<PAGE>

                                 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, 2000

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     Commission File No.  000-30335

                            SONIC INNOVATIONS, INC.
                   -----------------------------------------
            (Exact name of registrant as specified in its charter)

                      DELAWARE                         87-0494518
                      --------                         ----------
           (State or other jurisdiction of          (I.R.S. Employer
          incorporation or organization)          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

     As of August 10, 2000 there were 19,606,520 shares of the registrant's
     common stock outstanding.


<PAGE>

                            SONIC INNOVATIONS, INC.
                               TABLE OF CONTENTS

                                   FORM 10-Q

<TABLE>
<CAPTION>

PART I                                                                                          Page
  FINANCIAL INFORMATION                                                                         ----
<S>                         <C>                                                                 <C>
  ITEM 1.                   Condensed Consolidated Financial Statements (unaudited)

                            Condensed Consolidated Balance Sheets as of June 30, 2000
                            and December 31, 1999                                                 1


                            Condensed Consolidated Statements of Operations for the
                            three and six months ended June 30, 2000 and 1999                     2


                            Condensed Consolidated Statements of Cash Flows for the six
                            months ended June 30, 2000 and 1999                                   3


                            Notes to Condensed Consolidated Financial Statements                  4

  ITEM 2.                   Management's Discussion and Analysis of Financial Condition
                            and Results of Operations                                             7


  ITEM 3.                   Quantitative and Qualitative Disclosures about Market Risks          10

                            Factors That May Affect Future Performance                           11

PART II
  OTHER INFORMATION

  ITEM 2.                   Changes in Securities and Use of Proceeds                            16

  ITEM 4.                   Exhibits and Reports on Form 8-K                                     17

                            Signature                                                            17

</TABLE>
<PAGE>

PART I    FINANCIAL INFORMATION

ITEM 1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                            SONIC INNOVATIONS, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)
<TABLE>
<CAPTION>



                                                                                    June 30, 2000        December 31, 1999 (1)
                                                                                   ---------------      -----------------------
                                                                                     (unaudited)

                                   ASSETS

CURRENT ASSETS:
<S>                                                                                <C>                  <C>
Cash and cash equivalents......................................................    $        48,625      $                 5,939
Marketable securities..........................................................              5,764                            -
Accounts receivable............................................................             10,615                        4,925
Inventories:
   Raw materials...............................................................              2,341                        1,365
   Components and work in progress.............................................              1,230                          660
   Finished goods..............................................................                574                          343
                                                                                   ---------------      -----------------------
                                                                                             4,145                        2,368

Prepaid expenses and other.....................................................                420                          698
                                                                                   ---------------      -----------------------

           Total current assets................................................             69,569                       13,930

Property and equipment, net....................................................              4,000                        3,738
Other assets...................................................................                258                          794
                                                                                   ---------------      -----------------------

                  Total assets.................................................    $        73,827      $                18,462
                                                                                   ===============      =======================

                LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued expenses.                                             $         8,328      $                 8,055
Line of credit and convertible promissory notes................................                  -                       10,030
Current portion of long-term obligations.                                                      640                          964
                                                                                   ---------------      -----------------------

      Total current liabilities.                                                             8,968                       19,049

LONG-TERM LIABILITIES:
Capital lease obligations, net of current portion.                                             609                        1,935
Technology license obligation, net of current portion.                                         150                          150
                                                                                   ---------------      -----------------------
      Total long-term liabilities.                                                             759                        2,085

MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK                                               -                       36,129

STOCKHOLDERS' EQUITY:
Preferred stock................................................................                  -                          342
Common stock...................................................................                 20                            2
Additional paid-in capital.....................................................            111,637                        6,256
Deferred stock-based compensation..............................................             (2,303)                      (3,613)
Accumulated deficit and comprehensive loss.....................................            (45,254)                     (41,788)
                                                                                   ---------------      -----------------------

      Total stockholders' equity (deficit).                                                 64,100                      (38,801)
                                                                                   ---------------      -----------------------

           Total liabilities and stockholders' equity.                             $        73,827      $                18,462
                                                                                   ===============      =======================

</TABLE>

(1)  Derived from December 31, 1999 audited financials statements.


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

                                      -1-
<PAGE>

                            SONIC INNOVATIONS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                             Three months ended       Six months ended
                                                                  June 30,                June 30,

                                                             2000        1999        2000         1999
                                                           --------    --------    --------    ---------

<S>                                                        <C>         <C>         <C>         <C>
Net sales...............................................   $ 13,121    $  5,642    $ 25,517    $   8,863
Cost of sales...........................................      6,544       3,532      12,657        6,624
                                                           --------    --------    --------    ---------

Gross profit............................................      6,577       2,110      12,860        2,239

Selling, general and administrative expense.............      4,753       5,238       9,037        9,109
Research and development expense........................      2,026       1,759       3,882        3,224
Stock-based compensation expense........................        604          81       1,311           93
                                                           --------    --------    --------    ---------

Operating loss..........................................       (806)     (4,968)     (1,370)     (10,187)

Other expense, net......................................       (452)       (252)     (1,189)        (250)
                                                           --------    --------    --------    ---------

Net loss................................................     (1,258)     (5,220)     (2,559)     (10,437)

Accretion on mandatorily redeemable convertible                (261)       (596)       (959)      (1,171)
 preferred stock........................................
                                                           --------    --------    --------    ---------

Net loss applicable to common stockholders..............   $ (1,519)   $ (5,816)   $ (3,518)   $ (11,608)
                                                           ========    ========    ========    =========

Basic and diluted net loss per common share.............   $   (.12)   $  (4.30)   $   (.49)   $   (8.72)
                                                           ========    ========    ========    =========

Weighted average number of common shares outstanding....     12,864       1,352       7,191        1,331
                                                           ========    ========    ========    =========
Pro forma information (see note 9):

Net loss................................................   $   (582)   $ (5,220)   $ (1,519)   $ (10,437)
                                                           ========    ========    ========    =========

Basic and diluted net loss per common share.............   $   (.03)   $   (.38)   $   (.09)   $    (.75)
                                                           ========    ========    ========    =========

Weighted average number of common shares outstanding....     17,944      13,882      16,413       13,859
                                                           ========    ========    ========    =========

Amount of stock-based compensation allocable
  to each caption:

Cost of sales...........................................   $     28    $      4    $     61    $       5
Selling general and administrative expense..............        495          66       1,074           76
Research and development expense........................         81          11         176           12
                                                           --------    --------    --------    ---------

                                                           $    604    $     81    $  1,311    $      93
                                                           ========    ========    ========    =========
</TABLE>

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

                                      -2-
<PAGE>

                            SONIC INNOVATIONS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
                                  (unaudited)
<TABLE>
<CAPTION>

                                                                                               Six months ended June 30,
                                                                                                 2000             1999
                                                                                              ----------       ----------
<S>                                                                                           <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................................................   $   (2,559)      $  (10,437)
Adjustments to reconcile net loss to net cash used in operating
 activities:
  Depreciation and amortization............................................................          772              591
  Preferred stock issued for services......................................................            -               18
  Expenses related to remeasurement of stock options.......................................            -              170
  Non-cash imputed interest expense........................................................        1,244                -
  Stock-based compensation.................................................................        1,311               93
  Changes in assets and liabilities:
     Accounts receivable...................................................................       (5,800)          (2,200)
     Inventories...........................................................................       (1,798)          (1,643)
     Prepaid expenses and other............................................................           65             (484)
     Other assets..........................................................................          536             (611)
     Technology license obligation.........................................................            -              (85)
     Accounts payable and accrued expenses.................................................          307            2,856
                                                                                              ----------       ----------

       Net cash used in operating activities...............................................       (5,922)         (11,732)
                                                                                              ----------       ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.........................................................       (1,043)          (1,808)
Purchase of marketable securities..........................................................       (5,764)               -
                                                                                              ----------       ----------


       Net cash used in investing activities...............................................       (6,807)          (1,808)
                                                                                              ----------       ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering......................................................       57,960                -
Initial public offering costs..............................................................       (5,754)               -
Proceeds from convertible promissory notes.................................................        6,000                -
Line of credit borrowings (repayments).....................................................       (1,966)           1,195
Proceeds from (repayments of) long-term obligations........................................       (1,650)           1,204
Proceeds from exercise of stock options....................................................          656               19
                                                                                              ----------       ----------

       Net cash provided by financing activities...........................................       55,246            2,418
                                                                                              ----------       ----------

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
 CASH EQUIVALENTS..........................................................................          169               15
                                                                                              ----------       ----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................................       42,686          (11,107)
CASH AND CASH EQUIVALENTS, beginning of the period.........................................        5,939           11,979
                                                                                              ----------       ----------

CASH AND CASH EQUIVALENTS, end of the period...............................................  $    48,625       $      872
                                                                                              ==========       ==========

SUPPLEMENTAL CASH FLOW INFORMATION:
  Cash paid for interest...................................................................   $      153       $      222
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
 AND INVESTING ACTIVITIES:
  Equipment acquired under capital leases..................................................   $        -       $    1,443
  Mandatorily redeemable convertible preferred stock accretion.............................   $      959       $    1,171
  Conversion of convertible promissory notes and related accrued interest to equity........   $   15,103                -
  Conversion of preferred stock to equity..................................................   $   37,418                -
</TABLE>

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

                                      -3-
<PAGE>

                            SONIC INNOVATIONS, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)

1.   BASIS OF PRESENTATION

     The accompanying condensed consolidated financial statements include the
accounts of Sonic Innovations, Inc. and its wholly owned subsidiary, Sonic
Innovations A/S.  All intercompany balances and transactions have been
eliminated in consolidation.

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with 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 presentation have been included.  The results of operations
for the interim periods presented are not necessarily indicative of results that
may be expected for any other interim period or for the full year ending
December 31, 2000. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission (File
No. 333-30566).


2.   MARKETABLE SECURITIES

     Management determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such designation as of each
balance sheet date. At June 30, 2000, the Company's investment portfolio
consisted of short-term corporate debt securities classified as held-to-maturity
and is presented at its amortized cost.

3.   CONCENTRATIONS OF CREDIT RISK

     During the quarter ended June 30, 2000, the Company had two significant
customers which comprised 31% and 9% of net sales.  As of June 30, 2000, these
two customers accounted for approximately 54% and 10% of the net accounts
receivable balance.

4.   COMPREHENSIVE LOSS

     Comprehensive loss consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                           Three months ended June 30,                Six months ended June 30,
                                            2000                 1999                2000                 1999
                                      -----------------     --------------     -----------------     ----------------
<S>                                   <C>                   <C>                <C>                   <C>
Net loss                              $          (1,258)    $       (5,220)    $          (2,559)    $        (10,437)
Foreign currency gain (loss)                         13                 38                    55                  (55)
                                      -----------------     --------------     -----------------     ----------------

Comprehensive loss                    $          (1,245)    $       (5,182)    $          (2,504)    $        (10,492)
                                      =================     ==============     =================     ================
</TABLE>

5.   NET LOSS PER COMMON SHARE

     Basic and diluted net loss per common share were computed by dividing net
loss applicable to common stockholders by the weighted average number of common
shares outstanding. Common stock equivalents were not considered since their
effect would be antidilutive, thereby decreasing the net loss per common share.

                                      -4-
<PAGE>

                            SONIC INNOVATIONS, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)

6.   SEGMENT INFORMATION

     The following table presents information regarding the Company's geographic
operating segments for the three months and six months ended June 30, 2000 and
1999 (in thousands).

<TABLE>
<CAPTION>
Three months ended June 30, 2000                United States               Europe                  Total
--------------------------------                -------------           -------------           -------------
<S>                                             <C>                     <C>                     <C>
    Net sales to external customers             $      11,379           $       1,742           $      13,121
    Operating loss                                       (428)                   (378)                   (806)

Three months ended June 30, 1999                United States               Europe                  Total
--------------------------------                -------------           -------------           -------------
    Net sales to external customers             $       4,983           $         659           $       5,642
    Operating loss                                     (4,632)                   (336)                 (4,968)

Six months ended June 30, 2000                  United States               Europe                  Total
------------------------------                  -------------           -------------           -------------
    Net sales to external customers             $      21,933           $       3,584           $      25,517
    Operating loss                                       (978)                   (392)                 (1,370)

Six months ended June 30, 1999                  United States               Europe                  Total
------------------------------                  -------------           -------------           -------------
    Net sales to external customers             $       7,554           $       1,309           $       8,863
    Operating loss                                     (9,569)                   (618)                (10,187)
</TABLE>

U.S. net sales include export sales.

7.   REVERSE STOCK SPLIT

     On March 22, 2000, the Board of Directors approved a 1 for 1.9 reverse
stock split for the holders of common and preferred stock. This stock split has
been retroactively reflected in the accompanying condensed consolidated
financial statements for all periods presented.

8.   INITIAL PUBLIC OFFERING

     The Company filed a registration statement with the Securities and Exchange
Commission that became effective on May 1, 2000 and sold 4,141,000 shares,
including 540,000 shares pursuant to an overallotment option granted the
underwriters, at $14.00 per share.  The Company received net proceeds of $52.2
million, after the underwriters discount of $.98 per share and other IPO related
expenses.

In connection with the public offering the following items were converted into
common stock:

     .  The conversion of all outstanding convertible preferred stock into
        12,532,786 common shares;

     .  The conversion of $4.5 million of convertible promissory notes (plus
        accrued interest) into 336,086 shares of common stock at a conversion
        price equal to 100% of the IPO price;

     .  The conversion of $7.0 million of convertible promissory notes (plus
        accrued interest) into 545,373 shares of common stock at a conversion
        price equal to 93% of the IPO price;

     .  The conversion of $3.0 million of convertible promissory notes issued on
        the closing of the public offering into 214,285 shares of common stock
        at a conversion price equal to 100% of the IPO price; and

     .  The exercise, at an exercise price of $3.80 per share, of outstanding
        warrants to purchase 203,727 shares of common stock (net of 33,126 share
        surrendered in lieu of cash payment of the exercise price for certain
        warrants).


                                      -5-
<PAGE>

                            SONIC INNOVATIONS, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)

9.   PRO FORMA INFORMATION

     The pro forma income statement information assumes that the conversions of
convertible preferred stock and convertible promissory notes and the exercise of
warrants occurred as of January 1, 1999, or the date of issuance, if later.
Reconciliations of the numerator and the denominator used for purposes of
computing the pro forma net loss per common share for the three and six months
ended June 30, 2000 and 1999 were as follows (in thousands):


<TABLE>
<CAPTION>
                                        Three months ended June 30,     Six months ended June 30,
                                          2000               1999         2000             1999
                                        --------           --------     --------         --------
<S>                                     <C>                <C>          <C>              <C>
Numerator:
 Net loss applicable to common
   stockholders.......................  $ (1,519)          $ (5,816)    $ (3,518)        $(11,608)
 Reversal of interest expense on
   convertible promissory notes.......       141                  -          505                -
 Reversal of accretion on
   convertible preferred stock........       261                596          959            1,171
 Reversal of beneficial
   conversion feature on certain
   convertible promissory notes.......       535                  -          535                -
                                        --------           --------     --------         --------

 Pro forma net loss...................  $   (582)          $ (5,220)    $ (1,519)        $(10,437)
                                        ========           ========     ========         ========

Denominator:
 Weighted average number of
   common shares outstanding...........   12,864              1,352        7,191            1,331
 Effect of conversion of
   convertible preferred stock.........    4,683             12,530        8,607           12,528
 Effect of conversion of
   convertible promissory notes........      321                  -          475                -
 Exercise of warrants.................        76                  -          140                -
                                        --------           --------     --------         --------
 Pro forma weighted average
   number of common shares
   outstanding.........................   17,944             13,882       16,413           13,859
                                        ========           ========     ========         ========
</TABLE>

10.  LEGAL PROCEEDING

     The Company has been accused of infringing two patents owned by a third
party. The Company believes that the claims of infringement are without merit,
and to that end, commenced an action on August 4, 2000 in federal district court
in Utah by which it seeks a declaratory judgment that the patents are invalid
and not infringed by the Company. The Company anticipates that it will incur
associated litigation expenses in upcoming quarters. Although the Company
believes that it does not infringe these patents, that they are invalid and that
the ultimate outcome of this action (and any potential countersuits) will not
have a material adverse effect on the Company, litigation is inherently
uncertain and there can be no assurance that the Company will not be materially
affected.


                                      -6-
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     The following discussion contains forward-looking statements that involve
risks and uncertainties. These statements refer to our future plans, objectives,
expectations and intentions. These statements may be identified by the use of
words such as "believes," "expects," "anticipates," "intends," "plans" and
similar expressions. Examples of these forward-looking statements include, but
are not limited to, statements regarding the following: estimated levels of
sales returns, increasing sales, expanded customer service, distribution and
fulfillment activities, growth in operating expenses, increased capital
expenditures and growth in operations, infrastructure and personnel. Our actual
results could differ materially and adversely from those anticipated in such
forward-looking statements. Factors that could contribute to these differences
include, but are not limited to, the risks discussed in the section titled
"Factors That May Affect Future Performance."

OVERVIEW

     We design, manufacture and market advanced digital hearing aids and hearing
aid components designed to provide the highest levels of satisfaction for
hearing impaired consumers. We were primarily engaged in hearing aid research
and development from our inception through September 1998, at which time we
shipped our first branded product, NATURA. In 1999, we also began selling
hearing aid components consisting of our proprietary digital signal processing,
or DSP, platform to established hearing aid companies and partially completed
hearing aids, or faceplates, to distributors who market finished hearing aids
under our brand name.

     In reporting our financial condition and results of operations, we report
two geographic operating segments. We generally evaluate our operating results
on a company-wide basis because the principal components of all of our products
are sourced from the United States and all research and development and
considerable marketing and administrative support are globally provided from the
United States. However, management reviews the operating results of our Denmark-
based subsidiary, Sonic Innovations A/S, to make decisions about resource
allocation and to assess performance.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                        Three months ended June 30,      Six months ended June 30,
                                          2000             1999            2000            1999
                                        ----------      ----------      ----------      ----------
<S>                                     <C>             <C>             <C>             <C>
Net sales......................              100.0 %         100.0 %         100.0 %         100.0 %
Cost of sales..................               49.9            62.6            49.6            74.7
                                        ----------      ----------      ----------      ----------

Gross profit...................               50.1            37.4            50.4            25.3

Selling, general and                          36.2            92.8            35.4           102.8
 administrative................
Research and development.......               15.4            31.2            15.2            36.4
Stock-based compensation.......                4.6             1.4             5.2             1.0
                                        ----------      ----------      ----------      ----------


Operating loss.................               (6.1)          (88.0)           (5.4)         (114.9)

Other expense..................               (3.5)           (4.5)           (4.6)           (2.9)
                                        ----------      ----------      ----------      ----------

Net loss.......................               (9.6)%         (92.5)%         (10.0)%        (117.8)%
                                        ==========      ==========      ==========      ==========
</TABLE>

                                      -7-
<PAGE>

     Net Sales. Sales are recognized when products are shipped. Net sales
consist of product sales less a provision for sales returns which is made at the
time of sale. Net sales were $13.1 million for the quarter ended June 30, 2000,
an increase of $7.5 million from net sales of $5.6 million for the quarter ended
June 30, 1999. The net sales increase for the quarter ended June 30, 2000
included $1.6 million of branded product international sales (our European
operation was in the process of developing a distribution network in early 1999)
and $4.1 million of hearing aid component sales (the second quarter 1999 was the
first quarter of hearing aid component sales). The balance of the net sales
increase of $1.8 million resulted principally from branded product sales in the
United States.

     Net sales were $25.5 million for the six months ended June 30, 2000, an
increase of  $16.6 million from net sales of $8.9 million for the six months
ended June 30, 1999.   The net sales increase for the six months ended June 30,
2000 included $3.2 million of branded product international sales, $9.2 million
of hearing aid component sales and $4.2 million of branded product sales in the
United States.  U.S. branded product sales in 2000 benefited from the
introduction of our CONFORMA product in early 2000.

     We have a 90-day return period for our branded products and do not allow
returns of our hearing aid components.  Sales returns aggregated $3.0 million
and $2.3 million for the quarters ended June 30, 2000 and 1999, respectively,
and $5.7 million and $3.7 million for the six months ended June 30, 2000 and
1999, respectively. This increase principally related to the increase in net
sales from 1999 to 2000.   We believe that the hearing aid industry in the
United States experiences a high level of product returns due to factors such as
statutorily required liberal return policies and product performance
inconsistent with consumers' expectations. We believe our return levels are
within the range experienced by other hearing aid manufacturers with higher-end,
higher-priced products.  We expect sales returns of our NATURA products to
continue at or below historical levels. We believe that our CONFORMA product has
the potential to experience lower levels of returns in the future. However,
because our experience with CONFORMA at this point is limited, we are unable to
predict whether our return levels on our CONFORMA product will achieve lower
levels of returns at some future time.

     Cost of Sales. Cost of sales consists of manufacturing costs, royalty
expenses, quality assurance costs and costs associated with product returns,
remakes and repairs. Cost of sales was $6.5 million for the quarter ended June
30, 2000, an increase of $3.0 million from cost of sales of $3.5 million for the
quarter ended June 30, 1999.  For the first six months of 2000, cost of sales
was $12.7 million, an increase of $6.1 million from cost of sales of $6.6
million for the six months ended June 30, 1999. The increase was primarily due
to the increase in net sales. As a percentage of net sales, gross profit
increased to 50.1% for the quarter ended June 30, 2000 from 37.4% for the
quarter ended June 30, 1999 as a result of a significant increase in higher
margin hearing aid component sales, the fixed costs of our manufacturing
operations being spread over a much greater sales level and operating
efficiencies derived from producing at higher quantities. In addition, during
the initial phase of selling products in 1998 and early 1999, we were required
to outsource some of our production, which adversely impacted our costs. We
discontinued this outsourcing in April 1999 as we developed the capability to
manufacture our requirements internally.

     We provide for the cost of remaking and repairing products under warranty,
including hearing aid components. The warranty period is generally one or two
years for branded products and 30 to 120 days for hearing aid components.  In
the quarters ended June 30, 2000 and 1999, the warranty costs were $.4 million
and $.2 million, respectively and $.9 million and $.5 million for the six months
ended June 30, 2000 and 1999, respectively.

     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 and
administrative expenses. Selling, general and administrative expense was $4.8
million for the quarter ended June 30, 2000, a decrease of $ .4 million, or
9.3%, from the $5.2 million recorded for the quarter ended June 30, 1999.  For
the first six months of 2000, selling, general and administrative expense was
$9.0 million, a decrease of $.1 million from the $9.1 recorded for the six
months ended June 30, 1999.  This decrease was largely due to unusual and non-
recurring charges for severance and a provision for uncollectable accounts
totaling approximately $.8 million in 1999. The

                                      -8-
<PAGE>

decrease was offset somewhat by costs associated with adding new customers in
2000, product launch expenses for CONFORMA and NATURA 2 and additional
headcount.

  We expect sales and marketing expense to increase as we expand our staff,
incur additional costs related to the anticipated growth of our business and,
pursue an aggressive branding and advertising campaign, possibly including
direct-to-consumer advertising and promotions. Sales and marketing expenses may
also vary considerably from quarter to quarter as a result of the timing of our
advertising campaigns. To the extent that our sales volume increases in future
periods, we expect sales and marketing expenses to increase as we expand our
customer service, distribution and fulfillment activities. This includes the
costs of staffing and further developing our direct sales force and customer
care capabilities.

  Research and Development. Research and development expense consists primarily
of wages and benefits for personnel and consulting, software, intellectual
property, clinical study and engineering support costs. Research and development
expense was $2.0 million for the quarter ended June 30, 2000, an increase of $.2
million, or 15%, from the $1.8 million recorded for the quarter ended June 30,
1999. For the first six months of 2000, research and development expense was
$3.9 million, an increase of $.7 million from the $3.2 million recorded for the
six months ended June 30, 1999. The increase was primarily due to a push to
bring CONFORMA 2 to market on an accelerated timetable. We are making continual
efforts to improve our existing products as well as to develop new products
because we believe that new products are critical to our long-term success. As a
result, we expect research and development expense to continue to increase.

  Stock-Based Compensation. We have recorded deferred stock-based compensation
of  $4.6 million, representing the difference between the exercise price and the
deemed fair value of the common stock on the grant date for stock options
granted in 1999. This amount is being amortized over the vesting periods of the
individual stock options.  For the quarters ended June 30, 2000 and 1999, $.6
million and  $.1 million were amortized, respectively.  For the six months ended
June 30, 2000 and 1999, $1.3 million and $.1 million were amortized,
respectively.  The remaining amount of $2.3 million as of June 30, 2000 is
expected to be amortized as follows (in millions):


        July 1, 2000 to December 31, 2000                       $   .74
        2001                                                        .92
        2002                                                        .42
        2003                                                        .16
        2004                                                        .04
        2005                                                        .02
                                                                 ------

                                                                $  2.30
                                                                 ======

  Other Expense. Other expense consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                Three months ended June 30,             Six months ended June 30,
                                                  2000               1999                 2000             1999
                                                --------           --------             --------         --------
<S>                                             <C>                <C>                  <C>             <C>
Interest income........................         $    489           $     25             $    496        $     121
Interest expense.......................              (57)              (150)                (159)            (223)
Foreign currency exchange loss.........             (106)              (127)                (283)            (148)
Non-cash interest and conversion
 charges...............................             (778)                 -               (1,243)               -
                                                --------           --------             --------         --------
                                                $   (452)          $   (252)            $ (1,189)        $   (250)
                                                ========           ========             ========         ========
</TABLE>


Interest income increased significantly due to investing the IPO proceeds which
were received on May 5, 2000.

                                      -9-
<PAGE>

The non-cash charges for the quarter and six months ended June 30, 2000 related
to the following:

 .  Imputed interest charges on bank financings issued with warrants as a result
   of allocating the initial proceeds between the debt and warrants of $102,000
   and $204,000, respectively;

 .  Beneficial conversion feature offered on certain convertible debt of
   $535,000 for the quarter and six months ended June 30, 2000;

 .  Imputed interest charges on convertible debt financings issued with warrants
   as a result of allocating the initial proceeds between the debt and warrants
   of $79,000 and $316,000, respectively; and

 .  Interest accrued on converted debt totaling $62,000 and $189,000,
   respectively.

  Net Loss.  Pro forma net loss (see note 9 to the condensed consolidated
financial statements) for the three and six months ended June 30, 2000 was
$582,000 ($.03 per share) and $1,519,000 ($.09 per share), respectively, based
on shares outstanding of 17,944,000 and 16,413,000 respectively.

LIQUIDITY AND CAPITAL RESOURCES

  We completed an initial public offering ("IPO") on May 5, 2000 in which we
sold 4,140,000 shares (including 540,000 shares pursuant to the underwriters
overallotment option) at $14.00 per share.  Net proceeds from the IPO, after
deducting the underwriting discount and estimated offering expenses, were
approximately $52.2 million.  We also received $6.0 million from Hoya Healthcare
Corporation, a distributor of our branded products in Japan, under a convertible
note purchase agreement.

  Net cash used in operating activities of $5.9 million for the six months ended
June 30, 2000 primarily funded ongoing operations and supported increases in
accounts receivable and inventories.

  To date, our investing activities have consisted mainly of purchases of
property and equipment  and marketable securities. Capital expenditures totaled
$1.0 million for the six months ended June 30, 2000.  We expect to increase
capital expenditures consistent with our anticipated growth in operations,
infrastructure and personnel.

  At June 30, 2000, we had $55.4 million in cash, cash equivalents and
marketable securities. We allowed our $4.5 million line of credit to expire on
June 30, 2000.

  We expect to experience growth in our operating expenses in order to execute
our business plan, particularly in the areas of research and development and
sales and marketing. As a result, we estimate that these operating expenses, as
well as other expenditures we expect to incur to improve our manufacturing
capability and increase our manufacturing capacity, will constitute a
significant use of our cash resources on an ongoing basis.  Also, we will need
cash to finance increased working capital requirements, particularly accounts
receivable and inventory.  In addition, we may use cash resources to fund
acquisitions of complementary businesses and technologies; however, we currently
have no commitments or agreements regarding such transactions. We believe that
our available cash will be sufficient to meet our operating and working capital
requirements and capital expenditures for at least the next 12 months.
Thereafter, we may find it necessary to obtain additional equity or debt
financing. In the event that additional financing is required, we may not be
able to raise it on terms acceptable to us, if at all.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  Interest Rate Risk.  To date, we have not utilized derivative financial
instruments or derivative commodity instruments. We invest our cash in money
market funds and short-term investment grade debt securities which we believe
are subject to minimal credit and market risk. All of our outstanding debt with
the exception of certain capital lease debt was repaid or converted to common
stock in connection with our IPO.

  Foreign Currency Risk.  We face foreign currency risks primarily as a result
of sales made in European currencies and local currency costs incurred by our
Danish operation.  Fluctuations in the exchange rates between the U.S. dollar
and certain European currencies could increase the sales price of

                                      -10-
<PAGE>

our products in international markets where the prices of our products are
denominated in U.S. dollars or lead to currency exchange losses where the prices
of our products are denominated in local currencies. In addition, we have an
intercompany account balance between our U.S. company and our Danish company
which is subject to the effects of foreign currency translation. We have
recorded foreign currency translation losses of $.1 million and $.3 million in
other expense for the three and six months ended June 30, 2000, respectively.

FACTORS THAT MAY AFFECT FUTURE PERFORMANCE

WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOWS FROM OPERATING ACTIVITIES,
AND WE EXPECT OUR OPERATING EXPENSES TO CONTINUE TO INCREASE

  We have incurred net losses of $39.3 million for the period from inception
through June 30, 2000, including a net loss of $1.3 million in the quarter ended
June 30, 2000. We incurred negative cash flows of $5.9 million from operating
activities for the six months ended June 30,  2000. We have not achieved
profitability. We may incur net losses and negative cash flows in the future.
The size of our losses and whether or not we achieve profitability will depend
in significant part on the rate of growth in our net sales.

  We intend to increase our operating expenses and must generate additional
revenues to achieve profitability. Consequently, it is possible that we will not
achieve profitability, and even if we do achieve profitability, we may not
sustain or increase profitability on a quarterly or annual basis in the future.

WE EXPECT OUR FINANCIAL RESULTS TO FLUCTUATE SIGNIFICANTLY, WHICH MAY CAUSE OUR
STOCK PRICE TO DECLINE

  Our quarterly and annual operating results have fluctuated in the past and are
likely to fluctuate significantly in the future. These fluctuations could cause
our stock price to fluctuate significantly or decline. Factors that may cause
fluctuations in our operating results include the following:  demand for and
market acceptance of our products; manufacturing problems; high levels of
returns, remakes and repairs; and changes in our product or customer mix.
Factors that have not significantly affected our operating results in the past,
but may do so in the future, include the following: cancellation or changes in
the timing of product orders, particularly significant orders from other hearing
aid manufacturers for our hearing aid components; competitive pressures
resulting in lower selling prices or significant promotional costs;
unanticipated delays or problems in the introduction of new products; inaccurate
forecasting of revenues; and the announcement or introduction of new products or
services by our competitors.

  If net sales for a particular period were below our expectations, it is
unlikely that we would proportionately reduce our operating expenses for that
period. Therefore, any revenue shortfall would have a disproportionately
negative effect on our operating results for the period.

  Due to these and other factors, we believe that quarter-to-quarter comparisons
of our operating results may not be meaningful. You should not rely on our
results for any one quarter as an indication of our future performance. In
future quarters, our operating results may be below the expectations of public
market analysts or investors. If this occurs, the market price of our common
stock would very likely decrease.

THE LOSS OF ANY LARGE CUSTOMER OR ANY CANCELLATION OR DELAY OF A SIGNIFICANT
PURCHASE BY A LARGE CUSTOMER COULD SIGNIFICANTLY REDUCE OUR NET SALES AND HARM
OUR OPERATING RESULTS

  In addition to selling finished hearing aids to a large number of hearing care
professionals and distributors, we also sell hearing aid components to a limited
number of hearing aid manufacturers. These arrangements have accounted for a
significant portion of our net sales to date. The loss of any of these large
customers, or a significant reduction in sales to these customers, would
significantly reduce our net sales and have a negative effect on our operating
results. For example, sales of components to Starkey Laboratories, Inc.
accounted for approximately $4.1 million, or 31%, of net sales in the quarter
ended June 30, 2000.  Although Starkey is contractually committed to purchase a
minimum quantity of components through 2001, if Starkey were to breach its
agreement or were to not buy components after 2001, our net

                                      -11-
<PAGE>

sales would decline substantially, and we may not be able to recover the lost
revenue through other means. In addition, Starkey's purchase commitment only
covers annual periods and quarterly purchases could therefore be subject to
significant fluctuation. We anticipate that our operating results in any given
period will continue to depend to a significant extent upon revenues from a
small number of large customers.

  Other than Starkey, our customers are not generally contractually obligated to
purchase any fixed quantities of products, and they may stop placing orders with
us at any time regardless of any forecast they may have previously provided. If
any of our larger customers were to stop or delay purchases, our net sales and
operating results would be adversely affected, particularly on a quarterly
basis, which could cause our stock price to decline. We may be unable to retain
our current customers, and we may be unable to recruit replacement or additional
customers.

WE RELY ON SEVERAL SOLE SOURCE OR LIMITED SOURCE SUPPLIERS AND MANUFACTURERS,
AND OUR PRODUCTION WILL BE SERIOUSLY HARMED IF THESE SUPPLIERS AND MANUFACTURERS
ARE NOT ABLE TO MEET OUR DEMAND AND ALTERNATIVE SOURCES ARE NOT AVAILABLE

  A number of key components used in our products are currently available only
from a single or limited number of suppliers. For example, our proprietary
digital signal processing, or DSP, chips are manufactured by a single supplier.
In addition, the disposable tip used in our CONFORMA hearing aid is produced by
a single supplier and the receivers and microphones used in our products are
available from only two suppliers. We also rely on contract manufacturers and
are therefore subject to their performance, over which we have little control.
We may be forced to cease producing our products if we experience significant
shortages of critical components from these key suppliers or lose the services
of our contract manufacturers. Finding a substitute part, process, supplier or
manufacturer may be expensive, time-consuming or impossible.

WE HAVE NEW PRODUCTS AND A LIMITED SELLING HISTORY, WHICH MAKES IT DIFFICULT TO
EVALUATE OUR BUSINESS, AND OUR OPERATING RESULTS WILL SUFFER IF OUR PRODUCTS DO
NOT GAIN MARKET SHARE AS RAPIDLY AS WE ANTICIPATE

  We launched NATURA, our first hearing aid product, in September 1998 and
introduced CONFORMA in March 2000. We have been generating revenue from selling
hearing aid components for approximately one year. Accordingly, we have a
limited selling history on which investors can base an evaluation of our
products, business and prospects. Our revenue and income potential are unproven,
and our business model will continue to evolve. For example, we have developed a
new integrated circuit that we introduced in our products in the second quarter
of 2000. If our current and new products do not gain market share as rapidly as
we anticipate, our operating results will suffer.

WE HAVE HIGH LEVELS OF PRODUCT RETURNS, REMAKES AND REPAIRS, AND OUR NET SALES
AND OPERATING RESULTS WILL BE LOWER IF THESE LEVELS REMAIN HIGH OR INCREASE

  We offer a 90-day return policy and a minimum of a one-year warranty on our
products. To date, we have experienced high levels of returns, remakes and
repairs. Our sales returns were $3.0 million in the quarter ended June 30, 2000.
Our warranty costs for remake and repair were $.4 million in the quarter ended
June 30, 2000. We may not be able to attain lower levels of returns, remakes and
repairs and these levels may increase, either of which could reduce our net
sales and operating results.

WE FACE AGGRESSIVE COMPETITION IN OUR BUSINESS, AND IF WE DO NOT COMPETE
EFFECTIVELY OUR NET SALES AND OPERATING RESULTS WILL SUFFER

  We encounter aggressive competition from over 30 competitors worldwide, many
of which have far greater sales and more extensive financial and business
resources than we have. We may not be able to compete effectively with these
competitors. Consolidation within the industry has accelerated in the last
several years, and further consolidation could produce stronger competitors.  If
we fail to compete effectively, our net sales and operating results will suffer.

                                     -12-
<PAGE>

IF WE FAIL TO DEVELOP NEW AND INNOVATIVE PRODUCTS, OUR COMPETITIVE POSITION MAY
SUFFER

   In order to be successful, we must develop new products and be a leader in
the commercialization of new technology innovations in the hearing aid market.
Technological innovation is expensive and unpredictable and may require hiring
expert personnel who are difficult to find and attract. Without the timely
introduction of new products, our existing products are likely to become
technologically obsolete over time, which would harm our business.

  We may not have the technical capabilities necessary to develop
technologically innovative products. In addition, any enhancements to or new
generations of our products, even if successfully developed, may not generate
revenue in excess of the costs of development. Our products may be rendered
obsolete by changing consumer preferences or the introduction of products
embodying new technologies or features by our competitors.

SELLING HEARING AID COMPONENTS TO OUR COMPETITORS MAY INCREASE THEIR COMPETITIVE
POSITION RELATIVE TO OURS IF THEY DESIGN AND MANUFACTURE MORE COMPETITIVE
HEARING AIDS OR MARKET THEIR PRODUCTS MORE EFFECTIVELY THAN WE MARKET OURS

  Our business strategy of selling hearing aid components to our competitors may
place us in a vulnerable position. We may find that these competitors are able
to capture a larger portion of the finished hearing aid market, limiting our
ability to expand our share of the finished hearing aid market. This could harm
our net sales growth and operating results.

WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY BE UNABLE TO EXPAND OUR
MANUFACTURING CAPABILITIES SUFFICIENTLY OR TO FIND THIRD PARTIES TO MANUFACTURE
OUR PRODUCTS, WHICH WOULD LIMIT OUR ABILITY TO DEVELOP AND DELIVER SUFFICIENT
QUANTITIES OF PRODUCTS IN A TIMELY MANNER

  To be successful, we must manufacture our products in commercial quantities in
compliance with regulatory requirements at acceptable costs. We may not be able
to expand our manufacturing capabilities at acceptable costs or enter into
agreements with third parties with respect to these activities. We could incur
significant expenses, particularly if we expand our facilities and hire
additional personnel. We may seek collaborative arrangements with other
companies to manufacture current products or new products.

IF WE ARE UNABLE TO SUCCESSFULLY OUTSOURCE THE PRODUCTION OF CONFORMA, WE MAY BE
UNABLE TO DELIVER SUFFICIENT QUANTITIES OF CONFORMA IN A TIMELY MANNER

  We are currently producing CONFORMA both internally and externally. However,
we anticipate that we will eventually outsource all production of CONFORMA to a
third party manufacturer. If this manufacturer were unable to produce commercial
quantities of CONFORMA at an acceptable cost and quality level and meet customer
demand for CONFORMA, our net sales and operating results would be negatively
affected.

OUR ENTRY INTO ADDITIONAL DISTRIBUTION CHANNELS COULD HARM OUR RELATIONSHIPS
WITH EXISTING CUSTOMERS AND CAUSE THEM TO PURCHASE FEWER OF OUR PRODUCTS, WHICH
WOULD REDUCE OUR NET SALES AND OPERATING RESULTS

  We are currently exploring or testing additional distribution channels, such
as selling our hearing aids through alternative or emerging retail channels. Our
current initiatives or any future expansion of these initiatives could alienate
our traditional hearing care professional customers. It is possible that our
hearing care professional channel will react by reducing or discontinuing their
purchases from us. In such a scenario the resulting loss of revenue may not be
offset by our revenue from new distribution channels, and we may choose not to
continue using any of these new channels. Should hearing care professionals
react

                                      -13-
<PAGE>

unfavorably to our strategy, they would likely purchase fewer of our products,
which would reduce our net sales and operating results.

WE ARE DEPENDENT ON INTERNATIONAL SALES AND OPERATIONS, WHICH EXPOSES US TO
FOREIGN AND POLITICAL RISKS, INCLUDING THE BURDEN OF COMPLYING WITH A VARIETY OF
QUALITY ASSURANCE AND OTHER REGULATORY REQUIREMENTS, THAT COULD RESULT IN LOWER
INTERNATIONAL SALES

  We anticipate that international sales will continue to account for a material
portion of our sales. Our reliance on international sales and operations exposes
us to related risks and uncertainties which, if realized, could cause our
international sales and operating results to decrease.

COMPETITION FOR QUALIFIED PERSONNEL IS INTENSE IN TECHNOLOGY INDUSTRIES SUCH AS
OURS, AND WE MAY NOT BE ABLE TO MAINTAIN OR EXPAND OUR BUSINESS IF WE ARE UNABLE
TO HIRE AND RETAIN SUFFICIENT TECHNICAL, SALES, MARKETING AND MANUFACTURING
PERSONNEL

   If we are unable to hire and retain sufficient technical, sales, marketing
and manufacturing personnel, our business will suffer. We also must attract
qualified research scientists and engineers in order to continue to develop
innovative products. If we fail to retain and hire a sufficient number and type
of personnel, we will not be able to maintain and expand our business.

WE MAY ENCOUNTER DIFFICULTIES IN MANAGING OUR GROWTH, WHICH COULD ADVERSELY
AFFECT OUR OPERATING RESULTS

  We have experienced a period of rapid growth that has placed and may continue
to place a strain on our human and capital resources.  If we are unable to
manage this growth effectively, our operating results could suffer.

COMPLICATIONS MAY RESULT FROM HEARING AID USE, AND WE MAY INCUR SIGNIFICANT
EXPENSE IF WE ARE SUED FOR PRODUCT LIABILITY

  We may be held liable if any product we develop, or any product that uses or
incorporates any of our technologies, causes injury or is found otherwise
unsuitable.  Although we have not experienced any significant product liability
issues to date, product liability is an inherent risk in the production and sale
of hearing aid products.  If we are sued for an injury caused by our products,
the resulting liability could result in significant expense, which would harm
our operating results.

THIRD PARTIES HAVE CLAIMED AND MAY CLAIM IN THE FUTURE THAT WE ARE INFRINGING
THEIR INTELLECTUAL PROPERTY, AND WE COULD SUFFER SIGNIFICANT EXPENSE OR BE
PREVENTED FROM SELLING PRODUCTS IF THESE CLAIMS ARE SUCCESSFUL

  Third parties may claim that we are infringing their intellectual property
rights. While we do not believe that any of our products infringe the
proprietary rights of third parties, we may be unaware of intellectual property
rights of others that may cover some of our technology. Whether or not we
actually infringe a third party's rights, any litigation regarding patents or
other intellectual property could be costly and time-consuming and divert our
management and key personnel from our business operations. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements.

BECAUSE OUR SUCCESS DEPENDS ON OUR PROPRIETARY TECHNOLOGY, IF THIRD PARTIES
INFRINGE OUR INTELLECTUAL PROPERTY, WE MAY BE FORCED TO EXPEND SIGNIFICANT
RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE INJURY

  Our success depends in large part on our proprietary technology. We rely on a
combination of patents, copyrights, trademarks, trade secrets, confidentiality
procedures and licensing arrangements to establish

                                     -14-
<PAGE>

and protect our proprietary technology. If we fail to successfully enforce our
intellectual property rights, our competitive position will suffer.

IF WE FAIL TO COMPLY WITH A VARIETY OF GOVERNMENTAL REGULATIONS, WE MAY SUFFER
FINES, INJUNCTIONS OR OTHER PENALTIES


  Our products are considered to be medical devices and are, accordingly,
subject to extensive regulation in the United States and internationally, which
may hamper the timing of our product introductions or subject us to costly
penalties in the event we fail to comply.

  We must comply with facility registration and product listing requirements of
the Food and Drug Administration, or FDA, and adhere to its Quality System
regulations. The FDA enforces the Quality System regulations through periodic
inspections, which we have yet to undergo. If we or any third-party
manufacturers of our products do not conform to the Quality System regulations,
we will be required to find alternative manufacturers that do conform, which
could be a long and costly process. Noncompliance with applicable FDA
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production or criminal
prosecution.

  Sales of our products outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approvals required by other countries may be longer than that
required for FDA clearance or approval, and requirements for such approvals may
differ from FDA requirements. In order to market our products in the 15 member
countries of the European Union, we are required to obtain the EU's CE mark
certification, which we accomplished by meeting the requirements of ISO 9001 in
December 1998. Any failure to maintain our ISO 9001 certification or CE mark
could significantly reduce our net sales and operating results.


TECHNOLOGY STOCKS HAVE EXPERIENCED EXTREME VOLATILITY, AND OUR STOCK PRICE COULD
BE EXTREMELY VOLATILE. CONSEQUENTLY, YOU MAY NOT BE ABLE TO RESELL YOUR SHARES
AT OR ABOVE THE PRICE YOU PAID FOR THEM

     The stock market in general, and technology stocks in particular, have
experienced extreme volatility that has often been unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of our common stock.

THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK 180 DAYS AFTER
OUR PUBLIC OFFERING, OR EARLIER, BY OUR STOCKHOLDERS, AND THESE SALES COULD
CAUSE OUR STOCK PRICE TO FALL

     Sales of substantial amounts of our common stock in the public market, or
the perception that such sales will occur, could adversely affect the market
price of our common stock and make it difficult for us to raise funds through
equity offerings in the future. A substantial number of outstanding shares of
common stock and shares issuable upon exercise of outstanding options and
warrants will become available for resale in the public market at prescribed
times. Approximately 15.0 million of the approximately 19.6  shares of our
common stock outstanding  will become available for resale in the public market
on October 28, 2000, or earlier in Goldman, Sachs & Co.'s sole discretion,
subject to volume limitations in the case of shares held by our affiliates.

INSIDERS HAVE SUBSTANTIAL CONTROL OVER US, WHICH COULD DELAY OR PREVENT A CHANGE
IN CONTROL AND MAY NEGATIVELY AFFECT YOUR INVESTMENT

     Our officers, directors and their affiliated entities will together control
approximately 59% of our outstanding common stock. As a result, these
stockholders, if they act together, will be able to exert a significant degree
of influence over our management and affairs and over matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, this concentration of ownership
may delay or prevent a change in control and might affect the market price of
our common stock, even when a change may be in the best interests of all
stockholders.

                                     -15-
<PAGE>

PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DETER TAKEOVER EFFORTS
THAT YOU FEEL WOULD BE BENEFICIAL TO STOCKHOLDER VALUE

     Our certificate of incorporation and bylaws and Delaware law contain
provisions which could make it harder for a third party to acquire us without
the consent of our board of directors. While we believe these provisions provide
for an opportunity to receive a higher bid by requiring potential acquirors to
negotiate with our board of directors, these provisions apply even if the offer
may be considered beneficial by some stockholders and a takeover bid otherwise
favored by a majority of our stockholders might be rejected by our board of
directors.


PART II  OTHER INFORMATION

ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS

     On May 5, 2000, we completed the sale of an aggregate of 4,140,000 shares
of our common stock, par value $0.001 per share, at a price of $14.00 per share
in a firm commitment underwritten initial public offering (the "IPO). The IPO
was effected pursuant to a Registration Statement on Form S-1 (Registration No.
333-30566), which the United States Securities and Exchange Commission declared
effective on May 1, 2000. Goldman, Sachs & Co., Deutsche Bank Securities, Inc.
and U.S. Bancorp Piper Jaffray Inc. were the lead underwriters for the offering.

  Of the $58.0 million in aggregate proceeds we raised in the IPO, (i) $4.1
million was paid to underwriters in connection with the underwriting discount,
and (ii) approximately $1.7 million was paid or will be paid in connection with
offering expenses, printing fees, filing fees, and legal and accounting fees.
There were no other direct or indirect payments to directors or officers of
Sonic Innovations or any other person or entity.   Through June 30, 2000,
approximately $.6 million was used to purchase property and equipment, $2.2
million was used to fund working capital increases.  The balance has been
invested in investment-grade debt securities and money market instruments.
These funds may be used for general corporate purposes, including funding the
company's operations; further development and commercialization of our products;
research and development; repayment of remaining  capital lease obligations;
working capital; and possible acquisitions or investments. The amounts and
timing of our actual expenditures for each of these purposes may vary
significantly depending upon numerous factors, including the status of our
product development efforts, competition, marketing and sales activities and
market acceptance of our products. Pending use for these or other purposes, we
intend to continue to invest the balance of the IPO proceeds in short-term,
investment-grade securities.

  Effective upon the closing of the IPO, all previously outstanding preferred
stock converted into common stock, and we filed an Amended and Restated
Certification of Incorporation in the form set forth in an exhibit to the
registration statement.

                                     -16-
<PAGE>

ITEM 4.    EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits


Exhibit
Number          Description
-------         -----------
27.1            Financial Data Schedule.


(b)  Reports on Form 8-K.

     None.

                                   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.

                                SONIC INNOVATIONS, INC.
                                -----------------------
                                     (Registrant)


Date:  August 14, 2000          /s/ Stephen L. Wilson
                                ------------------------------------------------
                                Stephen L. Wilson
                                Vice President and Chief Financial Officer
                                (Duly Authorized Officer and Principal Financial
                                Officer)


                                     -17-