<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 SEPTEMBER 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 November 7, 2000 there were 19,708,799 shares of the registrant's common
stock outstanding.
<PAGE>

                            SONIC INNOVATIONS, INC.
                               TABLE OF CONTENTS

                                   FORM 10-Q


<TABLE>
<CAPTION>
                                                                                                                       Page
PART I  FINANCIAL INFORMATION

ITEM 1.  Condensed Consolidated Financial Statements (unaudited):
<S>           <C>                                                                                                    <C>
              Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999                          1

              Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
              September 30, 2000 and 1999                                                                                   2

              Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and              3
              1999

              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                                                                        10

PART II  OTHER INFORMATION

ITEM 1.  Legal Proceedings                                                                                                 16

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)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                      September 30, 2000     December 31, 1999
                                                                                     --------------------  ---------------------
                                      ASSETS
Current Assets:
<S>                                                                                  <C>                   <C>
Cash and cash equivalents..........................................................             $ 21,682               $  5,939
Marketable securities..............................................................               29,433                      -
Accounts receivable, net...........................................................               14,346                  4,925
Inventories........................................................................                4,755                  2,368
Prepaid expenses and other.........................................................                  462                    698
                                                                                                --------               --------
      Total current assets.........................................................               70,678                 13,930

Property and equipment, net........................................................                3,985                  3,738
Other assets.......................................................................                  215                    794
                                                                                                --------               --------

      Total assets.................................................................             $ 74,878               $ 18,462
                                                                                                ========               ========

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable and accrued expenses..............................................             $  8,564               $  8,055
Line of credit and convertible promissory notes....................................                    -                 10,030
Current portion of long-term obligations...........................................                  554                    964
                                                                                                --------               --------
      Total current liabilities....................................................                9,118                 19,049

Capital lease obligations, net of current portion..................................                  531                  1,935
Technology license obligation, net of current portion..............................                  150                    150

Mandatorily redeemable convertible preferred stock.................................                    -                 36,129

Stockholders' Equity (Deficit):
Preferred stock....................................................................                    -                    342
Common stock.......................................................................                   20                      2
Additional paid-in capital.........................................................              111,721                  6,256
Deferred stock-based compensation..................................................               (1,908)                (3,613)
Accumulated deficit and comprehensive loss.........................................              (44,754)               (41,788)
                                                                                                --------               --------
      Total stockholders' equity (deficit).........................................               65,079                (38,801)
                                                                                                --------               --------

        Total liabilities and stockholders' equity (deficit).......................             $ 74,878               $ 18,462
                                                                                                ========               ========
</TABLE>


  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     Nine months ended
                                                                     September 30,         September 30,
<S>                                                               <C>       <C>        <C>        <C>
                                                                     2000      1999       2000        1999
                                                                   -------   -------    -------    --------
Net sales.......................................................   $14,003   $ 8,370    $39,520    $ 17,233
Cost of sales...................................................     6,778     4,536     19,435      11,160
                                                                   -------   -------    -------    --------

Gross profit....................................................     7,225     3,834     20,085       6,073

Selling, general and administrative expense.....................     4,765     4,107     13,802      13,216
Research and development expense................................     2,028     1,943      5,910       5,167
Stock-based compensation expense................................       394       147      1,705         240
                                                                   -------   -------    -------    --------

Operating profit (loss).........................................        38    (2,363)    (1,332)    (12,550)

Other income (expense), net.....................................       627      (294)      (562)       (544)
                                                                   -------   -------    -------    --------

Net income (loss)...............................................       665    (2,657)    (1,894)    (13,094)

Accretion on mandatorily redeemable convertible preferred
  stock.........................................................         -      (621)      (959)     (1,792)
                                                                   -------   -------    -------    --------

Net income (loss) applicable to common stockholders.............   $   665   $(3,278)   $(2,853)   $(14,886)
                                                                   =======   =======    =======    ========

Net income (loss) per common share:
     Basic                                                         $   .03   $ (2.39)   $  (.25)   $ (11.18)
                                                                   =======   =======    =======    ========
     Diluted                                                       $   .03   $ (2.39)   $  (.25)   $ (11.18)
                                                                   =======   =======    =======    ========

Weighted average number of common shares outstanding:
     Basic                                                          19,633     1,371     11,369       1,331
                                                                   =======   =======    =======    ========
     Diluted                                                        21,574     1,371     11,369       1,331
                                                                   =======   =======    =======    ========

Pro forma information:
Net income (loss)                                                  $   665   $(2,455)   $  (854)   $(12,892)
                                                                   =======   =======    =======    ========
Net income (loss) per common share:
     Basic                                                         $   .03   $  (.17)   $  (.05)   $   (.93)
                                                                   =======   =======    =======    ========
     Diluted                                                       $   .03   $  (.17)   $  (.05)   $   (.93)
                                                                   =======   =======    =======    ========

Weighted average number of common shares outstanding:
     Basic                                                          19,633    14,254     17,495      13,859
                                                                   =======   =======    =======    ========
     Diluted                                                        21,574    14,254     17,495      13,859
                                                                   =======   =======    =======    ========

Amount of stock-based compensation allocable to each caption:
Cost of sales...................................................   $    18   $     7    $    79    $     12
Selling general and administrative expense......................       323       120      1,396         196
Research and development expense................................        53        20        230          32
                                                                   -------   -------    -------    --------

                                                                   $   394   $   147    $ 1,705    $    240
                                                                   =======   =======    =======    ========
</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>
                                                                                                           Nine months ended
                                                                                                             September 30,
                                                                                                         2000             1999
                                                                                                       --------         --------
<S>                                                                                             <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................................         $ (1,894)        $(13,094)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization...............................................................            1,162              934
  Preferred stock issued for services.........................................................                -               18
  Expenses related to remeasurement of stock options..........................................                -              170
  Non-cash imputed interest expense...........................................................            1,244                -
  Stock-based compensation....................................................................            1,705              240
  Loss on disposal of assets..................................................................               17                -
  Changes in assets and liabilities:
    Accounts receivable.......................................................................           (9,974)          (2,678)
    Inventories...............................................................................           (2,486)          (1,934)
    Prepaid expenses and other................................................................               20             (367)
    Other assets..............................................................................              578             (567)
    Technology license obligation.............................................................                -              (70)
    Accounts payable and accrued expenses.....................................................              915            2,584
                                                                                                       --------         --------

      Net cash used in operating activities...................................................           (8,713)         (14,764)
                                                                                                       --------         --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................................................           (1,448)            (896)
Purchase of marketable securities.............................................................          (29,433)               -
                                                                                                       --------         --------

      Net cash used in investing activities...................................................          (30,881)            (896)
                                                                                                       --------         --------

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            4,500
Line of credit borrowings (repayments)........................................................           (1,966)           1,195
Repayments of long-term obligations...........................................................           (1,814)            (253)
Proceeds from exercise of stock options.......................................................              742               32
                                                                                                       --------         --------

      Net cash provided by financing activities...............................................           55,168            5,474
                                                                                                       --------         --------

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS..................................              169               48
                                                                                                       --------         --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..........................................           15,743          (10,138)
CASH AND CASH EQUIVALENTS, beginning of the period............................................            5,939           11,979
                                                                                                       --------         --------

CASH AND CASH EQUIVALENTS, end of the period..................................................         $ 21,682         $  1,841
                                                                                                       ========         ========

SUPPLEMENTAL CASH FLOW INFORMATION:
  Cash paid for interest......................................................................         $    194         $    335

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING
   ACTIVITIES:
  Equipment acquired under capital leases.....................................................         $      -         $  1,443
  Mandatorily redeemable convertible preferred stock accretion................................              959            1,792
  Conversion of convertible promissory notes and related accrued interest to equity...........           15,103                -
  Conversion of preferred stock to common stock...............................................           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 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 presentation have been included. The results of operations
for the interim periods presented are not necessarily indicative of results that
may be expected 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 September 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

    The Company had one customer that comprised 26% and 30% of net sales for the
three and nine months ended September 30, 2000, respectively.  As of September
30, 2000, this customer accounted for approximately 60% of the net accounts
receivable balance. (See "Factors that may effect future performance -- 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").

4.  COMPREHENSIVE INCOME (LOSS)

    Comprehensive income (loss) consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   Three months            Nine months
                                                                ended September 30,    ended September 30,
                                                                 2000        1999        2000       1999
                                                                -------     -------     -------   --------
<S>                                                            <C>       <C>          <C>         <C>
Net income (loss)............................................   $   665     $(2,657)    $(1,894)  $(13,094)
Foreign currency loss........................................      (168)         (8)       (113)       (64)
                                                                -------     -------     -------   --------

Comprehensive income (loss)..................................   $   497     $(2,665)    $(2,007)  $(13,158)
                                                                =======     =======     =======   ========
</TABLE>

5.  NET INCOME (LOSS) PER COMMON SHARE

    Basic and diluted net income (loss) per common share were computed by
dividing net income (loss) applicable to common stockholders by the weighted
average number of common shares outstanding.  Common stock equivalents were not
considered in computing net loss per share amounts since their effect would be
antidilutive, thereby decreasing the net loss per common share.  The difference
between basic and diluted common shares outstanding for the quarter ended
September 30, 2000 is the assumed exercise of 2,517,000 common stock options
which resulted in a diluted effect of 1,941,000 shares after applying the
treasury stock method.


6.  INCOME TAXES

    There was no income tax provision for the quarter ended September 30, 2000
because the Company had a year-to-date pre-tax loss.

                                       -4
<PAGE>

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

7.  SEGMENT INFORMATION

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

<TABLE>
<CAPTION>
     Three months ended September 30, 2000       United States   Europe     Total
     -------------------------------------       -------------   ------     -----
<S>                                              <C>             <C>      <C>
Net sales to external customers                       $ 12,338   $1,665   $ 14,003
Operating profit (loss)                                    268     (230)        38

     Three months ended September 30, 1999       United States   Europe     Total
     -------------------------------------       -------------   ------     -----

Net sales to external customers                       $  7,181   $1,189   $  8,370
Operating loss                                          (2,176)    (187)    (2,363)

     Nine months ended September 30, 2000        United States   Europe     Total
     ------------------------------------        -------------   ------     -----

Net sales to external customers                       $ 34,271   $5,249   $ 39,520
Operating loss                                            (709)    (623)    (1,332)

     Nine months ended September 30, 1999        United States   Europe     Total
     ------------------------------------        -------------   ------     -----

Net sales to external customers                       $ 14,735   $2,498   $ 17,233
Operating loss                                         (11,745)    (805)   (12,550)
</TABLE>

U.S. net sales include export sales.

8.  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.

9.  INITIAL PUBLIC OFFERING

    The Company filed a registration statement with the Securities and Exchange
Commission that became effective on May 1, 2000 and sold 4,140,000 shares at
$14.00 per share. The Company received net proceeds of $52.2 million.

   In connection with the IPO the following items were converted into common
stock:
   .  All outstanding convertible preferred stock into 12,532,786 common shares;
   .  $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;
   .  $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;
   .  $3.0 million of convertible promissory notes issued on the closing of the
      IPO into 214,285 shares of common stock at a conversion price equal to
      100% of the IPO price; and
   .  Outstanding warrants to purchase 203,727 shares of common stock (net of
      33,126 shares surrendered in lieu of cash payment of the exercise price
      for certain warrants), at an exercise price of $3.80 per share.

                                       -5
<PAGE>

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

10.  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 income (loss) per common share for the three and
nine months ended September 30, 2000 and 1999 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                  Three months ended September 30,   Nine months ended September 30,
                                                                        2000             1999             2000             1999
                                                                        ----             ----             ----             ----
<S>                                                           <C>              <C>               <C>              <C>
Numerator:
Net income (loss) applicable to common stockholders.........          $   665          $(3,278)         $(2,853)        $(14,886)
Reversal of interest expense on convertible promissory notes                -              202              505              202
Reversal of accretion on convertible preferred stock........                -              621              959            1,792
Reversal of beneficial conversion feature on certain
  convertible promissory notes..............................                -                -              535                -
                                                                      -------          -------          -------         --------

Pro forma net income (loss).................................          $   665          $(2,455)         $  (854)        $(12,892)
                                                                      =======          =======          =======         ========

Denominator:
Weighted average number of common shares outstanding........           19,633            1,371           11,369            1,331
Conversion of convertible preferred stock...................                -           12,533            5,718           12,412
Conversion of convertible promissory notes..................                -              231              315               78
Exercise of warrants........................................                -              119               93               38
                                                                      -------          -------          -------         --------

Pro forma weighted average number of common shares
  outstanding...............................................           19,633           14,254           17,495           13,859
                                                                      =======          =======          =======         ========
</TABLE>

11.  LEGAL PROCEEDINGS

     The Company is currently a defendant in a lawsuit filed in October 2000
claiming that the Company and certain of its officers and directors violated the
federal securities laws by providing materially false and misleading
information, or concealing information, about the Company's relationship with
Starkey Laboratories, Inc. This lawsuit, which is pending in the U.S. District
Court for the District of Utah, purports to be brought as a class action on
behalf of all purchasers of the Company's common stock from May 2, 2000 to
October 24, 2000 and seeks damages in an unspecified amount. The complaint
alleges that as a result of false statements or omissions, the Company was able
to complete its IPO, artificially inflate its second and third quarter
projections and results and have its stock trade at inflated levels. The Company
strongly denies these allegations and will defend itself vigorously; however,
litigation is inherently uncertain and there can be no assurance that the
Company will not be materially affected.

     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 forward-looking statements include statements
regarding the following:  estimated levels of sales returns, increased sales and
marketing expense, additional customers, expansions in staff, expanded product
offerings, anticipated growth of our business, future branding and advertising
campaigns, expanded customer service, distribution and fulfillment activities,
increased research and development expense, amortization of stock-based
compensation, collection of the Starkey accounts receivable balance, increased
capital expenditures, growth in other operating expenses, future cash
requirements and the sufficiency of available cash to meet operating and working
capital requirements and capital expenditures.  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
introduced our first branded product line, 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.  We introduced our CONFORMA product in the
first quarter 2000 and our ALTAIR product line in the fourth quarter 2000.

     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 net sales.

<TABLE>
<CAPTION>
                                                               Three months ended September 30,    Nine months ended September 30,
                                                                     2000              1999              2000             1999
                                                                   ------            ------            ------           ------
<S>                                                             <C>               <C>               <C>               <C>
Net sales...............................................            100.0%            100.0%            100.0%           100.0%
Cost of sales...........................................             48.4              54.2              49.2             64.8
                                                                   ------            ------            ------           ------

Gross profit............................................             51.6              45.8              50.8             35.2

Selling, general and administrative.....................             34.0              49.1              34.9             76.7
Research and development................................             14.5              23.1              15.0             29.9
Stock-based compensation................................              2.8               1.8               4.3              1.4
                                                                   ------            ------            ------           ------

Operating profit (loss).................................               .3             (28.2)             (3.4)           (72.8)

Other income (expense)..................................              4.4              (3.5)             (1.4)            (3.2)
                                                                   ------            ------            ------           ------

Net income (loss).......................................              4.7%            (31.7)%            (4.8)%          (76.0)%
                                                                   ======            ======            ======           ======
</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 $14.0 million for the quarter ended September 30,
2000, an increase of $5.6 million from net sales of $8.4 million for the quarter
ended September 30, 1999. The net sales increase for the quarter ended September
30, 2000 included $4.0 million of branded product sales in the United States,
$.3 million of branded product international sales (our European operation was
in the process of developing a distribution network in early 1999) and $1.3
million of hearing aid component sales (the second quarter of 1999 was the first
quarter in which we recognized hearing aid component sales).

     Net sales were $39.5 million for the nine months ended September 30, 2000,
an increase of $22.3 million from net sales of $17.2 million for the nine months
ended September 30, 1999. The net sales increase for the nine months ended
September 30, 2000 included $3.5 million of branded product international sales,
$10.5 million of hearing aid component sales and $8.3 million of branded product
sales in the United States. Branded product sales in 2000 benefited from the
introduction of our CONFORMA product; our second-generation NATURA product line,
NATURA 2SE; and our second generation CONFORMA product, CONFORMA 2SE.

     We generally have a 90-day return policy for our branded products and a no
return policy for our components business.  Sales returns aggregated $2.6
million and $2.3 million for the quarters ended September 30, 2000 and 1999,
respectively, and $8.3 million and $6.1 million for the nine months ended
September 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, particularly 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. In the third
quarter 2000, net sales were reduced by $.4 million to allow for a potential
exchange of certain first generation components for second generation components
by our largest customer.

     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 $6.8 million for the quarter ended
September 30, 2000, an increase of $2.3 million from cost of sales of $4.5
million for the quarter ended September 30, 1999.  For the first nine months of
2000, cost of sales was $19.4 million, an increase of $8.2 million from cost of
sales of $11.2 million for the nine months ended September 30, 1999. The
increase was primarily due to the increase in net sales. As a percentage of net
sales, gross profit increased to 51.6% for the quarter ended September 30, 2000
from 45.8% for the quarter ended September 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 custom molded hearing aid production, which
adversely impacted our costs. We discontinued this outsourcing in April 1999 as
we developed the capability to manufacture our custom molded hearing aids
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.
Warranty costs were $.6 million and $.3 million for the quarters ended September
30, 2000 and 1999, respectively, and $1.5 million and $.8 million for the nine
months ended September 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 September 30, 2000, an increase of $ .7 million
from the $4.1 million recorded for the quarter ended September 30, 1999.  For
the first nine months of 2000, selling, general and administrative expense was
$13.8 million, an increase of $.6 million from the $13.2 recorded for the nine
months ended September 30, 1999.  The increases in selling, general and
administrative expense for the three and nine months ended September 30, 2000
were a result of costs associated with adding new customers in 2000, product
launch expenses for CONFORMA, CONFORMA 2SE and NATURA 2SE, additional headcount
and new marketing programs.  For the nine month comparative periods, the
increase from 1999 to 2000 was offset somewhat by an unusual $.8 million charge
relating to severance costs and uncollectable accounts in 1999.

     We expect sales and marketing expense to increase as we add new customers,
expand our staff, expand our product offerings, 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 capabilities. This includes the costs of staffing and further
developing our direct sales force and customer care capabilities.

                                       -8
<PAGE>

     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 September 30,
2000, an increase of $.1 million from the $1.9 million recorded for the quarter
ended September 30, 1999. For the first nine months of 2000, research and
development expense was $5.9 million, an increase of $.7 million from the $5.2
million recorded for the nine months ended September 30, 1999. The increases
were primarily due to additional headcount and development programs for CONFORMA
2SE and NATURA 2SE, both of which were introduced in 2000. We are making
continual efforts to improve our existing products as well as to develop new
products because we believe that new and better 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 the one-year period preceding the IPO. This amount is being
amortized over the vesting periods of the individual stock options. For the
quarters ended September 30, 2000 and 1999, $.4 million and $.1 million were
amortized, respectively. For the nine months ended September 30, 2000 and 1999,
$1.7 million and $.2 million were amortized, respectively. The remaining amount
of $1.9 million as of September 30, 2000 is expected to be amortized as follows
(in millions):

<TABLE>
<CAPTION>
<S>                                                                                       <C>
         October 1, 2000 to December 31, 2000....................................................       $ .34
         2001....................................................................................         .92
         2002....................................................................................         .42
         2003....................................................................................         .16
         2004....................................................................................         .04
         2005....................................................................................         .02
                                                                                                        -----
                                                                                                        $1.90
                                                                                                        =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                                     Three months ended    Nine months ended
                                                                        September 30,        September 30,
                                                                       2000       1999     2000        1999
                                                                      -----      -----    -------     -----
<S>                                                                <C>        <C>        <C>        <C>
Interest income..................................................     $ 841      $  13    $ 1,337     $ 111
Interest expense.................................................       (41)      (345)      (200)     (568)
Foreign currency exchange loss...................................      (158)        38       (434)      (87)
Non-cash interest and conversion charges.........................         -          -     (1,243)        -
Loss on disposal of assets and other.............................       (15)         -        (22)        -
                                                                      -----      -----    -------     -----

                                                                      $ 627      $(294)   $  (562)    $(544)
                                                                      =====      =====    =======     =====
</TABLE>

     Interest income increased significantly due to investing the IPO proceeds
which were received on May 5, 2000.  Interest expense decreased because certain
debt was repaid with proceeds from the IPO.  The non-cash interest and
conversion charges of $1,243,000 for the nine months ended September 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 $204,000;
     .  Beneficial conversion feature offered on certain convertible debt of
        $535,000;
     .  Imputed interest charges on convertible debt financings issued with
        warrants as a result of allocating the initial proceeds between the debt
        and warrants of $316,000; and
     .  Interest accrued on converted debt of $188,000.

     Income Taxes. There were no income taxes provided for the third quarter
pre-tax income because the Company had a year-to-date pre-tax loss.

     Net Income (Loss).  Pro forma net income (see note 10 to the condensed
consolidated financial statements) for the three months ended September 30, 2000
was $665,000 ($.03 per share) and pro forma net loss for the nine months ended
September 30, 2000 was $854,000 ($.05 per share), based on shares outstanding of
21,574,000 and 17,495,000, respectively.

                                       -9
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     We completed an IPO in May 2000 in which we sold 4,140,000 shares at $14.00
per share. Net proceeds from the IPO 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 $8.7 million for the nine months
ended September 30, 2000 primarily funded ongoing operations and supported
increases in accounts receivable and inventories.  The accounts receivable
balance from our largest customer, Starkey Laboratories, comprised $8.6 million
of the total accounts receivable balance of $14.3 million as of September 30,
2000.  We expect to collect $6.3 million of this balance by year-end 2000.

     To date, our investing activities have consisted mainly of purchases of
property and equipment and marketable securities. Capital expenditures totaled
$1.4 million for the nine months ended September 30, 2000.  We expect to
increase capital expenditures consistent with our anticipated growth in
operations, infrastructure and personnel.

     At September 30, 2000, we had $51.1 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. We are currently
involved in procuring additional leased space which will double the size of our
Minnesota based production facility. 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
Denmark based operation. Fluctuations in the exchange rates between the U.S.
dollar and certain European currencies could increase the sales price of 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 $.4 million in
other expense for the three and nine months ended September 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 $38.6 million for the period from inception
through September 30, 2000. We incurred negative cash flows of $8.7 million from
operating activities for the nine months ended September 30, 2000. Although we
earned our first quarterly net income, of $.7 million, in the quarter ended
September 30, 2000, we have not achieved profitability on an annual basis. We
may incur net losses and negative cash flows in the future. The size of our
losses and whether or not we achieve annual profitability will depend in
significant part on the rate of growth in our net sales.

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

                                      -10
<PAGE>

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
may 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; litigation expenses; 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 $3.7 million, or 26%, of net sales in the quarter
ended September 30, 2000 and $11.8 million, or 30%, of net sales in the nine
months ended September 30, 2000. Although Starkey is contractually committed to
purchase a minimum quantity of components through 2001 and has placed a purchase
order with us for $4 million of components for delivery in the fourth quarter
2000, Starkey has stated publicly that it does not intend to take any more
product from us. We do not know, therefore, whether Starkey will honor its
fourth quarter purchase order and its commitment for 2001. If Starkey were to
breach its purchase order or the commitment covering 2001, or were not to buy
components after 2001, our net sales and operating results would decline
substantially and our gross margin would be negatively affected. In addition,
Starkey's purchase commitment only covers annual periods and quarterly purchases
could therefore be subject to significant fluctuation. Beyond that, we announced
in our third quarter earnings release that we were taking Starkey out of our
internal 2001 revenue forecasts. While Starkey is contractually committed to
purchase approximately $18 million of hearing aid components in 2001, we have
removed these revenues from our internal 2001 forecast and we are reevaluating
our long-term relationship with Starkey.

     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 ARE A DEFENDANT IN A CLASS ACTION LAWSUIT IN WHICH THE PLAINTIFF IS CLAIMING
THAT WE AND CERTAIN OF OUR OFFICERS AND DIRECTORS VIOLATED THE FEDERAL
SECURITIES LAWS.

     We are currently a defendant in a lawsuit filed in October 2000 claiming
that we and certain of our officers and directors violated the federal
securities laws by providing materially false and misleading information, or
concealing information, about our relationship with Starkey Laboratories, Inc.
This lawsuit, which is pending in the U.S. District Court for the District of
Utah, purports to be brought as a class action on behalf of all purchasers of
our common stock from May 2, 2000 to October 24, 2000. The complaint alleges
that as a result of false statements or omissions, we were able to complete our
IPO, artificially inflate our second and third quarter projections and results
and have our stock trade at inflated levels. We strongly deny these allegations
and will defend ourselves vigorously; however, litigation is inherently
uncertain and there can be no assurance the we will not be materially affected.

                                      -11
<PAGE>

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 all 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 ARE INCREASING OUR SALES TO HEARING INDUSTRY CONSOLIDATORS, WHICH WILL LIKELY
CONCENTRATE OUR RISK

     We are selling an increasing number of branded products to several industry
consolidators who have a large number of owned or franchised hearing aid
clinics.  As sales to these consolidators increase, we will become subject to
the risk of losing these customers or incurring significant reductions in sales
to these customers.  In addition, we may become subject to the risk of
collecting accounts receivable balances from these companies.

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 line, in September 1998.  We
introduced our CONFORMA product in March 2000, our second-generation NATURA
line, NATURA 2SE, in May 2000, and our second-generation CONFORMA product,
CONFORMA 2SE, in June 2000. We have been generating revenue from selling hearing
aid components for approximately two years. 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, our "SE" products, which
contain a noise reduction feature that we introduced in the second quarter of
2000, now comprise the majority of our branded product sales. 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 generally offer a 90-day return policy and a minimum of a one-year
warranty on our branded product sales.  Our components business warranty is
generally 30 to 120 days. To date, we have experienced high levels of returns,
remakes and repairs. Our sales returns were $2.6 million and $8.3 million in the
quarter and nine months ended September 30, 2000, respectively.   We believe
that the hearing aid industry, particularly 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.  Our
warranty costs for remake and repair were $.6 million and $1.5 million in the
quarter and nine months ended September 30, 2000, respectively. We may not be
able to attain lower levels of returns, remakes and repairs and, in fact, these
levels may increase, which could reduce our net sales and operating results.

                                      -12
<PAGE>

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 some 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.

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 further
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 us or 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

     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.  We are currently
involved in doubling the physical size of our Minnesota based production
facility and are planning to more than double our hearing aid production
capability.  We may be unsuccessful in this endeavor which could cause us to be
unable to meet our current or future customer demand.

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 unfavorably to our strategy, they would likely purchase
fewer of our products, which would reduce our net

                                      -13
<PAGE>

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. We have been accused of infringing two patents owned by a third party.
We believe that this claim of infringement is without merit, and to that end, we
commenced an action on August 4, 2000 in federal district court in Utah by which
we seek a declaratory judgment that the patents are invalid and not infringed by
us. We anticipate that we will incur associated litigation expenses in upcoming
quarters. Although we believe that we do 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 us, litigation is
inherently uncertain and there can be no assurance that we will not be
materially affected. 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 and protect our proprietary
technology. If we fail to successfully enforce our intellectual property rights,
our competitive position will suffer.

                                      -14
<PAGE>

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 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 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. Approximately 15.5 million of the approximately
19.6 million shares of our common stock outstanding became available for resale
in the public market on October 28, 2000 upon the expiration of the 180 day IPO
lock-up period.

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 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.

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.

                                      -15
<PAGE>

                          PART II   OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     We are currently a defendant in a lawsuit filed in October 2000 claiming
that we and certain of our officers and directors violated the federal
securities laws by providing materially false and misleading information, or
concealing information, about our relationship with Starkey Laboratories, Inc.
This lawsuit, which is pending in the U.S. District Court for the District of
Utah, purports to be brought as a class action on behalf of all purchasers of
our common stock from May 2, 2000 to October 24, 2000. The complaint alleges
that as a result of false statements or omissions, we were able to complete our
IPO, artificially inflate our second and third quarter projections and results
and have our stock trade at inflated levels. We strongly deny these allegations
and will defend ourselves vigorously; however, litigation is inherently
uncertain and there can be no assurance the we will not be materially affected.

     We have been accused of infringing two patents owned by a third party. We
believe that the claim of infringement are without merit, and to that end,
commenced an action on August 4, 2000 in federal district court in Utah by which
we seek a declaratory judgment that the patents are invalid and not infringed by
us. We anticipate that we will incur associated litigation expenses in upcoming
quarters. Although we believe that we do not infringe these patents, that they
are invalid and the ultimate outcome of this action (and any potential counter-
suits) will not have a material adverse effect on us, litigation is inherently
uncertain, and there can be no assurance that we will not be materially
affected.

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 September 30, 2000,
approximately $1.0 million of the IPO proceeds were used to purchase property
and equipment and $5.0 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; expanding our capacity and business; 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 customer order levels, 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:  November 14, 2000    /s/ Stephen L. Wilson
                            ---------------------
                            Stephen L. Wilson
                            Vice President and Chief Financial Officer
                            (Duly Authorized Officer and Principal Financial
                            Officer)


                                      -17