undue reliance should not be placed on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we
undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of future events or developments.

OVERVIEW

Otix Global, Inc. (Otix) was previously named
Sonic Innovations, Inc. (Sonic). At the May 2009 annual meeting, the shareholders of Sonic voted to change the name to Otix. The change was to create a holding company that will allow the Sonic Innovations brand and Sonics other
brands to operate independently from each other. Sonic will continue as a company and brand, developing and distributing leading hearing instruments and services, and Otix will serve as the parent company of Sonic and Sonics other legal
entities.

Otix is a hearing aid company focused on the therapeutic aspects of hearing care. We design, develop, manufacture and market high-performance
digital hearing aids intended to provide the highest levels of satisfaction for hearing impaired consumers. We have developed patented digital signal processing (DSP) technologies based on what we believe is an advanced understanding of
human hearing. In those countries where we have direct (owned) operations, we sell our products to hearing care professionals or directly to hearing impaired consumers. In other parts of the world where we do not have direct operations, we sell
principally to distributors.

We have been acquisitive after raising capital in an Initial Public Offering in 2000 and a Private Investment/Public Equity
(PIPE) offering in 2006. Product evolution continues, but the differentiation between product offerings by hearing aid companies has narrowed, and thus distribution and access to distribution continues to grow in importance. Accordingly,
we acquired a number of our then distributors from 2000 to 2003. Thereafter, we acquired an operation in Germany with a unique distribution model. Then, from 2006 to 2008, we acquired a number of retail practices. This was all to strengthen our
distribution network.



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##### Table of Contents

Germany Legislation. Legislation passed by the Federal Council of Germany in November 2008 and which became
effective on April 1, 2009, resulted in sweeping changes to the way doctors and healthcare providers interact and are reimbursed from insurance companies. These changes require our German subsidiary to renegotiate contracts with insurance
companies and ENT doctors on a new basis. In the first three months of 2009, we believed our German subsidiary was making progress, having successfully renegotiated contracts representing approximately 27% of our 2008 German revenue. However, on
April 1, 2009, we were notified by one large insurance company representing approximately 25% of our German revenue that, despite several months of favorable negotiations, due to political headwinds, they were refusing to enter into
a contract; therefore, our German subsidiary filed a lawsuit in the Social Court in Hamburg, Germany against this insurance company, requesting that the court compel the insurance company to enter into a contract with our German subsidiary. On
April 28, 2009, the Court rejected these claims. We have subsequently filed an appeal of this decision. In addition, a number of other insurance companies were unsure if they should sign a contract because there were rumors that the newly
enacted law could potentially change again, thus requiring the need to renegotiate again. Without renegotiated insurance contracts, and the ability to pay customary fitting fees to the ENT doctors, we expected revenue to decline substantially and
cash flow of the operation would not be sufficient to support our intangibles balances. Thus, we recognized a $14.7 million non-cash write-off of our goodwill and trade name associated with our German operation in the first quarter of 2009.

In June 2009, the German government passed additional amendments to the law that became effective July 23, 2009. The key implication of these
amendments to our business model was to impose additional costs on the doctors and insurance companies that conduct business with our German operation.

We
are currently renegotiating contracts in light of the new legislative requirements and are working to contract with other insurance companies as well. The lack of signed insurance contracts and the imposition of new and costly requirements on the
ENT doctors and the insurance companies are expected to put further strain on sales beyond what we experienced in the second quarter of 2009.

Germany
represented 78% of European segment revenues and 95% of European segment operating profit for the year ended December 31, 2008, and 72% and 97% and 75% and 91%, respectively, for the three and six months ended June 30, 2009.

Market

The hearing aid market is large at both the wholesale level
(over $2 billion) and the retail level (over $6 billion). It is estimated less than 24% of those who could benefit from a hearing aid actually own one. There are many factors that cause this low market penetration rate, such as the high cost of
hearing aids, the stigma associated with wearing hearing aids, the discomfort of wearing hearing aids and the difficulty in adjusting to amplification. We believe that these negative factors will decrease in importance in the future because we
expect the stigma aspect to decrease as improvements in technology make the devices smaller, less conspicuous and more comfortable and as hearing loss becomes more prevalent in society. In addition, demographic trends and modern lifestyle choices
will accelerate hearing aid adoption rates. We expect that more people who could benefit from hearing aids will buy them, and we believe that the growth rate of the hearing impaired population could be significant, particularly as the developed
worlds population ages.

Offsetting this trend are the following market conditions affecting us in a negative way:



| |  |  | Competition is intense and new product offerings by our competitors are coming to market more quickly than in the past.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | The performance, features and quality of lower-priced products continue to improve.
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Many consumers feel that hearing aids are simply too expensive and they cannot justify the purchase on a cost-benefit basis.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | Governments who reimburse for hearing aids are reducing the amount per device or are increasing the technology requirements for the same level of reimbursement. In
a more specific circumstance to us, we have the legislative changes previously mentioned.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our operations and performance depend on general economic conditions. The global economy is experiencing an economic downturn due to the crisis in credit markets,
slower economic activity, concerns about inflation, increased energy costs, decreased consumer confidence, and other adverse business conditions. Such fluctuations in the global economy could cause, among others, deterioration and continued decline
in consumer spending and increases in the cost of labor and materials.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The available wholesale market continues to shrink as our competitors implement forward integration strategies and buying groups limit the number of manufacturers
with whom they do business. Therefore, we plan to continue to develop and potentially acquire additional distribution capacities.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Product Developments

We officially launched Touch, our first receiver-in-the-canal (RIC) product family, in March 2009. RIC has
become a very popular product type, representing approximately 35% of hearing aids sold in the United States. Touch represents a major step forward for us. In addition to its sophisticated design, very small size and ease of use features, we
believe Touch is the smallest and has the best moisture resistance of any RIC product on the market. Touch products incorporate many of the sound processing technologies present in our Velocity series of hearing solutions. Touch provides natural
sound quality, superior noise reduction, and excellent



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directionality, driven by our unique DIRECTIONALfocus technology. Touch is offered at three price points and available in a choice of five base colors and 15
accent color clips. The three Touch products are readily identified by the number of processing channels. Touch 6 has six channels and two programs, Touch 12 has 12 channels and three programs, and Touch 24 has 24 channels, four programs
and voice alerts.

The current global economic situation makes it more important than ever to provide our customers with pricing flexibility in selling to
the hearing impaired consumer. In the last half of 2008, we launched four new products specifically designed to provide competitive features and additional price options for our customers. Velocity 24, our new premium product, combines a superior
set of algorithms to provide the consumer with hands-free operation in a variety of listening environments. Our new advanced-level product, Velocity 12, offers many sophisticated features, such as automatic and adaptive directionality, data logging,
and auto telephone. With Velocity 6, we have added a highly competitive mid-level product line. Velocity 4, our newest entry-level offering, makes Sonics patented and proven noise reduction available at a price-point that is particularly
attractive to cost-sensitive consumers. All Velocity products are available in a full line of custom models and feature a robust standard behind the ear (BTE) that can accommodate a severe hearing loss. Velocity 24, Velocity 12, and
Velocity 6 also offer a miniBTE model that provides both open-fit and standard fittings, a powerful fitting range and extendable functionality such as Bluetooth and direct audio import support.

The ion family of products  ion 400, ion 200, and ion  continues to be an important part of our strategy to provide outstanding products in every market
segment. ion 400, launched March 2008, offers premium features in the smallest open-fit product available on the market.

The market is using open-fit
products primarily to target the first-time hearing aid wearer. The market for open-fit products has grown rapidly, as illustrated by the Hearing Industries Association (HIA) data. The BTE category, into which open-fit and RIC products
fall, has seen continued growth in 2008, representing 55% of the units sold in the United States, up from 51% in 2007 and 44% in 2006

With the release of
the Touch product series, we now have 13 active product families  Touch, Velocity 24, Velocity 12, Velocity 6, Velocity 4, ion 400, ion 200, ion, Balance, Applause, Natura Pro, Natura 2SE and Quartet.

Distribution Developments

Hearing aids are generally sold through
the following distribution channels:



| |  |  | Independent retailers,
| | - |  | ----------------------



| |  |  | Purchasing groups,
| | - |  | ------------------



| |  |  | Retail chains,
| | - |  | --------------



| |  |  | Governments,
| | - |  | ------------



| |  |  | Internet, and
| | - |  | -------------



| |  |  | Manufacturer owned retail.
| | - |  | --------------------------

The growth today is in
retail chains, governments, internet (small but growing) and manufacturer owned retail. Independent retailers are shrinking for a number of reasons, but foremost due to consolidation through acquisition by large retailers and manufacturers. We are
competing in an industry that includes six much larger competitors who have significantly more resources and have established relationships and reputations. Our competitors continue to forward integrate by buying independents and offering financial
arrangements through loans and other lock-up agreements. Therefore, the market available for us in the wholesale business is shrinking, making it difficult for us to compete in the traditional distribution fashion. For this reason, we are interested
in both new and existing distribution methods. We are making progress with our strategy. In certain cases, we sell direct to the consumer utilizing the ENT doctor to perform the hearing aid fitting, while in other cases, we sell direct to the
consumer through various retail stores. We believe a combination of wholesale and direct-to-consumer distribution will continue to be critical for us in certain geographies. We also offer customer advances to secure distribution in situations where
customers are seeking to grow their businesses.

In parts of the world where we do not have direct operations, we sell principally to distributors with
payment terms ranging from 30 to 120 days. Certain distributors are offered volume discounts which are earned upon meeting unit volume targets. Distributor agreements do not convey price protection or price concession rights.

In 2008, we had a number of entities in Europe which lacked sufficient market share to effectively compete in todays environment. Therefore, we restructured and
eliminated certain operations in 2008 centered mostly in Europe with the goal of streamlining processes, eliminating non-performing business units and focusing on profitable opportunities. On September 1, 2008, we sold one European operation
and closed a second European operation. These are classified as discontinued operations in our Condensed Consolidated Statements of Operations.



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Financial Results

Our loss from continuing operations of $19,550 for the six months ended June 30, 2009, compared with a loss from continuing operations of $1,154 for the six months ended June 30, 2008, was primarily impacted by four items:



| | 1. | Non-cash goodwill and definite-lived intangibles impairment charges of $14,658 as a result of an adverse legal decision and regulatory changes in Germany.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | The legislative changes in Germany reduced our German sales.
| | -- | ------------------------------------------------------------



| | 3. | A softening in North American wholesale sales primarily resulting from the downturn in the economy and a market movement toward RIC products. We launched Touch, our RIC product
family, in March 2009.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | The strengthening of the U.S. dollar has a negative effect on our profit.
| | -- | -------------------------------------------------------------------------

Our future sales and financial results for the next 12 months are expected to be driven by the following items:



| |  |  | The penetration of the Touch product family. We have launched the product in all our major markets, with the exception of Germany. Touch and ion (open fit products)
are product types that are experiencing growing demand in the marketplace.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Launching a power BTE product in early 2010.
| | - |  | --------------------------------------------



| |  |  | Focusing on improving the results of retail audiology practices we acquired between 2006 and 2008.
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Implementation of cost savings initiatives. Reducing costs has been an on-going company focus since early 2008, with the closure/restructuring or sale of four
European operations and significant U.S. cost reductions. Manufacturing continues lowering purchased component costs, reducing headcount, outsourcing to lower cost geographies and improving manufacturing efficiencies.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Offsetting these developments will be the following factor:



| |  |  | The likely continued decline in sales for our German operation.
| | - |  | ---------------------------------------------------------------

We previously applied to the U.S. Veterans Administration (the V.A) to supply hearing aids to U.S. veterans and we anticipate that the V.A. will be announcing the names of the suppliers who will be
awarded contracts in August 2009.

We will continue to review our strategic alternatives in light of the adverse events in Germany and focus on reducing
costs, strengthening cash flow, expanding distribution channels, enhancing customer service, improving product quality, launching new products, and improving operational efficiency.

The following table sets forth selected statement of operations information for the periods indicated expressed as a percentage of net sales.



|                                                                |  |                             |   |  |                           |   |  |       |   |  |       |  
|--------------------------------------------------------------- |  | --------------------------- | - |  | ------------------------- | - |  | ----- | - |  | ----- | -
|                                                                |  | Three months ended June 30, |   |  | Six months ended June 30, |  
|                                                                |  | 2009                        |   |  | 2008                      |   |  | 2009  |   |  | 2008  |  
|Net sales                                                       |  | 100.0                       | % |  | 100.0                     | % |  | 100.0 | % |  | 100.0 | %
|Cost of sales                                                   |  | 39.2                        | % |  | 37.4                      | % |  | 40.6  | % |  | 36.8  | %
|                                                                |  |                             |   |  |                           |   |  |       |   |  |       |  
|Gross profit                                                    |  | 60.8                        | % |  | 62.6                      | % |  | 59.4  | % |  | 63.2  | %
|Selling, general and administrative expense                     |  | 60.2                        | % |  | 56.0                      | % |  | 59.4  | % |  | 55.8  | %
|Research and development expense                                |  | 7.6                         | % |  | 6.2                       | % |  | 7.8   | % |  | 6.6   | %
|Goodwill and definite-lived intangibles impairment charges      |  | 0.0                         | % |  | 0.0                       | % |  | 29.4  | % |  | 0.0   | %
|Restructuring charges                                           |  | 2.1                         | % |  | 2.4                       | % |  | 1.1   | % |  | 2.0   | %
|                                                                |  |                             |   |  |                           |   |  |       |   |  |       |  
|Operating loss                                                  |  | -9.0                        | % |  | -1.9                      | % |  | -38.3 | % |  | -1.2  | %
|Interest expense                                                |  | -0.5                        | % |  | -0.5                      | % |  | -0.6  | % |  | -0.5  | %
|Other income (expense), net                                     |  | -0.1                        | % |  | 0.3                       | % |  | 0.2   | % |  | 0.9   | %
|                                                                |  |                             |   |  |                           |   |  |       |   |  |       |  
|Loss before income taxes                                        |  | -9.6                        | % |  | -2.2                      | % |  | -38.7 | % |  | -0.9  | %
|Provision for income taxes                                      |  | 0.7                         | % |  | 0.8                       | % |  | 0.6   | % |  | 0.9   | %
|                                                                |  |                             |   |  |                           |   |  |       |   |  |       |  
|Loss from continuing operations                                 |  | -10.3                       | % |  | -3.0                      | % |  | -39.2 | % |  | -1.7  | %
|Income (loss) from discontinued operations, net of income taxes |  | 0.1                         | % |  | -8.5                      | % |  | 0.0   | % |  | -5.1  | %
|                                                                |  |                             |   |  |                           |   |  |       |   |  |       |  
|Net loss                                                        |  | -10.2                       | % |  | -11.5                     | % |  | -39.2 | % |  | -6.8  | %
|                                                                |  |                             |   |  |                           |   |  |       |   |  |       |  



18



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##### Table of Contents

Net Sales.Net sales consist of product sales less a provision for sales returns, which is made at the time of the
related sale. Net sales by reportable operating segment were as follows:



|              |  |                             |        |      |                           |        |  |       |      |  |      |        |        |   |        |  |       |  
|------------- |  | --------------------------- | ------ | ---- | ------------------------- | ------ |  | ----- | ---- |  | ---- | ------ | ------ | - | ------ |  | ----- | -
|              |  | Three months ended June 30, |        |      | Six months ended June 30, |       
|              |  | 2009                        |        | 2008 |                           | Change |  |       | 2009 |  | 2008 |        | Change |  
|Net sales:    |  |                             |        |      |                           |        |  |       |      |  |      |        |        |   |        |  |       |  
|North America |  | $                           | 9,696  |      | $                         | 12,339 |  | -21.4 | %    |  | $    | 17,912 |        | $ | 24,232 |  | -26.1 | %
|Europe        |  |                             | 9,193  |      |                           | 14,207 |  | -35.3 | %    |  |      | 20,270 |        |   | 26,831 |  | -24.5 | %
|Rest-of-World |  |                             | 6,531  |      |                           | 8,291  |  | -21.2 | %    |  |      | 11,670 |        |   | 15,224 |  | -23.3 | %
|              |  |                             |        |      |                           |        |  |       |      |  |      |        |        |   |        |  |       |  
|Total         |  | $                           | 25,420 |      | $                         | 34,837 |  | -27.0 | %    |  | $    | 49,852 |        | $ | 66,287 |  | -24.8 | %
|              |  |                             |        |      |                           |        |  |       |      |  |      |        |        |   |        |  |       |  

The following table reflects the significant components of sales activity for the three months ended June 30,
2008 to the three months ended June 30, 2009.



|                                               |  |               |        |   |        |       |    |               |   |        |       |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |   
|---------------------------------------------- |  | ------------- | ------ | - | ------ | ----- | -- | ------------- | - | ------ | ----- |  | ----- | -- |  | - | ------ | - |  | ----- | -- |  | - | ------ | - |  | ----- | --
|                                               |  | North America |        |   | Europe |       |    | Rest-of-World |   |        | Total | 
|                                               |  | $             |        |   | %      |       |    | $             |   |        | %     |  |       | $  |  |   | %      |   |  | $     |    |  | % |       
|Sales for the three months ended June 30, 2008 |  | $             | 12,339 |   |        |       |    |               | $ | 14,207 |       |  |       |    |  | $ | 8,291  |   |  |       |    |  | $ | 34,837 |   |  |       |   
|Organic reduction                              |  |               | (2,481 | ) |        | (20.1 | %) |               |   | (3,869 | )     |  | (27.2 | %) |  |   | (229   | ) |  | (2.8  | %) |  |   | (6,579 | ) |  | (18.9 | %)
|Foreign currency                               |  |               | (162   | ) |        | (1.3  | %) |               |   | (1,145 | )     |  | (8.1  | %) |  |   | (1,531 | ) |  | (18.4 | %) |  |   | (2,838 | ) |  | (8.1  | %)
|                                               |  |               |        |   |        |       |    |               |   |        |       |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |   
|Sales for the three months ended June 30, 2009 |  | $             | 9,696  |   |        | (21.4 | %) |               | $ | 9,193  |       |  | (35.3 | %) |  | $ | 6,531  |   |  | (21.2 | %) |  | $ | 25,420 |   |  | (27.0 | %)
|                                               |  |               |        |   |        |       |    |               |   |        |       |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |   

The following table reflects the significant components of sales activity for the six months ended June 30,
2008 to the six months ended June 30, 2009.



|                                             |  |               |        |   |        |       |    |               |   |        |       |  |       |    |  |   |        |   |  |       |    |  |   |         |   |  |       |   
|-------------------------------------------- |  | ------------- | ------ | - | ------ | ----- | -- | ------------- | - | ------ | ----- |  | ----- | -- |  | - | ------ | - |  | ----- | -- |  | - | ------- | - |  | ----- | --
|                                             |  | North America |        |   | Europe |       |    | Rest-of-World |   |        | Total | 
|                                             |  | $             |        |   | %      |       |    | $             |   |        | %     |  |       | $  |  |   | %      |   |  | $     |    |  | % |        
|Sales for the six months ended June 30, 2008 |  | $             | 24,232 |   |        |       |    |               | $ | 26,831 |       |  |       |    |  | $ | 15,224 |   |  |       |    |  | $ | 66,287  |   |  |       |   
|Organic reduction                            |  |               | (5,970 | ) |        | (24.6 | %) |               |   | (3,963 | )     |  | (14.8 | %) |  |   | (139   | ) |  | (0.9  | %) |  |   | (10,072 | ) |  | (15.2 | %)
|Foreign currency                             |  |               | (350   | ) |        | (1.5  | %) |               |   | (2,598 | )     |  | (9.7  | %) |  |   | (3,415 | ) |  | (22.4 | %) |  |   | (6,363  | ) |  | (9.6  | %)
|                                             |  |               |        |   |        |       |    |               |   |        |       |  |       |    |  |   |        |   |  |       |    |  |   |         |   |  |       |   
|Sales for the six months ended June 30, 2009 |  | $             | 17,912 |   |        | (26.1 | %) |               | $ | 20,270 |       |  | (24.5 | %) |  | $ | 11,670 |   |  | (23.3 | %) |  | $ | 49,852  |   |  | (24.8 | %)
|                                             |  |               |        |   |        |       |    |               |   |        |       |  |       |    |  |   |        |   |  |       |    |  |   |         |   |  |       |   

Net sales from continuing operations for the three months ended June 30, 2009 of $25,420 decreased 27.0% from
net sales from continuing operations of $34,837 for the three months ended June 30, 2008. Net sales in the six months ended June 30, 2009 of $49,852 were down 24.8% from the six months ended June 30, 2008 net sales of $66,287. The
decrease in sales in the second quarter and for the year-to-date is due to the strengthening of the U.S. dollar, the challenging global economic environment, the legislative changes in Germany and their impact on our ability to conduct business, and
exiting customers as part of our European restructuring activities in 2008.

North American hearing aid sales of $9,696 in the three months ended
June 30, 2009 were down 21.4% from last years three months ended June 30, 2008 sales level of $12,339. North American hearing aid sales for the six months ended June 30, 2009 were $17,912, a decrease of 26.1% from the six months
ended June 30, 2008 sales of $24,232. The decrease in sales in the second quarter and year-to-date is due to volume declines of 17.8% and 25.0%, respectively, as a result of not having the RIC product when the market has moved in this
direction, the economy, a large buying group brought on two additional manufacturers and lastly, average selling prices which were approximately 5% lower for the six months ended June 30, 2009 compared to the same period in 2008 based on
pressure from competitors and the economic recession. RIC products currently approximate 35% of hearing aid sales in the U.S.

European sales of $9,193 for
the three months ended June 30, 2009 decreased 35.3% from the three months ended June 30, 2008 net sales of $14,207. European sales were $20,270 for the six months ended June 30, 2009, a reduction of 24.5% or $6,561 for the same
period in 2008. European sales were impacted by the strengthening of the U.S. dollar against the Euro, the legislative changes in Germany, and exiting customers as part of our European restructuring activities in 2008 (announced in the second
quarter 2008). As a result of the restructuring actions in 2008, we outsourced one European divisions sales and administration functions, closed another European office, discontinued an unprofitable domiciliary European business, and sold
retail stores in one European country that did not fit into our long-term strategy. These businesses had been losing approximately $1,000 per quarter when we announced this initiative in 2008, and as of the second quarter of 2009, after completion
of this initiative, we are achieving profitability. The surviving portion of these operations has lower sales.



19



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##### Table of Contents

The legislative change in Germany impacted sales in two ways. First, and most importantly, is the impact of not having
contracts with the insurers. The second impact is that previously we billed the insurance company the full price of a hearing aid and included in the reimbursement was the doctors fee. Thus, we recorded the full reimbursement as revenue and
the payment to the ENT doctors as a cost of sale. In the future, and for a portion of Q2 2009 sales, we will only bill for the hearing aid, and the doctors will bill separately for their fitting services. Therefore, we will no longer record the
doctors fees as revenue and cost of sales. The total cost of doctors fees recorded in 2008 as revenue and cost of sales using the March 31, 2009 Euro exchange rate was approximately $7,000. This would have increased our 2008 gross margin
by 4.0% had it been in effect for all of 2008.

Rest-of-World sales of $6,531 for the three months ended June 30, 2009 decreased 21.2% from the three
months ended June 30, 2008 sales of $8,291. Year-to-date sales were $11,670 for the six months ended June 30, 2009 which was a decrease of 23.3% from the six months ended June 30, 2008 sales of $15,224. Both the second quarter and
year-to-date sales decline resulted from a strengthening U.S. dollar against the Australian dollar and a small decrease in organic growth.

We generally
have a 60 day return policy for wholesale hearing aid sales and 30 days for retail sales. Provisions for sales returns for continuing operations were $2,028, or 7.4% of gross hearing aid sales, and $2,986, or 7.9% of gross hearing aid sales from
continuing operations, for the three months ended June 30, 2009 and 2008, respectively. The year-to-date provision for sales returns for continuing operations is $4,335, or 8.0% of gross hearing aid sales, and $5,896, or 8.2% of gross hearing
aid sales from continuing operations, for the six months ended June 30, 2009 and 2008, respectively. The percentage decrease was driven by lower U.S. wholesale return rates which we believe is a result of improved technology and the quality of
our hearing aid components. Retail sales are recognized after fitting and acceptance, which results in lower return rates, whereas in wholesale, revenue is recognized on shipment and a reserve is established for expected returns. We
believe that the hearing aid industry, particularly in the U.S., experiences a high level of product returns due to factors such as statutorily required liberal return policies and product performance that is inconsistent with hearing impaired
consumers expectations.

Gross Profit.Cost of sales primarily consists of manufacturing costs, royalty expenses, quality costs and costs
associated with product remakes and repairs (warranty). Gross profit and gross margin by reportable operating segment were as follows:



|                      |  |                             |        |  |                           |   |  |      |        |  |      |   |  |   |        |  |      |   |  |   |        |  |      |  
|--------------------- |  | --------------------------- | ------ |  | ------------------------- | - |  | ---- | ------ |  | ---- | - |  | - | ------ |  | ---- | - |  | - | ------ |  | ---- | -
|                      |  | Three months ended June 30, |        |  | Six months ended June 30, |  
|                      |  | 2009                        |        |  | 2008                      |   |  | 2009 |        |  | 2008 |  
|Continuing operations |  |                             |        |  |                           |   |  |      |        |  |      |   |  |   |        |  |      |   |  |   |        |  |      |  
|Gross profit:         |  |                             |        |  |                           |   |  |      |        |  |      |   |  |   |        |  |      |   |  |   |        |  |      |  
|North America         |  | $                           | 5,540  |  | 57.1                      | % |  | $    | 7,482  |  | 60.6 | % |  | $ | 9,839  |  | 54.9 | % |  | $ | 15,070 |  | 62.2 | %
|Europe                |  |                             | 5,140  |  | 55.9                      | % |  |      | 8,355  |  | 58.8 | % |  |   | 11,667 |  | 57.6 | % |  |   | 15,778 |  | 58.8 | %
|Rest-of-World         |  |                             | 4,784  |  | 73.3                      | % |  |      | 5,980  |  | 72.1 | % |  |   | 8,121  |  | 69.6 | % |  |   | 11,051 |  | 72.6 | %
|                      |  |                             |        |  |                           |   |  |      |        |  |      |   |  |   |        |  |      |   |  |   |        |  |      |  
|Total gross profit    |  | $                           | 15,464 |  | 60.8                      | % |  | $    | 21,817 |  | 62.6 | % |  | $ | 29,627 |  | 59.4 | % |  | $ | 41,899 |  | 63.2 | %
|                      |  |                             |        |  |                           |   |  |      |        |  |      |   |  |   |        |  |      |   |  |   |        |  |      |  

Gross profit from continuing operations of $15,464 for the three months ended June 30, 2009 decreased 29.1%
from the quarter ended June 30, 2008 gross profit of $21,817 and gross margin decreased from 62.6% in 2008 to 60.8% in 2009. Gross profit from continuing operations for the six months ended June 30, 2009 of $29,627 was a 29.3% reduction
from gross profit of $41,899 for the six months ended June 30, 2008 and gross margin decreased from 63.2% in 2008 to 59.4% in 2009. This decrease for both the second quarter and the year-to-date gross profit is primarily a result of the
strengthening of the U.S. dollar, lower overall sales and lower average selling prices in certain geographies due to mix of products and customers.

North
American gross margin decreased from 60.6% for the three months ended June 30, 2008 to 57.1% for the three months ended June 30, 2009 and it decreased from 62.2% for the six months ended June 30, 2008 to 54.9% for the six months ended
June 30, 2009. The decline in gross margin is primarily a result of lower average selling prices in North America wholesale as a result of the economic environment, and launching a low cost product line in late 2008 to meet the market demand
given the difficult economic environment, partially offset by a higher mix of retail sales. Retail sales carry a higher gross margin than our wholesale sales. The second quarter 2009 was sequentially better than the first quarter 2009 due to the
launch of our RIC product, Touch.

European gross margin decreased from 58.8% for the three months ended June 30, 2008 to 55.9% for the three months
ended June 30, 2009; the year-to-date gross margin also decreased slightly from 58.8% in 2008 to 57.6% in 2009. The lower gross margin is due to the strengthening of the U.S. dollar, pricing of new distributors and mix in sales by customer. As
we expand our distributor base and move into smaller, less developed countries, the gross margin percentage on this business will be lower, but gross profit dollars will be higher. Also, we have had only a limited launch of our new product, Touch.
Sales in Europe are significantly weighted by our business model where we sell through the ENT physician. Gross margin will increase due to the change in reimbursement for Germany. Previously we recorded the doctor payments as net sales and cost of
sales; total cost in 2008 for these payments was approximately $7,000. Elimination of these payments reduces revenue but will increase the gross margin percentage going forward.

Rest-of-World gross margin increased from 72.1% for the three months ended June 30, 2008 to 73.3% for the three months ended June 30, 2009 and decreased from 72.6% for the six months ended June 30, 2008
to 69.6% for the six months ended June 30, 2009. The second quarter increase in gross margin is a result of higher average selling prices in retail due to the launch of Touch.



20



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##### Table of Contents

Provisions for warranty for continuing operations increased from $1,227 for the three months ended June 30, 2008 to
$1,457 for the three months ended June 30, 2009 and increased from $2,096 for the three months ended June 30, 2008 to $2,192 primarily due to the launch of Touch. The receiver assembly associated with the RIC may need to be replaced more
frequently and thus the warranty per unit is anticipated to be higher than other products we sell. We will closely monitor this given the RIC is a new product line for us.

Selling, General and Administrative. Selling, general and administrative expense primarily consists of wages and benefits for sales and marketing personnel, sales commissions, promotions and advertising,
marketing support, distribution and administrative, stock compensation, and depreciation and amortization expenses.

Selling, general and administrative
expense in dollars and as a percent of sales by reportable operating segment was as follows:



|                                          |  |                             |        |  |                           |   |  |      |        |  |      |   |  |   |        |  |      |   |  |   |        |  |      |  
|----------------------------------------- |  | --------------------------- | ------ |  | ------------------------- | - |  | ---- | ------ |  | ---- | - |  | - | ------ |  | ---- | - |  | - | ------ |  | ---- | -
|                                          |  | Three months ended June 30, |        |  | Six months ended June 30, |  
|                                          |  | 2009                        |        |  | 2008                      |   |  | 2009 |        |  | 2008 |  
|Continuing operations                     |  |                             |        |  |                           |   |  |      |        |  |      |   |  |   |        |  |      |   |  |   |        |  |      |  
|Selling, general and administrative:      |  |                             |        |  |                           |   |  |      |        |  |      |   |  |   |        |  |      |   |  |   |        |  |      |  
|North America                             |  | $                           | 7,973  |  | 82.2                      | % |  | $    | 9,637  |  | 78.1 | % |  | $ | 15,507 |  | 86.6 | % |  | $ | 18,317 |  | 75.6 | %
|Europe                                    |  |                             | 3,349  |  | 36.4                      | % |  |      | 4,926  |  | 34.7 | % |  |   | 7,037  |  | 34.7 | % |  |   | 9,463  |  | 35.3 | %
|Rest-of-World                             |  |                             | 3,976  |  | 60.9                      | % |  |      | 4,944  |  | 59.6 | % |  |   | 7,075  |  | 60.6 | % |  |   | 9,220  |  | 60.6 | %
|                                          |  |                             |        |  |                           |   |  |      |        |  |      |   |  |   |        |  |      |   |  |   |        |  |      |  
|Total selling, general and administrative |  | $                           | 15,298 |  | 60.2                      | % |  | $    | 19,507 |  | 56.0 | % |  | $ | 29,619 |  | 59.4 | % |  | $ | 37,000 |  | 55.8 | %
|                                          |  |                             |        |  |                           |   |  |      |        |  |      |   |  |   |        |  |      |   |  |   |        |  |      |  

The following table reflects the components of selling, general and administrative expense for the three months
ended June 30, 2008 to the three months ended June 30, 2009.



|                                                                                      |  |               |        |   |        |       |    |               |   |        |       |  |       |    |  |   |       |   |  |       |    |  |   |        |   |  |       |   
|------------------------------------------------------------------------------------- |  | ------------- | ------ | - | ------ | ----- | -- | ------------- | - | ------ | ----- |  | ----- | -- |  | - | ----- | - |  | ----- | -- |  | - | ------ | - |  | ----- | --
|                                                                                      |  | North America |        |   | Europe |       |    | Rest-of-World |   |        | Total | 
|                                                                                      |  | $             |        |   | %      |       |    | $             |   |        | %     |  |       | $  |  |   | %     |   |  | $     |    |  | % |       
|Selling, general and administrative expenses for three months ended June 30, 2008     |  | $             | 9,637  |   |        |       |    |               | $ | 4,926  |       |  |       |    |  | $ | 4,944 |   |  |       |    |  | $ | 19,507 |   |  |       |   
|Organic growth (reduction)                                                            |  |               | (1,619 | ) |        | (16.8 | %) |               |   | (1,197 | )     |  | (24.3 | %) |  |   | (24   | ) |  | (0.5  | %) |  |   | (2,840 | ) |  | (14.6 | %)
|Foreign currency                                                                      |  |               | (45    | ) |        | (0.5  | %) |               |   | (380   | )     |  | (7.7  | %) |  |   | (944  | ) |  | (19.1 | %) |  |   | (1,369 | ) |  | (7.0  | %)
|                                                                                      |  |               |        |   |        |       |    |               |   |        |       |  |       |    |  |   |       |   |  |       |    |  |   |        |   |  |       |   
|Selling, general and administrative expenses for the three months ended June 30, 2009 |  | $             | 7,973  |   |        | (17.3 | %) |               | $ | 3,349  |       |  | (32.0 | %) |  | $ | 3,976 |   |  | (19.6 | %) |  | $ | 15,298 |   |  | (21.6 | %)
|                                                                                      |  |               |        |   |        |       |    |               |   |        |       |  |       |    |  |   |       |   |  |       |    |  |   |        |   |  |       |   

The following table reflects the components of selling, general and administrative expense for the six months
ended June 30, 2009 to the six months ended June 30, 2008.



|                                                                                    |  |               |        |   |        |       |    |               |   |        |       |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |   
|----------------------------------------------------------------------------------- |  | ------------- | ------ | - | ------ | ----- | -- | ------------- | - | ------ | ----- |  | ----- | -- |  | - | ------ | - |  | ----- | -- |  | - | ------ | - |  | ----- | --
|                                                                                    |  | North America |        |   | Europe |       |    | Rest-of-World |   |        | Total | 
|                                                                                    |  | $             |        |   | %      |       |    | $             |   |        | %     |  |       | $  |  |   | %      |   |  | $     |    |  | % |       
|Selling, general and administrative expenses for six months ended June 30, 2008     |  | $             | 18,317 |   |        |       |    |               | $ | 9,463  |       |  |       |    |  | $ | 9,220  |   |  |       |    |  | $ | 37,000 |   |  |       |   
|Organic growth (reduction)                                                          |  |               | (2,700 | ) |        | (14.7 | %) |               |   | (1,778 | )     |  | (18.8 | %) |  |   | (74    | ) |  | (0.8  | %) |  |   | (4,552 | ) |  | (12.3 | %)
|Foreign currency                                                                    |  |               | (110   | ) |        | (0.6  | %) |               |   | (648   | )     |  | (6.8  | %) |  |   | (2,071 | ) |  | (22.5 | %) |  |   | (2,829 | ) |  | (7.6  | %)
|                                                                                    |  |               |        |   |        |       |    |               |   |        |       |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |   
|Selling, general and administrative expenses for the six months ended June 30, 2009 |  | $             | 15,507 |   |        | (15.3 | %) |               | $ | 7,037  |       |  | (25.6 | %) |  | $ | 7,075  |   |  | (23.3 | %) |  | $ | 29,619 |   |  | (19.9 | %)
|                                                                                    |  |               |        |   |        |       |    |               |   |        |       |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |   

Selling, general and administrative expense for the three months ended June 30, 2009 of $15,298 decreased by
$4,209 or 21.6%, from the three months ended June 30, 2008 level of $19,507. Selling, general and administrative expense for the six months ended June 30, 2009 of $29,619 decreased by $7,381 or 19.9%, from the six months ended
June 30, 2008 of $37,000. Selling general and administrative expenses decreased due to the impact of our 2008 restructuring actions and ongoing cost control initiatives, and the strengthening of the U.S. dollar.

North American selling, general and administrative expense for the three months ended June 30, 2009 of $7,973 decreased by $1,664, or 17.3%, from the three months
ended June 30, 2008 level of $9,637. Selling, general and administrative expense decreased from $18,317 to $15,507, a decrease of $2,810 or 15.3%, for the six months ended June 30, 2009 due to targeted marketing cost cutting, a reduction
in our annual hearing industry convention costs, and lower wages and benefits expense and business development costs, partially offset by Touch launch costs. Included in the cost of the Touch launch is approximately $500 for an event in Las Vegas
where we introduced our Touch product family to approximately 300 customers.

European selling, general and administrative expenses decreased for the six
months ended June 30, 2009 from the three and six months ended June 30, 2008 principally as a result of the 2008 restructuring actions, limited cost cutting due to the reduction in Germany net sales, and the strengthening of the U.S.
dollar.



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Rest-of-World selling, general and administrative expense decreased for the three and six months ended June 30, 2009
from the three and six months ended June 30, 2008 resulting from the strengthening of the U.S. dollar against the Australian dollar.

Research and
Development. Research and development expense primarily consists of wages and benefits for research and development, engineering, regulatory and clinical personnel and also includes consulting, intellectual property, clinical studies and
engineering support costs. Research and development expense of $1,929, or 7.6% of net sales, for the three months ended June 30, 2009 decreased $228, or 10.6%, over the research and development expense of $2,157, or 6.2% of net sales, for the
three months ended June 30, 2008. Research and development expense of $3,908, or 7.8% of net sales, for the six months ended June 30, 2009 decreased $474, or 10.8%, over the research and development expense of $4,382, or 6.6% of net sales,
for the six months ended June 30, 2008.

Restructuring and Impairment Charges. During the three months ended June 30, 2009, we took
actions to improve the profitability of our operations by reducing the total number of employees in North America. Accordingly we have recorded restructuring charges of $525 to be paid during the third quarter of 2009. In the first quarter of
2009, as a result of the German court decision previously described, we recognized a goodwill impairment charge of $14,205 and a trade name impairment of $453, resulting in a total charge of $14,658 related to our German operation.

In the second quarter of 2008, we recorded $3,200 in restructuring charges, of which $828 related to continuing operations, and we recorded $565 in the first quarter
2008 of which $501 related to continuing operations. These charges were for our restructuring program in Europe in an effort to reduce expenses and focus management and resources on those markets that provide the greatest opportunity for increased
profitability.

Interest Expense and Other Income (Expense), Net. Other income (expense), net, primarily consists of foreign currency gains and
losses, interest income and other non-operating gains and losses. In 2008, we had significant foreign currency gains where as in 2009, those have been modest losses. We are hedging our intercompany balances in 2009, and thus, have been able to
mitigate the impact of foreign currency fluctuations on our intercompany balances. Other changes include lower interest income due to lower investment balances.

Provision for Income Taxes. In some jurisdictions net operating loss carry-forwards reduce or offset the provision for income taxes. We had an income tax provision for the three and six months ended June 30, 2009 of $180 and
$276, respectively from continuing operations compared to an income tax provision of $295 and $589 for the three and six months ended June 30, 2008, respectively, from continuing operations. The current and prior year income tax provisions were
principally the result of pre-tax profits in foreign geographies, alternative minimum tax in the U.S., amortization of goodwill, and state taxes. Income taxes on profits in the U.S. and a number of our foreign subsidiaries are currently negated by
our net operating loss carry-forwards.

LIQUIDITY AND CAPITAL RESOURCES

Our cash flows from operating, investing and financing activities, as reflected in the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2009 and 2008 are summarized as follows:



|                                                                                          |  |                                  |        |   |      |   |        |  
|----------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                          |  | For the six monthsended June 30, |       
|                                                                                          |  | 2009                             |        |   | 2008 |  
|Net cash provided by (used in) operating activities from continuing operations            |  | $                                | (3,053 | ) |      | $ | 4,863  |  
|Net cash provided by (used in) discontinued operations                                    |  |                                  | 22     |   |      |   | (1,004 | )
|                                                                                          |  |                                  |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                                       |  |                                  | (3,031 | ) |      |   | 3,859  |  
|Net cash used in investing activities                                                     |  |                                  | (2,064 | ) |      |   | (6,566 | )
|Net cash provided by financing activities                                                 |  |                                  | 539    |   |      |   | 2,143  |  
|Effect of exchange rate changes on cash and cash equivalents from continuing operations   |  |                                  | 70     |   |      |   | 251    |  
|Effect of exchange rate changes on cash and cash equivalents from discontinued operations |  |                                  | (10    | ) |      |   | 2      |  
|                                                                                          |  |                                  |        |   |      |   |        |  
|Net decrease in cash and cash equivalents                                                 |  |                                  | (4,496 | ) |      |   | (311   | )
|Cash and cash equivalents, beginning of the period                                        |  |                                  | 13,129 |   |      |   | 15,214 |  
|                                                                                          |  |                                  |        |   |      |   |        |  
|Cash and cash equivalents, end of the period                                              |  | $                                | 8,633  |   |      | $ | 14,903 |  
|                                                                                          |  |                                  |        |   |      |   |        |  

Net cash used in operating activities from continuing operations was $3,053 for the six months ended June 30,
2009. Negative cash flow resulted from a net loss of $19,560 which was positively affected by certain non-cash expenses including goodwill and definite-lived intangible impairment charges of $14,658 relating to our German operation, depreciation and
amortization of $2,046, stock-based compensation of $808, foreign currency loss of $160, and the amortization of discounts on long-term debt of $76. Positive operating cash flow also resulted from a decrease in accounts receivables of $410 primarily
due to collection efforts during 2009, a decrease in other assets of $380, and a net increase of accrued restructuring liabilities of $208. These positive cash flow items were offset by an increase in inventory of $2,145 for new product launches; an
increase in accounts payable, accrued expenses and deferred revenue of $57, withholding taxes remitted on share-based awards of $37, and deferred income taxes of $10.

Net cash provided by operating activities of discontinued operations was $22 for the six months ended June 30, 2009.



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Net cash provided by operating activities from continuing operations was $4,863 for the six months ended June 30,
2008. Negative cash flow resulted from a net loss from continuing operations of $4,534 and was positively affected by certain non-cash expenses including restructuring of $211, depreciation and amortization of $2,484, stock-based compensation of
$989, and the amortization of discounts on long-term debt of $184. This was partially offset by foreign currency gain of $280. Positive operating cash flow also resulted from a decrease in accounts receivable of $1,745 which was the result of
improved management of receivables during the first six months of 2008, a decrease in inventory of $925 following the build-up for new product launches, an increase in accrued restructuring of $844, and a decrease in other assets of $110. These
positive cash flow items were partially offset by a decrease in accounts payable, accrued expenses and deferred revenue for $1,112 and withholding taxes remitted on share-based awards of $215.

Net cash used in operating activities from discontinued operations was $1,004 for the six months ended June 30, 2008.

Net cash used in investing activities from continuing operations of $2,064 for the six months ended June 30, 2009 resulted from the purchase of property and
equipment of $1,706 and net customer advances of $358.

Net cash used in investing activities from continuing operations of $6,577 for the six months ended
June 30, 2008 resulted from payments related to acquisitions of retail audiology practices for $3,270, the purchase of property and equipment of $1,293, and customer advances of $2,014.

Net cash provided by discontinued operations in investing activities was $11 for the six months ended June 30, 2008.

Net cash provided by financing activities from continuing operations of $539 for the six months ended June 30, 2009 resulted from borrowings on the line of credit
of $2,750, decreases in restricted cash and cash equivalents of $261 and proceeds from tax payments received on vested restricted stock of $20, partially offset by principal loan payments of $2,492.

Net cash provided by financing activities from continuing operations of $2,143 for the six months ended June 30, 2008 resulted from decreases in restricted cash and
cash equivalents of $5,215 and proceeds from the exercise of stock options of $8, partially offset by principal loan payments of $3,080.

Our cash and cash
equivalents, including restricted amounts, totaled $8,697 as of June 30, 2009. We remitted our settlement payment of 1,050 ($1,471) to the former owners in Germany on August 6, 2009. In April 2009 we borrowed $2,750 on our revolving
credit facility. We had substantial cash flow usage in the second quarter of 2009 as a result of scheduled debt payments, the Touch launch, and an annual hearing industry convention. We expect a reduction of inventory and accounts receivable for the
rest of the year, providing the necessary cash to support our business. However, the future will depend, to a significant degree, on the outcome of our situation in Germany.

Both the revolving credit facility and the German bank debt have a customary material adverse change clause that allows the banks to call the loans, if invoked. Neither bank has invoked such clause.

Our ability to make payments on and to refinance our indebtedness, and to fund planned capital expenditures and ongoing operations, will depend on our ability to
generate cash in the future. This depends to a degree on general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We currently are managing receivables and inventory to improve turns
which will free-up cash and, together with available cash balances, we will be able to fund our future debt service payments, ongoing operations and capital expenditures. Based on our current level of operations, expected revenue growth
trends and anticipated cost management and operating improvements, we believe we will generate positive cash flow from operations over the next twelve months. The key to this assumption will be our German operating performance and our
ability to reduce receivables and inventory. In financing activities, we are limiting capital expenditures to key strategic projects with an anticipated high rate of return. We expect that total current debt service payments due over
the next year of $5.9 million will be repaid from available cash on hand and anticipated cash flow from operations, and we expect the line-of-credit portion of our current debt obligations ($2.75 million due on April 10, 2010) will be
renegotiated.

There can be no assurance, however, that our business will generate sufficient cash flow from operations, that currently anticipated cost
savings and operating improvements will be realized on schedule or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. Furthermore, we cannot provide any
assurances that ongoing adverse conditions in global capital markets and adverse general economic conditions will not have a material adverse impact on our future operations and cash flows. We may need to refinance all or a portion of our
indebtedness on or before maturity and we cannot provide assurances that we will be able to refinance any of our indebtedness on commercially reasonable terms, or at all. Should we be unable to renegotiate our debt service payments, we may need to
sell assets of the company, which will also be subject to market conditions existing at that time.

We monitor our capital structure on an ongoing basis
and from time to time we consider financing and refinancing options to improve our capital structure and to enhance our financial flexibility. Our ability to enter into new financing arrangements is subject to restrictions in our outstanding debt
instruments. At any given time we may pursue a variety of financing opportunities, and our decision to proceed with any financing will depend, among other things, on prevailing market conditions, near term maturities and available terms.



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Contractual Obligations

As of June 30, 2009, we had unrecognized tax benefits of $240 of which $189 is recorded as a liability and which could result in cash outlays in the event of unfavorable taxing authority rulings.

There have been no material changes to our contractual obligations outside the ordinary course of business since December 31, 2008.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 141(R), Business Combinations, effective for fiscal years beginning after December 15, 2008. This standard
requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and
liabilities assumed, and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. The adoption of SFAS 141 effective
January 1, 2009 did not have a material impact on our consolidated financial statements.

Also in December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial Statements, effective for fiscal years beginning after December 15, 2008. This standard requires all entities to report non-controlling (minority) interests in
subsidiaries in the same way as equity in the condensed consolidated financial statements. The adoption of SFAS 160 effective January 1, 2009 did not have a material impact on our condensed consolidated financial statements.

In September 2008, the FASB issued FSP FAS 133-1 and FASB Interpretation (FIN) 45-4, Disclosures about Credit Derivatives and
Certain Guarantees: An Amendment of FAS 133 and FIN 45; and Clarification of the Effective Date of FAS161.This FSP became effective for us during the fourth quarter of 2008. We entered into two foreign currency forward
contracts during the three months ended June 30, 2009 where we held forward contract hedges on 2,000 ($2,809) and Australian $2,400 ($1,931). We recognized an unrealized gain of $6 at June 30, 2009. The unrecognized gain is recorded
in Other income (expense), net in the Condensed Consolidated Statements of Operations, and in Prepaid expenses and other in the Condensed Consolidated Balance Sheets. The contracts will expire in the second quarter of 2009. Effective in the second
quarter 2008, we entered into an interest rate swap agreement. The contract effectively fixes the interest rate of the long term debt associated with the German acquisition at 9.59%.

In May 2009, the FASB issued SFAS 165, Subsequent Events(SFAS 165), which provides guidance to establish general
standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for interim or fiscal periods ending after June 15,
2009. The adoption of SFAS 165 did not have a material impact on our consolidated financial statements. We evaluated the effects of all subsequent events from the end of the second quarter through August 7, 2009, the date we filed our financial
statements with the SEC.

In June 2009, the FASB issued SFAS 168, The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles- a replacement of FASB Statement 162 (SFAS 168), which became the source of authoritative non-SEC U.S. GAAP for nongovernmental entities. SFAS 168 is effective for financial statement issued for
interim and annual periods ending after September 15, 2009. We do not expect the adoption of SFAS 168 will have a material impact on our consolidated financial statements.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
|------- | -----------------------------------------------------------

Interest Rate Risk.We generally invest our cash in money market funds and corporate debt securities. These are subject to minimal credit and market risk considering that they are short-term (expected maturities of 18 months or less
from date of purchase) and provided that we hold them to maturity, which is our intention. As of June 30, 2009, we had $4,878 held in commercial money market instruments that carry an effective interest rate of 0.47%. The interest rates on our
customer advances approximate the market rates for comparable instruments and are fixed.

As of June 30, 2009 we had $2,458 in long-term bank debt
that bears interest at a rate of the EURIBOR rate plus four percent. The debt was amended on June 13, 2008 to release the requirement of a stand-by letter of credit which was supported by restricted cash of U.S. dollar $5,194 and to incorporate
an interest rate swap agreement to fix the rate at 9.59%.

A hypothetical one percentage point change in interest rates would not have had a material
effect on our results of operations and financial position. Given current interest rates, we believe the market risks associated with these financial instruments are minimal.

Derivative Instruments and Hedging Activities.We may employ derivative financial instruments to manage risks, including the short term impact of foreign currency fluctuations on certain intercompany balances,
or variable interest rate exposures. We do not enter into these contracts for trading or speculation purposes. Gains and losses on the contracts are included in the results of operations and offset foreign exchange gains or losses recognized on the
revaluation of certain intercompany balances, or interest expense due to movement in variable interest rates, as applicable.

Our foreign exchange forward
contracts generally mature in three months or less from the contract date. We held forward contract hedges on 2,000 ($2,809) and Australian $2,400 ($1,931) at June 30, 2009. We recognized an unrealized gain of $6 at the period ending
June 30, 2009. The unrecognized gain is recorded in Other income (expense), net in the Condensed Consolidated Statements of Operations, and in Prepaid expenses and other in the Condensed Consolidated Balance Sheets. The contracts will expire in
the third quarter of 2009.

Effective in the second quarter 2008, we entered into an interest rate swap agreement. The contract effectively fixes the
interest rate of the long term debt associated with the German acquisition at 9.59%.

Foreign Currency Risk. We face foreign currency risks
primarily as a result of the revenues we derive from sales made outside the U.S., expenses incurred outside the U.S., and from intercompany account balances between our U.S. parent and our non-U.S. subsidiaries. In the three months ended
June 30, 2009, approximately 58.5% of our net sales and 41.1% of our operating expenses were denominated in currencies other than the U.S. dollar. In the six months ended June 30, 2009, approximately 60.5% of our net sales and 40.8% or our
operating expenses were denominated in currencies other than the U.S. dollar.

Inventory purchases were transacted in U.S. dollars. The local currency of
each foreign subsidiary is considered the functional currency, and revenue and expenses are translated at average exchange rates for the reported periods. Therefore, our foreign sales and expenses will be higher in a period in which there is a
weakening of the U.S. dollar and will be lower in a period in which there is a strengthening of the U.S. dollar. The Australian dollar and Euro are our most significant foreign currencies. Given the uncertainty of exchange rate fluctuations and the
varying performance of our foreign subsidiaries, we cannot estimate the affect of these fluctuations on our future business, results of operations and financial condition. Fluctuations in the exchange rates between the U.S. dollar and other
currencies could effectively increase or decrease the selling prices of our products in international markets where the prices of our products are denominated in U.S. dollars. We regularly monitor our foreign currency risks and may take measures to
reduce the impact of foreign exchange fluctuations on our operating results. To date, we have not used derivative financial instruments for hedging, trading or speculating on foreign currency exchange, except to hedge intercompany balances in 2008
and for the six months ending June 30, 2009.

For the six months ended June 30, 2009 and 2008, average currency exchange rates to convert one
U.S. dollar into each local currency for which we had sales of over $5,000 by quarter were as follows:



|                  |  |      |  |     
|----------------- |  | ---- |  | ----
|                  |  | 2009 |  | 2008
|Euro              |  | 0.75 |  | 0.65
|Australian dollar |  | 1.41 |  | 1.08



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|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures.Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act), as of the end of the period covered by this report. Based on this evaluation, our principal
executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in Internal Controls Over Financial Reporting.During the period covered by this report, there were no changes in our internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, such internal controls over financial reporting.

PART II - OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

In February 2006, the former owners of Sanomed,
which we acquired in 2003, filed a lawsuit in German civil court claiming that certain deductions made by us against certain accounts receivable amounts and other payments remitted to the former owners were improper. The former owners sought damages
in the amount of approximately 2,600 ($3,600). We filed our statement of defense and presented our position during oral arguments. The court asked the parties to attempt to settle the matter and, on July 20, 2009, we agreed to settle the
claim with the former owners. Under the terms of the settlement, we agreed to pay the former owners of Sanomed an aggregate sum of 1,050 ($1,471), approximately the amount reserved in our balance sheet at March 31 and June 30, 2009
for this matter. We remitted the settlement payment on August 6, 2009.

As part of the Sanomed purchase agreement, the former owners were entitled to
contingent consideration based on the achievement of certain revenue milestones. In certain circumstances, the former owners were entitled to contingent consideration irrespective of the achievement of the revenue milestones. In addition to the
above noted lawsuit, two of the former owners filed suit against us, one of which was settled in 2007, and the other former owners contingent consideration claim against us for approximately 1,100 ($1,500) plus interest was dismissed on
July 2008, with the German court rendering its decision in our favor. The former owner has appealed. We continue to strongly deny the allegations contained in the former owners appeal and intend to vigorously defend ourselves; however,
litigation is inherently uncertain and an unfavorable result could have a material adverse effect. We establish liabilities when a particular contingency is probable and estimable.

Also see Item 1-A, below, regarding our on-going litigation against a German insurance company.

From time to time, we
are subject to legal proceedings, claims and litigation arising in the ordinary course of its business. Most of these legal actions are brought against us by others and, when we feel it is necessary, we may bring legal actions. Actions can stem from
disputes regarding the ownership of intellectual property, customer claims regarding the function or performance of our products, government regulation or employment issues, among other sources. Litigation is inherently uncertain, and therefore, we
cannot predict the eventual outcome of any such lawsuits. However, we do not expect that the ultimate resolution of any known legal action, other than as identified above, will have a material adverse effect on our results of operations and
financial position.



|ITEM 1-A. | RISK FACTORS
|--------- | ------------

In addition to the other information set forth in
this report, you should carefully consider the factors discussed in Part I, Item 1-A, Factors That May Affect Future Performance in our Annual Report on Form 10-K for the year ended December 31, 2008 which could materially
affect our business, results of operations and financial position. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially adversely affect our business, results of operations and financial position.

Legislation passed by the Federal
Council of Germany in November 2008 and which became effective on April 1, 2009, resulted in sweeping changes to the way doctors and healthcare providers interact and are reimbursed from insurance companies. These changes require our German
subsidiary to renegotiate contracts with insurance companies and ENT doctors on a new basis. In the first three months of 2009, we believed our German subsidiary was making progress, having successfully renegotiated contracts representing
approximately 27% of our 2008 German revenue. However, on April 1, 2009, we were notified by one large insurance company representing approximately 25% of our German revenue that, despite several months of favorable negotiations, due to
political headwinds, they were refusing to enter into a contract; therefore, our German subsidiary filed a lawsuit in the Social Court in Hamburg, Germany against this insurance company, requesting that the court compel the insurance
company to enter into a contract with our German subsidiary. On April 28, 2009, the Court rejected these claims. We have subsequently filed an appeal of this decision. In addition, a number of other insurance companies were unsure if they
should sign a contract because there were rumors that the newly enacted law could potentially change again, thus requiring the need to renegotiate again. Without renegotiated insurance contracts, and the ability to pay customary fitting fees to the
ENT doctors, we expected revenue to decline substantially and



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cash flow of the operation would not be sufficient to support our intangibles balances. Thus, we recognized a $14.7 million non-cash write-off of our
goodwill and trade name associated with our German operation in the first quarter of 2009.

In June 2009, the German government passed additional
amendments to the law that became effective July 23, 2009. The key implication of these amendments to our business model was to impose additional costs on the doctors and insurance companies that conduct business with our German operation.

We are currently renegotiating contracts in light of the new legislative requirements and are working to contract with other insurance companies as well.
The lack of signed insurance contracts and the imposition of new and costly requirements on the ENT doctors and the insurance companies are expected to put further strain on sales beyond what we experienced in the second quarter of 2009.



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|ITEM 6. | EXHIBITS
|------- | --------

(a) Exhibits required to be filed by
Item 601 of Regulation S-K:



|          |  |                                                                                                                                                                       
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit # |  | Description                                                                                                                                                           
|          | 
|31.1      |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                   
|          | 
|31.2      |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                   
|          | 
|32        |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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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 thereunto duly authorized.

Date: August 7, 2009



/s/ MICHAEL M. HALLORANMichael M. HalloranVice President and Chief Financial Officer




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