<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 MARCH 31, 2001

[ ] 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 May 7, 2001, there were 19,967,555 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
<S>        <C>                                                                                                       <C>
ITEM 1.     Condensed Consolidated Financial Statements (unaudited):
               Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000                         1

               Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and 2000       2

               Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000       3

               Notes to Condensed Consolidated Financial Statements                                                     4

ITEM 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations                        6

ITEM 3.    Quantitative and Qualitative Disclosures about Market Risks                                                  9

           Factors That May Affect Future Performance                                                                   9

PART II    OTHER INFORMATION

ITEM 1.    Legal Proceedings                                                                                            14

ITEM 2.    Changes in Securities and Use of Proceeds                                                                    14

ITEM 4.    Exhibits and Reports on Form 8-K                                                                             15

           Signature                                                                                                    15
</TABLE>
<PAGE>

PART I    FINANCIAL INFORMATION

ITEM 1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                            SONIC INNOVATIONS, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                            March 31, 2001      December 31, 2000
                                                            ---------------     ------------------
<S>                                                         <C>                 <C>
                                    ASSETS
Current Assets:
Cash and cash equivalents.................................        $ 23,238               $  7,312
Marketable securities.....................................          22,873                 44,898
Accounts receivable, net..................................           9,849                  9,881
Inventories...............................................           8,024                  7,418
Prepaid expenses and other................................             698                    667
                                                                  --------               --------

     Total current assets.................................          64,682                 70,176

Long-term marketable securities...........................           4,948                      -
Property and equipment, net...............................           4,127                  4,202
Other assets..............................................           1,846                  1,870
                                                                  --------               --------

     Total assets.........................................        $ 75,603               $ 76,248
                                                                  ========               ========

                     LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
Accounts payable and accrued expenses.....................        $ 10,704               $ 10,899
Current portion of long-term obligations..................             471                    627
                                                                  --------               --------

     Total current liabilities............................          11,175                 11,526

Long-term obligations, net of current portion.............             368                    451

Shareholders' Equity:
Common stock..............................................              20                     20
Additional paid-in capital................................         111,653                111,633
Deferred stock-based compensation.........................          (1,072)                (1,346)
Accumulated deficit and comprehensive loss................         (46,541)               (46,036)
                                                                   --------               --------

     Total shareholders' equity...........................          64,060                 64,271
                                                                  --------               --------

     Total liabilities and shareholders' equity...........        $ 75,603               $ 76,248
                                                                  ========               ========
</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
                                                                            March 31,
                                                                         2001       2000
                                                                         ----       ----
<S>                                                                    <C>         <C>
Net sales.........................................................     $15,033     $12,396
Cost of sales.....................................................       7,800       6,113
                                                                       -------     -------

Gross profit......................................................       7,233       6,283

Selling, general and administrative expense.......................       5,597       4,284
Research and development expense..................................       2,289       1,856
Stock-based compensation expense..................................         226         707
                                                                       -------     -------

Operating loss....................................................        (879)       (564)

Other income (expense), net.......................................         629        (737)
                                                                       -------     --------

Net loss..........................................................        (250)     (1,301)

Accretion on mandatorily redeemable convertible preferred stock...           -        (698)
                                                                       -------     --------

Net loss applicable to common shareholders........................     $  (250)    $(1,999)
                                                                       =======     ========

Basic and diluted net loss per common share.......................     $  (.01)    $ (1.32)
                                                                       =======     ========

Weighted average number of common shares outstanding..............      19,847       1,517
                                                                       =======     =======

Pro forma information:

Net loss applicable to common shareholders........................                 $  (937)
                                                                                   ========

Basic and diluted net loss per common share.......................                 $  (.06)
                                                                                   ========

Weighed average number of common shares outstanding...............                  14,882
                                                                                   =======

Stock-based compensation allocable to each caption:
Cost of sales.....................................................     $    10     $    33
Selling, general and administrative expense.......................         185         579
Research and development expense..................................          31          95
                                                                       -------     -------

                                                                       $   226     $   707
                                                                       =======     =======
</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>
                                                                                     Three months ended
                                                                                          March 31,
                                                                                      2001        2000
                                                                                      ----        ----
<S>                                                                                 <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................................        $   (250)    $(1,301)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization ............................................             375         362
  Non-cash imputed interest expense ........................................              --         466
  Stock-based compensation .................................................             226         707
Changes in assets and liabilities:
    Accounts receivable ....................................................            (139)       (781)
    Inventories ............................................................            (687)     (1,193)
    Prepaid expenses and other .............................................             (42)        (11)
    Other assets ...........................................................              32          --
    Technology license obligation ..........................................            (100)         --
    Accounts payable and accrued expenses ..................................            (129)       (511)
                                                                                    --------    ---------

     Net cash used in operating activities .................................            (714)     (2,262)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .........................................            (314)       (317)
Purchase of marketable securities ..........................................         (10,268)         --
Proceeds from the maturity of marketable securities ........................          27,345          --
                                                                                    --------    --------

     Net cash provided by (used in) investing activities ...................          16,763        (317)

CASH FLOWS FROM FINANCING ACTIVITIES:
Initial public offering costs ..............................................            --           (91)
Proceeds from convertible promissory note ..................................            --         3,000
Line of credit repayment ...................................................            --        (1,966)
Principal payments on long-term obligations ................................            (139)     (1,480)
Proceeds from exercise of stock options ....................................              67         181
                                                                                    --------    --------

     Net cash used in financing activities .................................             (72)       (356)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ...............             (51)         91
                                                                                    --------    --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................          15,926      (2,844)
CASH AND CASH EQUIVALENTS, beginning of the period .........................           7,312       5,939
                                                                                    --------    --------
CASH AND CASH EQUIVALENTS, end of the period ...............................         $23,238      $3,095
                                                                                    ========    ========

SUPPLEMENTAL CASH FLOW INFORMATION:
  Cash paid for interest ...................................................        $     25    $    131

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING
   ACTIVITIES:
  Mandatorily redeemable convertible preferred stock accretion .............        $     --    $    698
</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
                     (in thousands, except per share data)
                                  (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 period ended March 31, 2001 are not necessarily indicative of results
that may be expected for the full year ending December 31, 2001. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission.

2.  MARKETABLE SECURITIES

    Management designates the appropriate classification of marketable
securities at the time of purchase and re-evaluates such designation as of each
balance sheet date. As of March 31, 2001, the Company's investment portfolio
consisted of short and long-term corporate debt securities classified as held-
to-maturity and were presented at their amortized cost.

3.  CONCENTRATIONS OF CREDIT RISK

    The Company had one customer that comprised 13% and 33% of net sales for the
three months ended March 31, 2001 and 2000, respectively. As of March 31, 2001,
this customer accounted for approximately 20% of the Company's net accounts
receivable. See "Factors that may affect 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
elsewhere in this report on Form 10-Q.

4.  COMPREHENSIVE LOSS

    Comprehensive loss consisted of the following:

                                                        Three months ended
                                                             March 31,
                                                         2001       2000
                                                        ------    -------

Net loss..............................................  $(250)    $(1,301)
Foreign currency gain (loss)..........................   (255)         42
                                                        ------    -------

Comprehensive loss....................................  $(505)    $(1,259)
                                                        ======    ========

5.  NET LOSS PER COMMON SHARE

    Basic and diluted net loss per common share were computed by dividing net
loss applicable to common shareholders 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
                     (in thousands, except per share data)
                                  (unaudited)

6.  SEGMENT INFORMATION

    The table below presents selected information for the Company's geographic
operating segments for the three months ended March 31, 2001 and 2000.  U.S. net
sales include export sales.

Three months ended March 31, 2001           United States   Europe    Total
---------------------------------           -------------   ------    -----

Net sales to external customers..........         $12,309   $2,724   $15,033
Operating loss...........................            (789)     (90)     (879)

Three months ended March 31, 2000........   United States   Europe     Total
---------------------------------........   -------------   ------     -----

Net sales to external customers..........         $10,554   $1,842   $12,396
Operating loss...........................            (550)     (14)     (564)


7.  INITIAL PUBLIC OFFERING (IPO)

    The Company filed a registration statement with the Securities and Exchange
Commission that became effective on May 1, 2000 and sold 4,140 shares at $14.00
per share. The Company received net proceeds of $52,228.   In connection with
the IPO the following items were converted into common stock:

    .  All outstanding convertible preferred stock into 12,533 common shares;
    .  $4,500 of convertible promissory notes (plus accrued interest) into 336
       shares of common stock at a conversion price equal to 100% of the IPO
       price;
    .  $7,000 of convertible promissory notes (plus accrued interest) into 545
       shares of common stock at a conversion price equal to 93% of the IPO
       price;
    .  $3,000 of convertible promissory notes issued on the closing of the IPO
       into 214 shares of common stock at a conversion price equal to 100% of
       the IPO price; and
    .  Outstanding warrants to purchase 203 shares of common stock (net of 33
       shares surrendered in lieu of cash payment of the exercise price for
       certain warrants) at an exercise price of $3.80 per share.

8.  PRO FORMA INFORMATION

    The pro forma information assumes that the conversions of convertible
preferred stock and convertible promissory notes and the exercise of warrants
occurred as of January 1, 2000, or the date of issuance, if later.  The
numerator and the denominator used for purposes of computing the pro forma net
loss per common share for the three months ended March 31, 2000 was derived as
follows:


                                                                         2000
                                                                         ----
Numerator:
Net loss applicable to common shareholders.......................      $(1,999)
Reversal of interest expense on convertible promissory notes.....          364
Reversal of accretion on convertible preferred stock.............          698
                                                                       -------
Pro forma net loss...............................................      $  (937)
                                                                       ========

Denominator:
Weighted average number of common shares outstanding.............        1,517
Conversion of convertible preferred stock........................       12,533
Conversion of convertible promissory notes.......................          629
Exercise of warrants.............................................          203
                                                                       -------

Pro forma weighted average number of common shares outstanding...       14,882
                                                                       =======


                                       5
<PAGE>

                            SONIC INNOVATIONS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                     (in thousands, except per share data)
                                  (unaudited)

9.  LEGAL PROCEEDINGS

    The Company is currently a defendant in a lawsuit filed in October 2000
claiming that the Company and certain of its officers 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 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 Audio
Technology Partners LLC. The Company believes that it does not infringe these
patents, 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.  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.

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 results, plans,
objectives, expectations and intentions. These forward-looking statements
include statements regarding the following: estimated levels of sales returns
for NATURA and ALTAIR products, increased selling, general and administrative
expense, additional customers, expansions in staff, expanded product offerings,
anticipated growth of our business, future branding and advertising campaigns,
legal expenses, increased research and development expense, amortization of
stock-based compensation, increased capital expenditures, growth in operating
expenses, future cash requirements and uses 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."
All amounts are reflected in thousands, except per share data.

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 customers. Capitalizing on a new understanding of human
hearing, we have developed patented digital signal processing ("DSP")
technologies and embedded them in the smallest single-chip DSP platform ever
installed in a hearing aid.  We sell finished hearing aids, hearing aids kits
and hearing aid components to hearing care professionals, distributors and other
hearing aid manufacturers in the United States, and much of Europe, Japan,
Australia and Canada.  We launched our first branded product line, NATURA, in
the fourth quarter 1998, 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 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.

                                       6
<PAGE>

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.

                                              Three months ended
                                                   March 31,
                                               2001        2000
                                              -----      ------

Net sales.............................        100.0%      100.0%

Cost of sales.........................         51.9        49.3
                                              -----      ------

Gross profit..........................         48.1        50.7

Selling, general and administrative...         37.2        34.6
Research and development..............         15.2        15.0
Stock-based compensation..............          1.5         5.7
                                              -----      ------

Operating loss........................         (5.8)       (4.6)

Other income (expense)................          4.1        (5.9)
                                              -----      -------

Net loss..............................         (1.7)%     (10.5)%
                                              ======     =======

     Net Sales.  Net sales consist of product sales less a provision for sales
returns which is made at the time of sales. We break our sales into two
categories: branded product sales, which includes NATURA, ALTAIR and CONFORMA
hearing aids; and hearing aid component sales, which includes sales of our DSP
chip to several other hearing aid manufacturers.  Net sales were $15,033 for the
quarter ended March 31, 2001, an increase of $2,637 (21%) from net sales of
$12,396 for the quarter ended March 31, 2000. The net sales increase for the
quarter ended March 31, 2001 included $3,587 of branded product sales in the
United States and $1,469 of branded product international sales, offset somewhat
by a decrease of $2,419 of hearing aid component sales that resulted from a
decrease in sales to Starkey Laboratories.  Sales of our ALTAIR line, which was
introduced in November 2000, increased monthly since introduction, and comprised
25% of U.S. branded unit sales in the quarter ended March 31, 2001.

     We generally have a 90-day return policy for our branded products and a no
return policy for our component products.  Sales returns were $3,762 and $2,690
for the quarters ended March 31, 2001 and 2000, respectively. This increase
principally related to the increase in branded product sales from 2000 to 2001.
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 premium-performance,
premium-priced products. We expect sales returns of our NATURA products to
continue at or below historical levels, and sales returns for our lower priced
ALTAIR line to be lower than we experience with NATURA.

     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 $7,800 for the quarter ended March 31,
2001, an increase of $1,687 (28%) from cost of sales of $6,113 for the quarter
ended March 31, 2000.  As a percentage of net sales, gross profit decreased to
48.1% for the quarter ended March 31, 2001 from 50.7% for the quarter ended
March 31, 2000 as a result of a decrease in higher margin hearing aid component
sales, offset somewhat by the fixed costs of our manufacturing operations being
spread over a greater sales level and operating efficiencies derived from
producing at higher quantities.

     We provide for the cost of remaking and repairing products under warranty,
including hearing aid components. The warranty period ranges from one or three
years for branded products and 30 to 120 days for hearing aid components.
Warranty costs were $750 and $476 for the quarters ended March 31, 2001 and
2000, respectively.

     Selling, General and Administrative. Selling, general and administrative
expense consists primarily 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 $5,597
for the quarter ended March 31, 2001, an increase of $1,313 (31%) from $4,284
for the quarter ended March 31, 2000. The increase in selling, general and
administrative expense for the three months ended March 31, 2001 was primarily a
result of increased sales headcount, marketing programs and literature,
convention expenditures and legal expenses.

                                       7
<PAGE>

     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 branding and advertising
campaigns. Sales and marketing expenses may also vary considerably from quarter
to quarter as a result of the timing of our advertising campaigns and convention
costs. We expect legal expenses to increase as we incur expenses related to our
two existing lawsuits. As a result, we expect selling, general and
administrative expense to continue to increase in dollars, although not
necessarily as a percentage of sales.

     Research and Development. Research and development expense consists
primarily of wages and benefits for personnel, consulting, software,
intellectual property, clinical study and engineering support costs. Research
and development expense was $2,289 for the quarter ended March 31, 2001, an
increase of $433 (23%) from the $1,856 recorded for the quarter ended March 31,
2000. The increase was principally the result of additional headcount,
establishing a business development function and increased expenses in the areas
of new product introduction and sustaining engineering. 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 in dollars, although not necessarily as a percentage of sales.

     Deferred Stock-based Compensation. Deferred stock-based compensation
represents the difference between the exercise price and the deemed fair vale of
our common stock on the grant date for stock options granted in the one-year
period preceding the initial filing of our IPO and is being amortized over the
vesting periods of the individual stock options, periodically adjusted for
employee separations.  For the quarters ended March 31, 2001 and 2000, $226 and
$707 was amortized, respectively. The remaining amount as of March 31, 2001 is
expected to be amortized as follows:

        April 1, 2001 to December 31, 2001.................  $  554
        2002...............................................     358
        2003...............................................     123
        2004...............................................      26
        2005...............................................      11
                                                             ------

                                                             $1,072
                                                             ======

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

                                                           Three months ended
                                                                March 31,
                                                            2001        2000
                                                           -----      ------

        Interest income..............................      $ 732      $    7
        Interest expense.............................        (24)       (102)
        Foreign currency exchange loss...............        (60)       (171)
        Non-cash imputed interest expense............          -        (466)
        Loss on disposal of assets and other.........        (19)         (5)
                                                           -----      ------

                                                           $ 629      $(737)
                                                           =====      ======

     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 derived from the IPO and convertible promissory
notes.

     The non-cash imputted interest expense of $466 for the three months ended
March 31, 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;
     .  Imputed interest charges on convertible debt financings issued with
          warrants as a result of allocating the initial proceeds between the
          debt and warrants of $236; and
     .  Interest accrued on converted debt of $128.

     Income Taxes. We have generated operating losses since inception and no
provision or benefit for income taxes has been recorded to date.

     Net Loss. Net loss for the three months ended March 31, 2001 was $250 ($.01
per share), based on shares outstanding of 19,847. Pro forma net loss for the
three months ended March 31, 2000 was $937 ($.06 per share), based on shares
outstanding of 14,882 (see note 8 to the condensed consolidated financial
statements).

                                       8
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     Prior to our IPO, our principal sources of funds were the sale of common
and preferred stock, the sale of subordinated convertible debt, capital lease
financing arrangements and bank borrowings, totaling approximately $46,400 since
our inception. In May 2000, we completed an IPO in which we sold 4,140 shares of
common stock at $14.00 per share. Net proceeds from the IPO, after deducting the
underwriting commission and offering expenses, were $52,228.

     Net cash used in operating activities of $714 for the three months ended
March 31, 2001 was primarily to fund our operating loss and increases in
accounts receivable and inventories.

     Net cash provided by investing activities for the three months ended March
31, 2001 of $16,765 consisted of an excess of proceeds from the maturity of
marketable securities over purchases of marketable securities of $17,077, and
was net of purchases of property and equipment of $314. We expect to increase
capital expenditures consistent with our anticipated growth in operations,
infrastructure and personnel.

     Net cash used in financing activities of $72 for the three months ended
March 31, 2001 consisted of payments on long-term obligations, net of proceeds
from stock option exercises. As of March 31, 2001, we had $51,059 in cash, cash
equivalents and marketable securities.

     We expect to experience growth in or operating expenses in order to execute
our business plan, particularly in the areas of research and development and
sales and marketing.  We expect to incur expenses to improve our manufacturing
capability and increase our manufacturing capacity.  These activities will use a
portion of our cash over the next twelve months.  In addition, we may use cash
resources to fund acquisitions of complementary businesses and technologies.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

     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 primarily short-term investment grade debt securities which we
believe are subject to minimal credit and market risk.  The interest rate on our
capital lease obligations approximates market and is fixed.

     Foreign Currency Risk. We face foreign currency risks primarily as a result
of revenues we receive from sales made outside the United States and from the
intercompany account balance between our U.S. and Danish companies. Fluctuations
in the exchange rates between the U.S. dollar and other 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.

FACTORS THAT MAY AFFECT FUTURE PERFORMANCE

     Our future results, plans, objectives, expectations and intentions could be
affected by any of the following "risk factors."  Investors should understand
that it is not possible to predict or identify all such factors, and we are
under no obligation to update these factors.  Investors should not consider all
factors listed as a complete statement of all potential risks and uncertainties.

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

     We have an accumulated deficit of $46.2 at March 31, 2001. We incurred a
net loss of $3.2 million and negative cash flow of $7.1 million from operating
activities for the year ended December 31, 2000, and a net loss of $.2 million
and negative cash flow of $.7 million for the first quarter ended March 31,
2001. We have not achieved profitability on an annual basis. We may incur net
losses and negative cash flows in the future. We intend to increase our
operating expenses and therefore, must generate additional revenue to achieve
profitability. The size of our losses and whether or not we achieve
profitability will depend in significant part on the rate of growth of our net
sales. 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.

                                       9
<PAGE>

OUR FINANCIAL RESULTS MAY 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: cancellation or
changes in the timing of product orders, particularly significant orders from
other hearing aid manufacturers for our hearing aid components or from audiology
clinic consolidators for our branded products; demand for and market acceptance
of our products; manufacturing problems; high levels of returns, remakes and
repairs; litigation expenses; changes in our product or customer mix;
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.  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, our stock price 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

     We anticipate that our operating results in any given period will continue
to depend upon revenues from a small number of large customers. 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. We may be unable to retain our
current customers, and may be unable to recruit replacement or additional
customers. We sell branded products to several audiology clinic consolidators
who have a large number of owned or franchised hearing aid clinics. If 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 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., one of our large competitors,
accounted for approximately $12.3 million, or 24%, of net sales for the year
ended December 31, 2000 and $2.0 million, or 13%, of net sales for the quarter
ended March 31, 2001.  We shipped an additional $2.0 million of components to
Starkey in April 2001.  Currently, we do not have orders from Starkey, and we do
not anticipate future orders. Accordingly, our net sales and operating results
may decline and our gross margin will be negatively affected. While Starkey's
account receivable balance with us is current (they have paid for all products
shipped to them through March 31, 2001), we are subject to the risk of
collecting the April 2001 shipment of $2.0 million as it comes due.

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 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 and seeks damages in an
unspecified amount. The complaint alleges that as a result of false statements
or omissions, we were able to complete our IPO, artificially inflate our
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 that we will not be
materially affected. We anticipate that we will incur associated litigation
expense in connection with this action in future quarters.

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 chips are manufactured by a single supplier. Our
relationship with this supplier is

                                       10
<PAGE>

critical to our business because only a small number of suppliers would be able
or willing to produce our chip in the relatively small quantities and with the
exacting specifications we require. In addition, the disposable tip used in our
CONFORMA hearing aid is produced by a single supplier and the receivers and
microphones used on 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 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 the fourth quarter 1998.
We introduced our CONFORMA product in the first quarter 2000; our second
generation NATURA line, NATURA 2SE, and our second-generation CONFORMA product,
CONFORMA 2SE, in the second quarter 2000; and our ALTAIR line in the fourth
quarter 2000. 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 2000, and our ALTAIR line, which we introduced
in the fourth quarter 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 net sales and 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 products. Our components warranty is generally 30 to 120
days. To date, we have experienced high levels of returns, remakes and repairs.
Our sales returns were $12.9 million for the year ended December 31, 2000 and
$3.8 million for the quarter ended March 31, 2001. 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 premium-performance, premium-priced products. Our warranty
cost for remakes and repairs was $1.6 million for the year ended December 31,
2000 and $ .7 million for the quarter ended March 31, 2001. 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.

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 a number of competitors worldwide,
many of which have far greater sales and more extensive financial and business
resources than we have.  Some of our competitors have recently begun offering
forgivable loans or other incentives to hearing aid dispensers that sell
products.  We may not choose to, or be able to, match these incentives, which
could put us at a competitive disadvantage.  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 WILL
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 hearing aid market, limiting our ability to expand our
share of the hearing aid market. This could harm our net sales growth and
operating results.

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<PAGE>

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 as we expand our facilities and hire
additional personnel. We may seek collaborative arrangements with other
companies to manufacture current products or new products.

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 we do not infringe these patents, 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.
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.
We anticipate that we will incur associated litigation expense in future
quarters. 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.

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 such a 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 A
VARIETY OF RISKS 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. For
example, in order to market our products in the European Union, we are required
to have the EU's CE mark certification. Any failure to maintain our ISO 9001
certification or CE mark would significantly reduce our net sales and operating
results. In addition, we face foreign currency risks primarily as a result of
the revenues we receive from sales made outside the United States and from the
intercompany account balance between our U.S. and Danish companies. Fluctuations
in the exchange rates between the U.S. dollar and other 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.

                                       12
<PAGE>

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.

IF WE FAIL TO COMPLY WITH FOOD AND DRUG ADMINISTRATION REGULATIONS, WE MAY
SUFFER FINES, INJUNCTIONS OR OTHER PENALTIES

     Our products are considered to be medical devices and are, accordingly,
subject to regulation in the United States by the Food and Drug Administration
("FDA"), 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 FDA and adhere to its
Quality System regulations. 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.

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. Since our initial public
offering, the market price of our common stock has been volatile.

THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK BY PRE-INITIAL
PUBLIC OFFERING SHAREHOLDERS, 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. Approximately 15.5 million of the approximately 19.8
million shares of our common stock outstanding became available for resale in
the public market upon the expiration of the 180-day IPO lock-up period in
October 2000. Approximately 7.2 million of our outstanding shares continue to be
held by venture capital firms that have not yet distributed their shares to
their limited partners. In addition, some of our officers or directors may adopt
trading plans under SEC Rule 10b5-1 in order to dispose of a portion of their
shares in an orderly manner.

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 a
significant portion of our outstanding common stock.  As a result, these
shareholders, if they acted together, would be able to exert a significant
degree of influence over our management and affairs and over matters requiring
shareholder 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, which could cause our stock
price to decline.

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<PAGE>

PROVISIONS IN OUR CHARTER DOCUMENTS, OUR SHAREHOLDERS RIGHTS PLAN AND DELAWARE
LAW MAY DETER TAKEOVER EFFORTS THAT YOU FEEL WOULD BE BENEFICIAL TO SHAREHOLDER
VALUE

     Our certificate of incorporation and bylaws, shareholder rights plan 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 acquirers to negotiate with our board of directors, these provisions
apply even if the offer may be considered beneficial by some shareholders and a
takeover bid otherwise favored by a majority of our shareholders might be
rejected by our board of directors.

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 violated 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 on all purchasers of our 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, we were
able to complete our IPO, artificially inflate our 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 that we will not be materially affected.

     We have been accused of infringing two patents owned by Audio Technology
Partners LLC.  We believe that we do not infringe these patents, 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.  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.

     We anticipate that we will incur associated legal expenses as a result of
these legal proceedings.

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 ("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 commission,
and (ii) approximately $1.7 million was 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 March 31, 2001, $1.9 million
of the IPO proceeds were used to purchase property and equipment and $7.3
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 and convertible promissory notes converted into common stock.

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<PAGE>

ITEM 4.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

Exhibit
Number       Description
------       -----------

10.1*        Preferred Stock Rights Agreement, dated as of March 27, 2001,
             between Sonic Innovations, Inc. and American Stock Transfer and
             Trust Company.

*Incorporated by reference to Exhibit 1 to Sonic Innovations, Inc.'s
registration statement on Form 8-A filed with the Securities and Exchange
Commission on April 16, 2001.

(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.


Date: May 15, 2001             /s/ Stephen L. Wilson
                               ---------------------
                               Stephen L. Wilson
                               Vice President and Chief Financial Officer

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