<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, 2002

[_]   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 April 30, 2002 there were 19,449,868 shares of the registrant's common
stock outstanding.

                                       1
<PAGE>

                            SONIC INNOVATIONS, INC.
                               TABLE OF CONTENTS

                                   FORM 10-Q


<TABLE>
<CAPTION>

                                                                                                                   Page
<S>                                                                                                                <C>
PART I - FINANCIAL INFORMATION

ITEM 1.  Condensed Consolidated Financial Statements (Unaudited):

         Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001                             3

         Condensed Consolidated Statements of Operations for the Three Months Ended
         March 31, 2002 and 2001                                                                                      4

         Condensed Consolidated Statements of Cash Flows for the Three Months Ended
         March 31, 2002 and 2001                                                                                      5

         Notes to Condensed Consolidated Financial Statements                                                         6

ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations                        9

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risks                                                 12

         Factors That May Affect Future Performance                                                                  12

PART II - OTHER INFORMATION

ITEM 1.  Legal Proceedings                                                                                           17

ITEM 6.  Exhibits and Reports on Form 8-K                                                                            17

Signature                                                                                                            17
</TABLE>

                                       2
<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, 2002    December 31, 2001
                                                                                        --------------    -----------------
<S>                                                                                     <C>               <C>
ASSET
Current assets:
Cash and cash equivalents.......................................................         $       6,925      $      13,929
Marketable securities...........................................................                24,808             21,555
Accounts receivable, net........................................................                 7,400              7,044
Inventories.....................................................................                 5,777              6,075
Prepaid expenses and other......................................................                 1,123                938
                                                                                         -------------      -------------

     Total current assets.......................................................                46,033             49,541

Long-term marketable securities.................................................                10,899             10,322
Property and equipment, net.....................................................                 4,956              4,920
Intangible assets...............................................................                 8,400              5,445
Other assets....................................................................                   542                628
                                                                                         -------------      -------------

     Total assets...............................................................         $      70,830      $      70,856
                                                                                         =============      =============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses...........................................         $      14,142      $      13,241
Current portion of long-term obligations........................................                   361                349
                                                                                         -------------      -------------

     Total current liabilities..................................................                14,503             13,590

Long-term obligations, net of current portion...................................                     7                102

Shareholders' equity:
Common stock....................................................................                    20                 20
Additional paid-in capital......................................................               112,403            112,288
Deferred stock-based compensation...............................................                  (399)              (507)
Accumulated deficit and other comprehensive loss................................               (52,298)           (51,892)
Treasury stock, at cost.........................................................                (3,406)            (2,745)
                                                                                         -------------      -------------

     Total shareholders' equity.................................................                56,320             57,164
                                                                                         -------------      -------------

     Total liabilities and shareholders' equity.................................         $      70,830      $      70,856
                                                                                         =============      =============
</TABLE>

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

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                           Three months ended
                                                                                                March 31,
                                                                                                ---------
                                                                                       2002                   2001
                                                                                       ----                   ----
<S>                                                                                <C>                     <C>
Net sales......................................................................    $     15,104            $     15,033
Cost of sales..................................................................           7,441                   7,800
                                                                                   ------------            ------------

Gross profit...................................................................           7,663                   7,233

Selling, general and administrative expense....................................           6,313                   5,597
Research and development expense...............................................           2,052                   2,289
Stock-based compensation expense...............................................             106                     226
                                                                                   ------------            ------------

Operating loss.................................................................            (808)                   (879)

Other income...................................................................             389                     629
                                                                                   ------------            ------------

Net loss.......................................................................    $       (419)           $       (250)
                                                                                   ============            ============

Basic and diluted net loss per common share....................................    $       (.02)           $       (.01)
                                                                                   ============            ============

Weighted average number of common shares
     outstanding - basic and diluted...........................................          19,348                  19,847
                                                                                   ============            ============

Stock-based compensation allocable to each caption:

  Cost of sales................................................................    $          5            $         10
  Selling, general and administrative expense..................................              87                     185
  Research and development expense.............................................              14                      31
                                                                                   ------------            ------------

                                                                                   $        106            $        226
                                                                                   ============            ============
</TABLE>


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

                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                   Three months ended
                                                                                                         March 31,
                                                                                                         --------
                                                                                                  2002              2001
                                                                                                  ----              ----
<S>                                                                                           <C>                <C>
Cash flows from operating activities:
Net loss..................................................................................    $    (419)         $    (250)
Adjustments to reconcile net loss to net cash provided by (used in )
    operating activities:
      Depreciation and amortization.......................................................          525                375
      Stock-based compensation............................................................          106                226
      Changes in assets and liabilities, excluding the effect of acquisitions:
          Accounts receivable, net........................................................            4               (139)
          Inventories.....................................................................          404               (687)
          Prepaid expenses and other......................................................         (107)               (42)
          Other assets....................................................................          126                 32
          Long-term obligations...........................................................           --               (100)
          Accounts payable and accrued expenses...........................................         (537)              (129)
                                                                                              ---------          ---------
             Net cash provided by (used in) operating activities..........................          102               (714)

Cash flows from investing activities:
Acquisitions, net of cash acquired........................................................       (2,321)                --
Purchases of property and equipment.......................................................         (354)              (314)
Proceeds from (purchases of) marketable securities, net...................................       (3,830)            17,077
                                                                                              ---------          ---------
             Net cash provided by (used in) investing activities..........................       (6,505)            16,763

Cash flows from financing activities:
Principal payments on long-term obligations...............................................          (83)              (139)
Purchases of common stock for treasury....................................................         (661)                --
Proceeds from exercise of stock options and warrant.......................................          117                 67
                                                                                              ---------          ---------
             Net cash used in financing activities........................................         (627)               (72)

Effect of exchange rate changes on cash and cash equivalents..............................           26                (51)
                                                                                              ---------          ---------

Net increase (decrease) in cash and cash equivalents......................................       (7,004)            15,926
Cash and cash equivalents, beginning of the period........................................       13,929              7,312
                                                                                              ---------          ---------

Cash and cash equivalents, end of the period..............................................    $   6,925          $  23,238
                                                                                              =========          =========

Supplemental cash flow information:
Cash paid for interest....................................................................    $      13          $      25
</TABLE>

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

                                       5
<PAGE>

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

1.   BASIS OF PRESENTATION

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 three
month period ended March 31, 2002 are not necessarily indicative of results that
may be expected for the full year ending December 31, 2002. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 as filed with the Securities and Exchange Commission.

The accompanying condensed consolidated financial statements include the
accounts of Sonic Innovations, Inc. and its wholly owned subsidiaries, Sonic
Innovations A/S, Sonic Innovations Pty. Ltd. and Omni-ReSound ApS. All
intercompany balances and transactions have been eliminated in consolidation.

2.   ACQUISITION

Effective January 1, 2002, the Company purchased its Denmark distributor,
Omni-ReSound ApS, for $2,100. An additional $700 may be paid based upon
Omni-ReSound's performance in 2002 and 2003. The Company also purchased two
retail hearing aid outlets in Australia during the first quarter 2002 for a
total of $729. The acquisitions were accounted for as purchases in accordance
with Statement of Financial Accounting Standards No. ("FAS") 141 "Business
Combinations," which requires that all acquisitions after June 30, 2001 be
accounted for as purchases.

The following table sets forth the preliminary allocation of the purchase
consideration consisting of $2,829 in cash and $30 in direct expenses.

Current assets.........................    $ 1,086
Property and equipment.................        163
Other assets...........................          5
Goodwill...............................      2,954
Current liabilities....................     (1,349)
                                           -------
Purchase consideration.................    $ 2,859
                                           =======

The excess of purchase price over net assets acquired has been preliminarily
allocated to goodwill and the Company is undertaking a valuation to determine
the existence of any acquired intangible assets. The Company is not amortizing
goodwill in accordance with FAS 142 "Goodwill and Other Intangible Assets,"
which requires that goodwill not be amortized, but be subject to periodic tests
for impairment.

3.   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, 2002 and December 31, 2001, the Company's investment
portfolio consisted of money market funds and short and long-term corporate debt
securities, which were classified as held-to-maturity and presented at amortized
cost.

                                       6
<PAGE>

4.   INVENTORIES

Inventories are stated at the lower of cost or market value using the first- in,
first-out ("FIFO") method. Inventories at March 31, 2002 and December 31, 2001
consisted of the following:

<TABLE>
<CAPTION>
                                                              March 31,       December 31,
                                                                2002              2001
                                                                ----              ----
<S>                                                           <C>             <C>
Raw materials............................................     $1,598            $1,239
Components...............................................      1,933             2,117
Work in progress.........................................        162               206
Finished goods...........................................      2,084             2,513
                                                              ------            ------

Total....................................................     $5,777            $6,075
                                                              ======            ======
</TABLE>

5.   INTANGIBLE ASSETS

Intangible assets consisted of the following:

<TABLE>
<CAPTION>
                                                              March 31,       December 31,
                                                                2002              2001
                                                                ----              ----
<S>                                                           <C>             <C>
Acquisition intangibles..................................     $7,193            $4,206
Technology license, net..................................      1,207             1,239
                                                              ------            ------

Total....................................................     $8,400            $5,445
                                                              ======            ======
</TABLE>

6.   COMPREHENSIVE LOSS

Comprehensive loss consisted of the following:

<TABLE>
<CAPTION>
                                                                   Three months ended
                                                                        March 31,
                                                                        --------
                                                                 2002              2001
                                                                 ----              ----
<S>                                                            <C>               <C>
Net loss.................................................      $ (419)           $ (250)
Foreign currency gain (loss).............................          13              (255)
                                                               ------            ------

Comprehensive loss.......................................      $ (406)           $ (505)
                                                               ======            ======
</TABLE>

7.   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.
As of March 31, 2002, common stock equivalents consisted of options to purchase
4,369 shares.

8.   SEGMENT INFORMATION

The table below presents selected information for the Company's geographic
segments for the three months ended March 31, 2002 and 2001. Rest of world (ROW)
sales include Sonic Innovations Pty. Ltd. and export sales from the U.S. to ROW
countries.

                                       7
<PAGE>

<TABLE>
<CAPTION>
                                                                            United States      Europe        ROW         Total
                                                                            -------------      ------        ---         -----
<S>                                                                         <C>                <C>          <C>         <C>
Three months ended March 31, 2002
---------------------------------
Net sales to external customers..........................................      $ 9,218          $2,872      $3,014      $15,104
Operating profit (loss)..................................................       (1,473)            328         337         (808)

Three months ended March 31, 2001
---------------------------------
Net sales to external customers..........................................      $10,667          $2,724      $1,642      $15,033
Operating profit (loss)..................................................       (1,893)            (90)      1,104         (879)

March 31, 2002
--------------
Identifiable segment assets..............................................      $55,617          $6,695      $8,518      $70,830

December 31, 2001
-----------------
Identifiable segment assets..............................................      $59,629          $4,055      $7,172      $70,856
</TABLE>

9.   SHARE REPURCHASE PROGRAM

In May 2001, the Board of Directors authorized the repurchase of up to 1,000
shares of the Company's common stock as market conditions warrant through
December 31, 2001 and subsequently extended the program through March 31, 2002.
As of March 31, 2002, the Company has repurchased 875 shares of common stock at
a cost of $3,406 under this program, of which 145 shares of common stock were
repurchased at a cost of $661 during the quarter ended March 31, 2002.

10.  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 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 financial 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 moved to dismiss plaintiffs' Second Amended Complaint, which was
filed after the District Court dismissed plaintiff's First Amended Complaint
with leave to amend. There has been no discovery to date, no class has been
certified and no trial has been scheduled.

11.  RECENTLY ENACTED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. ("FAS") 141, "Business Combinations," and
FAS 142, "Goodwill and Other Intangible Assets." Certain provisions of these
statements are effective for business combinations entered into after June 30,
2001. Accordingly, the Company applied certain provisions of the new standards
to its acquisition of M-E Hearing Systems Pty. Ltd. in July 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized, but are subject to annual impairment tests. Other intangible
assets will continue to be amortized over their useful lives. The Company
adopted the remaining provisions on January 1, 2002 and such adoption did not
have a material impact on its results of operations, financial position or
liquidity.

In August 2001, the FASB issued FAS 143, "Accounting for Asset Retirement
Obligations." This statement requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes the
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The Company adopted
FAS 143 on January 1, 2002 and such adoption did not have a material impact on
its results of operations, financial position or liquidity.

In October 2001, the FASB issued FAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which replaces FAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
FAS 144 applies to all long-lived assets, including discounted operations, and
replaces the provisions of Accounting Principles Board Opinion No. 30,
"Reporting Results of Operations--Reporting the Effects of Disposal of a Segment
of a Business," for the disposal of segments of a business. This statement
requires that those long-lived assets be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. This

                                       8
<PAGE>

statement also broadens the reporting of discontinued operations. The Company
adopted FAS 144 on January 1, 2002 and such adoption did not have a material
impact on its results of operations, financial position or liquidity.

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: increased U.S. sales, expected levels of component
sales, increased selling, general and administrative expense, additional
customers, expansions in direct sales staff, expanded product offerings,
anticipated growth of our business, increased domestic sales as a result of the
introduction of the new Tribute line and Adesso product, future branding and
advertising campaigns, increased research and development expense, amortization
of deferred stock-based compensation, growth in operating expenses, particularly
direct selling expenses, increased capital expenditures to improve our
manufacturing capability and future acquisitions. 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" elsewhere in this Quarterly Report on Form 10-Q and
our Annual Report on Form 10-K for the year ended December 31, 2001. Our
critical accounting policies are described in our Annual Report on Form 10-K for
the year ended December 31, 2001. All amounts are reflected in thousands, except
per share data.


OVERVIEW

We design, develop, manufacture and market advanced digital hearing aids
designed to provide the highest levels of satisfaction for hearing impaired
customers. Capitalizing on our advanced 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.
In the U.S., we sell finished hearing aids principally to hearing care
professionals. Outside the U.S., we sell finished hearing aids and hearing aid
kits principally to distributors, except in Australia, where we sell hearing
aids on a retail basis to hearing impaired consumers and in Denmark, where we
sell principally to hearing care professionals. We occasionally sell hearing aid
components to other hearing aid manufacturers. We first began shipping product
in the fourth quarter of 1998. We completed our initial public offering ("IPO")
in May 2000.

In reporting our financial condition and results of operations, we report three
geographic 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 provided globally from the United States.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                                            Three months ended
                                                                                                 March 31,
                                                                                                 ---------
                                                                                            2002           2001
                                                                                            ----           ----
<S>                                                                                      <C>            <C>
Net sales....................................................................              100.0%         100.0%
Cost of sales................................................................               49.3           51.9
                                                                                         -------         ------

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

Selling, general and administrative..........................................               41.8           37.2
Research and development.....................................................               13.5           15.2
Stock-based compensation.....................................................                0.7            1.5
                                                                                         -------         ------

Operating loss...............................................................               (5.3)          (5.8)

Other expense................................................................                2.5            4.1
                                                                                         -------         ------

Net loss.....................................................................               (2.8)%         (1.7)%
                                                                                         =======         ======
</TABLE>

                                       9
<PAGE>

Net Sales. Net sales consist of product sales less a provision for sales
returns, which is made at the time of sales. We divide our sales into two
categories: hearing aid product sales, which includes Natura, Altair, Quartet,
Conforma and Adesso hearing aids; and hearing aid component sales, which
includes sales of our DSP chip to other hearing aid manufacturers. Hearing aid
product sales were $14,955 for the quarter ended March 31, 2002, a 22% increase
from $12,302 recorded for the quarter ended March 31, 2001.

By geography, U.S. hearing aid sales in the first quarter 2002 of $9,184 were up
6% from first quarter 2001 sales of $8,669. U.S. sales were affected by the
current lackluster growth in the domestic hearing aid market and the
introductions of a number of lower priced digital hearing aids by several of our
competitors. We believe that our new lower priced Tribute product line, which we
introduced in April 2002, and our second generation instant-fit product, Adesso,
which we introduced in March 2002, will help increase sales domestically.

Europe sales of $2,872 in the first quarter 2002 were up 5% from first quarter
2001 sales of $2,724 mainly as a result of our new directional BTE product and
the introduction of our lower priced Quartet product line, as well as the
incremental sales of our Danish distributor, Omni-ReSound ApS, which we acquired
in January 2002. Australian sales in the first quarter 2002 of $2,238 were
derived from our Australian subsidiary, which we acquired in July 2001.
Australia sales benefited from the introduction of our lower priced Quartet
product. Rest of world sales of $661 were down 27% from first quarter 2001 sales
of $909 primarily as a result of lower order levels from our Japanese
distributor, partially offset by increased sales to Latin America.

Component sales in the first quarter 2002 were $149. This compared to component
sales of $2,731 in the first quarter 2001, which included $1,950 of sales made
to Starkey Laboratories. We do not anticipate any further sales to Starkey and
do not expect the components business to generate any significant sales moving
forward.

We generally have a 60-day return policy for our hearing aid products and a no
return policy for our component products. Sales returns were $3,896 and $3,762
for the quarters ended March 31, 2002 and 2001, respectively. The increase in
returns principally related to the increase in hearing aid product sales from
2001 to 2002. We believe that the hearing aid industry, particularly in the
U.S., experiences a high level of product returns due to factors such as
statutorily required liberal return policies and product performance
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.

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 $7,441 for the quarter ended March 31, 2002, a
decrease of $359 (5%) from cost of sales of $7,800 for the quarter ended March
31, 2001. Gross margin of 50.7% in the first quarter was up from 48.1% in the
first quarter 2001 despite the steep drop in higher margin component sales. The
improvement in gross margin principally resulted from reductions in the costs of
purchased components, better labor utilization, manufacturing structure changes
and additional volume resulting in better fixed overhead absorption, as well as
the incremental gross margin resulting from the acquisitions of our Australian
and Denmark distributors.

We provide for the cost of remaking and repairing products under warranty. The
warranty periods range from one to three years for hearing aid products and 30
to 120 days for hearing aid components. Warranty costs were $762 and $750 for
the quarters ended March 31, 2002 and 2001, respectively. The increase in
warranty costs was principally due to the increase in sales.

Selling, General and Administrative. Selling, general and administrative expense
consists primarily of wages and benefits for personnel, sales commissions,
promotions and advertising, marketing support, conventions and administrative
expenses. Selling, general and administrative expense was $6,313 for the quarter
ended March 31, 2002, an increase of $716 (13%) from selling, general and
administrative expense of $5,597 for the quarter ended March 31, 2001. The
increase in selling, general and administrative expense for the quarter ended
March 31, 2002 was primarily a result of increased sales headcount, marketing
programs and product launch costs, offset somewhat by decreased legal expenses.

We expect selling and marketing expense to increase as we add new customers,
expand our direct sales staff, expand our product offerings, incur additional
costs related to the anticipated growth of our business, and pursue branding and
advertising campaigns. Selling and marketing expenses may also vary from quarter
to quarter as a result of the timing of our advertising campaigns and convention
costs. 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 $2,052 for the quarter ended March 31, 2002, a decrease of $237 (10%) from
research and development expense of $2,289 for the quarter ended March 31, 2001.
The decrease was principally the result of last year's fourth quarter
restructuring efforts, which

                                       10
<PAGE>

resulted in reduced headcount. We are making continual efforts to improve our
existing products as well as to develop new products because new and better
products are critical to our long-term success. As a result, we expect research
and development expense to increase through the balance of the year in absolute
dollars, although not necessarily as a percentage of sales.

Stock-based Compensation. Deferred stock-based compensation represents the
difference between the exercise price and the deemed fair value 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, 2002 and 2001, stock-based
compensation expense was $106 and $226, respectively. As of March 31, 2002,
deferred stock-based compensation of $399 is expected to be amortized as
follows: April 1, 2002 to December 31, 2002 - $243; 2003 - $120; 2004 - $26; and
2005 - $10.

Other Income.  Other income consisted of the following:

                                                       Three months ended
                                                            March 31,
                                                            ---------
                                                       2002           2001
                                                       ----           ----
Interest income.............................          $ 349          $ 732
Interest expense............................            (12)           (24)
Foreign currency exchange gain (loss).......            102            (60)
Loss on disposal of assets and other........            (50)           (19)
                                                      -----          -----

                                                      $ 389          $ 629
                                                      =====          =====

The decrease in other income reflected a reduction in interest income resulting
from a lower cash balance and significantly reduced interest rates, partially
offset by net currency exchange gains resulting from the impact of a relatively
weaker U.S. dollar on the intercompany balances between our U.S. and Australian
companies.

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 quarter ended March 31, 2002 was $419 ($.02 per
share) based on shares outstanding of 19,348. Net loss for the three months
ended March 31, 2001 was $250 ($.01 per share) based on shares outstanding of
19,847.

LIQUIDITY AND CAPITAL RESOURCES

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 provided by operating activities of $102 for the three months ended
March 31, 2002 resulted principally from a decrease in inventory of $404 and
non-cash expenses pertaining to depreciation, amortization and stock-based
compensation of $631, partially offset by net loss of $419 and an increase in
accounts payable and accrued expenses of $537.

Net cash used in investing activities of $6,533 for the three months ended March
31, 2002 consisted of purchases of marketable securities of $3,830, acquisition
costs, net of cash received, of $2,321 and purchases of property and equipment
of $354.

Net cash used in financing activities of $627 for the three months ended March
31, 2002 consisted of repayment of long-term obligations of $83 and the purchase
of treasury stock of $661, offset somewhat by proceeds from stock option and
warrant exercises of $117.

At March 31, 2002, we had $42,632 in cash, cash equivalents and marketable
securities. We expect to experience growth in our operating expenses,
particularly direct selling expenses, in order to execute our business plan. As
a result, we expect that these operating expenses, as well as capital
expenditures to improve our manufacturing capability will constitute a
significant use of our cash for at least the next twelve months. In addition, we
may use cash to fund acquisitions of complimentary businesses and technologies
and repurchase our stock from time to time.

                                       11
<PAGE>

RECENTLY ENACTED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. ("FAS") 141, "Business Combinations," and
FAS 142, "Goodwill and Other Intangible Assets." Certain provisions of these
statements are effective for business combinations entered into after June 30,
2001. We applied certain provisions of the new standards to our acquisitions of
M-E Hearing Systems Pty. Ltd. in July 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives are no longer amortized, but
are subject to annual impairment tests. Other intangible assets will continue to
be amortized over their useful lives. We adopted the remaining provisions on
January 1, 2002 and such adoption did not have a material impact on our results
of operations, financial position or liquidity.

In August 2001, the FASB issued FAS 143, "Accounting for Asset Retirement
Obligations." This statement requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. We adopted FAS 143 on January 1, 2002 and such adoption did not have a
material impact on our results of operations, financial position or liquidity.

In October 2001, the FASB issued FAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
We adopted FAS 144 on January 1, 2002 and such adoption did not have a material
impact on our results of operations, financial position or liquidity.

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 primarily in
money market funds and investment grade corporate debt securities, which we
believe are subject to minimal credit and market risk considering that they are
relatively short-term (maturities of 18 months or less from date of purchase)
and provided that we hold them to maturity, which is our intention. 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 U.S. and from the intercompany
account balances between our U.S., Australian and Denmark companies.
Fluctuations in the exchange rates between the U.S. dollar and other currencies
could affect the selling prices 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 the
factors listed as a complete statement of all potential risks and uncertainties.

WE HAVE A HISTORY OF LOSSES AND NEGATIVE OPERATING CASH FLOWS

We have an accumulated deficit of $52.3 million at March 31, 2002. We incurred a
net loss of $0.4 million in the quarter ended March 31, 2002 and cash and
marketable securities declined from $45.8 million at December 31, 2001 to $42.6
million at March 31, 2002. We have not achieved profitability on an annual
basis. We may incur net losses and negative operating cash flows in the future.
We expect 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.

                                       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 a number of competitors worldwide, six
of which have far greater sales and more extensive financial and business
resources than we have. Some of our competitors have invested in or advanced
money, offered forgivable loans and provided other incentives to retail hearing
aid operations. We may not choose to, or be able to, match these incentives,
which could put us at a competitive disadvantage. Some of our competitors have
introduced less expensive digital hearing aids, which could have the effect of
limiting our market penetration or depressing the average selling prices of our
products. In addition, competitors may establish their own network of owned or
franchised hearing aid clinics, which could cause us to lose existing customers.
If we fail to compete effectively, our net sales and operating results will
suffer.

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: demand for and market acceptance
of our products; cancellation or a reduction in orders from audiology clinic
consolidators; manufacturing problems; high levels of returns, remakes and
repairs; 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 could 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.

ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE OUR SHAREHOLDERS AND HARM OUR OPERATING RESULTS

We have acquired and may in the future acquire complementary businesses,
products and technologies. Any anticipated benefits of an acquisition may not be
realized. Acquisition prospects include those that would complement our existing
product offerings, augment our market coverage or distribution channels, enhance
our technological capabilities, or otherwise offer growth opportunities.
Acquisitions of other companies may result in the utilization of cash and
marketable securities, dilutive issuances of equity securities, the incurrence
of debt and the amortization of intangible assets or the write-down of goodwill.
In addition, acquisitions involve numerous risks, including difficulties in the
assimilation of operations, technologies, products and personnel of the acquired
company, diversion of management's attention from other business concerns, risks
of entering markets in which we have no direct or limited prior experience, and
the potential loss of key employees of ours and the acquired company. For
example, we acquired M-E Hearing Systems Pty. Ltd. ("M-E Hearing") in July 2001
and Omni-ReSound ApS ("Omni-ReSound") in January 2002. We may encounter
difficulties in integrating the operations of M-E Hearing and Omni-ReSound with
our own on economically advantageous bases. Difficulties in integrating
Omni-ReSound may result in loss of the annually awarded Danish government
hearing aid contract. Failure to successfully integrate acquisitions we make
could harm our business and operating results.

THE LOSS OF ANY LARGE CUSTOMER OR A REDUCTION IN ORDERS FROM ANY 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 somewhat 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. We
may be unable to retain our current customers, and may be unable to recruit
replacement or additional customers. We are selling an increasing number of
hearing aids to several audiology clinic consolidators that have a large number
of owned or franchised hearing aid clinics. We are subject to the risk of losing
these customers, incurring significant reductions in sales to these customers or
granting price concessions in order to maintain our business. In addition, we
are subject to the risk of being unable to collect accounts receivable balances
from these customers. We had one hearing aid customer who accounted for
approximately $1.1 million, or 7%, of net sales in the quarter ended March 31,
2002. This customer accounted for approximately $0.8 million, or 8%, of our
gross account receivable balance at March 31, 2002. In recent years competitors
have purchased consolidators, which could result in lost revenue for us.

                                       13
<PAGE>

WE ARE A DEFENDANT IN A CLASS ACTION LAWSUIT IN WHICH THE PLAINTIFF IS CLAIMING
THAT WE AND CERTAIN OF OUR OFFICERS VIOLATED 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 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,
is being 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. We deny the allegations in this action and will defend ourselves
vigorously; however, litigation is inherently uncertain and there can be no
assurance that we will not be materially and adversely affected. The Company has
moved to dismiss plaintiffs' Second Amended Complaint, which was filed after the
District Court dismissed plaintiffs' First Amended Complaint with leave to
amend. There has been no discovery to date, no class has been certified and no
trial date has been scheduled.

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 critical to our business because only a small
number of suppliers would be able or willing to produce our chips in the
relatively small quantities and with the exacting specifications we require.
Under our agreement with this supplier, we are required to make minimum annual
purchases, which may be higher than our requirements. In addition, the
disposable tips used in our Adesso hearing aids are 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 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 60-day return policy and a minimum of a one-year warranty
on our hearing aids. Our components warranty is generally 30 to 120 days. Sales
returns were $3.9 million and $3.8 million in the quarters ended March 31, 2002
and 2001, respectively. Warranty costs for remakes and repairs were $0.8 million
and $0.7 million in the quarters ended March 31, 2002 and 2001, 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.

IF WE FAIL TO DEVELOP NEW AND INNOVATIVE PRODUCTS, OUR COMPETITIVE POSITION WILL
SUFFER AND IF OUR NEW PRODUCTS DO NOT GAIN MARKET SHARE AS RAPIDLY AS WE
ANTICIPATE OUR OPERATING RESULTS 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. If our products do not gain market share
as rapidly as we anticipate, our net sales and operating results will suffer.

WE 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 would incur
significant expenses if we expanded our facilities and hired additional
personnel. We may seek collaborative arrangements with other companies to
manufacture current products or new products.

                                       14
<PAGE>

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

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

Our success depends in large part on our proprietary technology. We rely on a
combination of patents, copyrights, trademarks, trade secrets, confidentiality
procedures and licensing arrangements to establish 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 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 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 U.S. and from the intercompany account balances between
our U.S. and Danish and Australian companies. Fluctuations in the exchange rates
between the U.S. dollar and other currencies could affect 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.

WE MAY NOT BE ABLE TO MAINTAIN OR EXPAND OUR BUSINESS IF WE ARE UNABLE TO HIRE
AND RETAIN SUFFICIENT TECHNICAL AND SALES PERSONNEL

Competition for qualified personnel in technology industries can be intense. We
intend to expand our direct sales force in order to increase market awareness of
our products and, in turn, to generate increased revenue. Accordingly, we expect
to hire a number of sales personnel in 2002. If we are unable to hire and retain
sufficient technical and sales personnel our business and operating results will
suffer.

IF OUR STOCK PRICE DOES NOT INCREASE, WE MAY HAVE DIFFICULTY RETAINING EMPLOYEES

Stock options are an important component of the compensation of our personnel.
If our stock price does not increase in the future, we may face difficulty
retaining employees and may need to exchange options for new options or issue
new options to motivate and retain our employees, which would be dilutive to our
shareholders.

                                       15
<PAGE>

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 U.S. 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.

THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK BY PRE-INITIAL
PUBLIC OFFERING SHAREHOLDERS INCLUDING OUR DIRECTORS AND OFFICERS, 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 5.8 million of our outstanding shares of
common stock 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 have adopted trading plans under SEC Rule 10b5-1 in order to dispose of
a portion of their shares in an orderly manner. Other officers or directors may
adopt such a trading plan in the future.

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.

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 that 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.

OUR FINANCIAL STATEMENTS ARE AUDITED BY ARTHUR ANDERSEN, WHICH HAS BEEN INDICTED
BY THE DEPARTMENT OF JUSTICE, AND WE MAY NEED TO CHANGE AUDITORS, WHICH COULD BE
EXPENSIVE AND COULD HAVE OTHER ADVERSE CONSEQUENCES

Our financial statements for the year ended December 31, 2001 were audited by
Arthur Andersen LLP, and our Board of Directors has appointed Arthur Andersen as
our independent public accounting firm for the year ending December 31, 2002.
Arthur Andersen has been indicted by the Department of Justice for obstruction
of justice. The Securities and Exchange Commission ("SEC") has adopted
regulations requiring companies to receive representations from Arthur Andersen
concerning audit quality

                                       16
<PAGE>

controls prior to filing financial statements audited by Arthur Andersen after
March 14, 2002. If Arthur Andersen is unable to meet SEC auditing requirements
in the future, or if our Board of Directors decides that it is in our and our
shareholders' best interest to disengage Arthur Andersen, we could incur
significant costs and delays in preparing audited financial statements and we
may be unable to satisfy our SEC filing requirements (including meeting
requirements that are necessary for continued listing on Nasdaq that permit
sales of stock pursuant to Rule 144 and that allow use of S-3 registration
statements), either of which could harm our business.

                           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 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,
is being 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. We strongly deny the allegations in this action and will defend
ourselves vigorously; however, litigation is inherently uncertain and there can
be no assurance that we will not be materially and adversely affected. The
Company has moved to dismiss plaintiffs' Second Amended Complaint, which was
filed after the District Court dismissed plaintiffs' First Amended Complaint
with leave to amend. There has been no discovery to date, no class has been
certified and no trial has been scheduled.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1     Agreement between the registrant and Kevin J. Ryan.

(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 3, 2002

                                   /s/  Stephen L. Wilson
                                   ---------------------------------------------
                                   Stephen L. Wilson
                                   Vice President and Chief Financial Officer

                                       17