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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.
20549

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FORM 10-Q

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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|- | ----------------------------------------------------------------------------------------
| 
|  | FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003                                            
| 
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-30335

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|SONIC INNOVATIONS, INC.                                       
|--------------------------------------------------------------
|                                                              
|(Exact name of registrant as specified in its charter)        
|                                                              
|                                                              
|                                                              
|Delaware                                                      
|                                                              
|(State or other jurisdiction of incorporation or organization)
|                                                              
|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 | o | No
|- | --- | - | --

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act.)

|x | Yes | o | No
|- | --- | - | --

As of August 6, 2003 there were 19,889,712 shares of the registrants $.001 par value
common stock outstanding.

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##### Table of Contents

SONIC INNOVATIONS, INC.

TABLE OF CONTENTS

|           |                                                                                                           | Page
|---------- | --------------------------------------------------------------------------------------------------------- | ----
|           |                                                                                                           |     
|PART I     | FINANCIAL INFORMATION                                                                                     |     
|           |                                                                                                           |     
|ITEM 1.    | Unaudited Condensed Consolidated Financial Statements:                                                    |     
|           |                                                                                                           |     
|           | Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002                           | 3   
|           |                                                                                                           |     
|           | Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002 | 4   
|           |                                                                                                           |     
|           | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002           | 5   
|           |                                                                                                           |     
|           | Notes to Condensed Consolidated Financial Statements                                                      | 6   
|           |                                                                                                           |     
|ITEM 2.    | Managements Discussion and Analysis of Financial Condition and Results of Operations                     | 12  
|           |                                                                                                           |     
|ITEM 3.    | Quantitative and Qualitative Disclosures about Market Risk                                                | 16  
|           |                                                                                                           |     
|ITEM 4.    | Controls and Procedures                                                                                   | 16  
|           |                                                                                                           |     
|           | Factors That May Affect Future Performance                                                                | 16  
|           |                                                                                                           |     
|PART II    | OTHER INFORMATION                                                                                         |     
|           |                                                                                                           |     
|ITEM 1.    | Legal Proceedings                                                                                         | 21  
|           |                                                                                                           |     
|ITEM 4.    | Submission of Matters to a Vote of Security Holders                                                       | 21  
|           |                                                                                                           |     
|ITEM 6(a). | Exhibits                                                                                                  | 21  
|           |                                                                                                           |     
|ITEM 6(b). | Reports on Form 8-K                                                                                       | 21  
|           |                                                                                                           |     
|SIGNATURE  | 22                                                                                                       



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PART I     
FINANCIAL INFORMATION

ITEM 1.     
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

|                                                      |  | June 30, 2003 |         | December 31, 2002 |  
|----------------------------------------------------- |  | ------------- | ------- | ----------------- | -
|                                                      |  |               |         |                   |  
|ASSETS                                                |  |               |         |                   |  
|Current assets:                                       |  |               |         |                   |  
|Cash and cash equivalents                             |  | $             | 14,778  |                   | $
|Restricted cash                                       |  |               | 13,000  |                   |  
|Marketable securities                                 |  |               | 5,863   |                   |  
|Accounts receivable, net                              |  |               | 14,241  |                   |  
|Inventories                                           |  |               | 7,567   |                   |  
|Prepaid expenses and other                            |  |               | 2,092   |                   |  
|                                                      |  |               |         |                   |  
|Total current assets                                  |  |               | 57,541  |                   |  
|Long-term marketable securities                       |  |               | 4,006   |                   |  
|Property and equipment, net                           |  |               | 6,081   |                   |  
|Goodwill and other indefinite-lived intangible assets |  |               | 23,846  |                   |  
|Definite-lived intangible assets, net                 |  |               | 3,717   |                   |  
|Other assets                                          |  |               | 2,224   |                   |  
|                                                      |  |               |         |                   |  
|Total assets                                          |  | $             | 97,415  |                   | $
|                                                      |  |               |         |                   |  
|LIABILITIES AND SHAREHOLDERS EQUITY                  |  |               |         |                   |  
|Current liabilities:                                  |  |               |         |                   |  
|Short-term loan                                       |  | $             | 13,000  |                   | $
|Accounts payable                                      |  |               | 5,214   |                   |  
|Accrued payroll and related expenses                  |  |               | 2,774   |                   |  
|Accrued warranty                                      |  |               | 3,580   |                   |  
|Deferred revenue, current portion                     |  |               | 2,044   |                   |  
|Accrued income taxes                                  |  |               | 1,843   |                   |  
|Other accrued liabilities                             |  |               | 4,129   |                   |  
|Capital lease obligation                              |  |               |        |                   |  
|                                                      |  |               |         |                   |  
|Total current liabilities                             |  |               | 32,584  |                   |  
|Deferred revenue, net of current portion              |  |               | 3,577   |                   |  
|Other liabilities                                     |  |               | 243     |                   |  
|                                                      |  |               |         |                   |  
|Total liabilities                                     |  |               | 36,404  |                   |  
|                                                      |  |               |         |                   |  
|Shareholders equity:                                 |  |               |         |                   |  
|Common stock                                          |  |               | 21      |                   |  
|Additional paid-in capital                            |  |               | 113,789 |                   |  
|Deferred stock-based compensation                     |  |               | (79     | )                 |  
|Accumulated deficit                                   |  |               | (52,266 | )                 |  
|Accumulated other comprehensive income                |  |               | 3,319   |                   |  
|Treasury stock, at cost                               |  |               | (3,773  | )                 |  
|                                                      |  |               |         |                   |  
|Total shareholders equity                            |  |               | 61,011  |                   |  
|                                                      |  |               |         |                   |  
|Total liabilities and shareholders equity            |  | $             | 97,415  |                   | $
|                                                      |  |               |         |                   |  

See accompanying notes to condensed consolidated financial statements.

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

|                                                            |  | Three months ended June 30, |        | Six months ended June 30, |  
|----------------------------------------------------------- |  | --------------------------- | ------ | ------------------------- | -
|                                                            |  |                             |        |                           |  
|                                                            |  | 2003                        |        | 2002                      |  
|                                                            |  |                             |        |                           |  
|Net sales                                                   |  | $                           | 21,887 |                           | $
|Cost of sales                                               |  |                             | 10,646 |                           |  
|                                                            |  |                             |        |                           |  
|Gross profit                                                |  |                             | 11,241 |                           |  
|                                                            |  |                             |        |                           |  
|Selling, general and administrative expense                 |  |                             | 9,008  |                           |  
|Research and development expense                            |  |                             | 2,283  |                           |  
|Stock-based compensation expense                            |  |                             | 34     |                           |  
|                                                            |  |                             |        |                           |  
|Operating loss                                              |  |                             | (84    | )                         |  
|                                                            |  |                             |        |                           |  
|Other income, net                                           |  |                             | 589    |                           |  
|                                                            |  |                             |        |                           |  
|Income (loss) before income taxes                           |  |                             | 505    |                           |  
|Provision for income taxes                                  |  |                             | 341    |                           |  
|                                                            |  |                             |        |                           |  
|Net income (loss)                                           |  | $                           | 164    |                           | $
|                                                            |  |                             |        |                           |  
|Basic and diluted earnings (loss) per common share          |  | $                           | 0.01   |                           | $
|                                                            |  |                             |        |                           |  
|Weighted average number of common shares outstanding:       |  |                             |        |                           |  
|Basic                                                       |  |                             | 19,934 |                           |  
|                                                            |  |                             |        |                           |  
|Diluted                                                     |  |                             | 20,620 |                           |  
|                                                            |  |                             |        |                           |  
|Stock-based compensation expense allocable to each caption: |  |                             |        |                           |  
|Cost of sales                                               |  | $                           | 2      |                           | $
|Selling, general and administrative expense                 |  |                             | 27     |                           |  
|Research and development expense                            |  |                             | 5      |                           |  
|                                                            |  |                             |        |                           |  
|Stock-based compensation expense                            |  | $                           | 34     |                           | $
|                                                            |  |                             |        |                           |  

See accompanying notes to condensed consolidated financial statements.

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

|                                                                            |  | Six months ended June 30, |        
|--------------------------------------------------------------------------- |  | ------------------------- | -------
|                                                                            |  |                           |        
|                                                                            |  | 2003                      |        
|                                                                            |  |                           |        
|Cash flows from operating activities:                                       |  |                           |        
|Net loss                                                                    |  | $                         | (682   
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |        
|Depreciation and amortization                                               |  |                           | 1,185  
|Stock-based compensation                                                    |  |                           | 77     
|Foreign currency transaction gain                                           |  |                           | (903   
|Changes in assets and liabilities, excluding the affect of acquisitions:    |  |                           |        
|Accounts receivable, net                                                    |  |                           | (1,540 
|Inventories, net                                                            |  |                           | 352    
|Prepaid expenses and other                                                  |  |                           | (505   
|Other assets                                                                |  |                           | 47     
|Accounts payable and accrued expenses                                       |  |                           | 255    
|                                                                            |  |                           |        
|Net cash used in operating activities                                       |  |                           | (1,714 
|                                                                            |  |                           |        
|Cash flows from investing activities:                                       |  |                           |        
|Acquisitions, net of cash acquired                                          |  |                           | (8,638 
|Purchases of property and equipment                                         |  |                           | (921   
|Investments and advances, net                                               |  |                           | (215   
|Restricted cash                                                             |  |                           | (13,000
|Proceeds from marketable securities, net                                    |  |                           | 12,002 
|                                                                            |  |                           |        
|Net cash used in investing activities                                       |  |                           | (10,772
|                                                                            |  |                           |        
|Cash flows from financing activities:                                       |  |                           |        
|Principal payments on long-term obligations                                 |  |                           | (103   
|Purchases of common stock for treasury                                      |  |                           |       
|Proceeds from short-term loan                                               |  |                           | 13,000 
|Proceeds from exercise of stock options and ESPP purchases                  |  |                           | 355    
|                                                                            |  |                           |        
|Net cash provided by (used in) financing activities                         |  |                           | 13,252 
|Effect of exchange rate changes on cash and cash equivalents                |  |                           | 322    
|                                                                            |  |                           |        
|Net increase (decrease) in cash and cash equivalents                        |  |                           | 1,088  
|Cash and cash equivalents, beginning of the period                          |  |                           | 13,690 
|                                                                            |  |                           |        
|Cash and cash equivalents, end of the period                                |  | $                         | 14,778 
|                                                                            |  |                           |        

See accompanying notes to condensed consolidated financial statements.

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

1.     BASIS OF PRESENTATION
AND ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America 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 and six months ended June 30, 2003 are not necessarily indicative of results that may be expected for the full year ending December 31, 2003. 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, 2002 as filed with the Securities and Exchange Commission.

Principles of
Consolidation. The consolidated financial statements include the accounts of Sonic Innovations, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

Revenue Recognition. Sales are recognized when (i) products are shipped, except for retail sales in Australia and Germany, which are recognized upon acceptance
by the hearing impaired consumer, (ii) persuasive evidence of an arrangement exists, (iii) title and risk of loss have transferred, (iv) the price is fixed and determinable, (v) contractual obligations have been satisfied and (vi) collectability is
reasonably assured. Net sales consist of product sales less provisions for sales returns which are made at the time of sale. The Company generally has a 60-day return policy and allowances for sales returns are reflected as reductions in accounts
receivable. Allowances for sales returns were as follows:

|                            |  | Three months ended June 30, |        | Six months ended June 30, |  
|--------------------------- |  | --------------------------- | ------ | ------------------------- | -
|                            |  |                             |        |                           |  
|                            |  | 2003                        |        | 2002                      |  
|                            |  |                             |        |                           |  
|Beginning balance           |  | $                           | 2,956  |                           | $
|Provisions and acquisitions |  |                             | 4,318  |                           |  
|Returns processed           |  |                             | (3,987 | )                         |  
|                            |  |                             |        |                           |  
|Ending balance              |  | $                           | 3,287  |                           | $
|                            |  |                             |        |                           |  

Revenues related to sales of extended warranties are deferred and recognized on a straight-line basis
over the warranty period.

Research and Development. Research and development costs are expensed when incurred.

2.     ACQUISITION

In May 2003, the Company acquired 100% of the stock of Sanomed
Handelsgesellschaft mbH (Sanomed) which markets hearing aids directly to German hearing impaired customers through ear, nose and throat (ENT) physicians.  Sanomed was founded in 1990 as a limited liability company. 
The acquisition was effected through a wholly owned subsidiary of the Company, PALME Verwaltungsgellschaft mbH.  The Company accounted for this transaction under the purchase method in accordance with Statement of Financial Accounting Standards
(SFAS) No. 141 Business Combinations.  The results of operations of Sanomed are included in the consolidated results of the Company from May 1, 2003.  The Company acquired Sanomed to gain a location and meaningful
presence in Germany.

The initial consideration paid by the Company was $13,000.  The Company incurred an additional $341 of expenses associated
with the acquisition. Additional consideration of up to a maximum of $4,600 may be payable over a three-year period based on sales performance.

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The following table sets forth the Companys preliminary allocation of the purchase consideration to the tangible and
intangible assets acquired and liabilities assumed:

|Cash and cash equivalents (less dividends payable to former shareholders of $2,051) |  | $ | 5,261  |  
|----------------------------------------------------------------------------------- |  | - | ------ | -
|Accounts receivable                                                                 |  |   | 2,952  |  
|Inventories                                                                         |  |   | 850    |  
|Other assets                                                                        |  |   | 576    |  
|Accounts payable and accrued expenses                                               |  |   | (1,682 | )
|Deferred revenue                                                                    |  |   | (3,251 | )
|Income tax and other liabilities                                                    |  |   | (2,318 | )
|Definite-lived intangible assets                                                    |  |   | 2,200  |  
|Goodwill                                                                            |  |   | 8,753  |  
|                                                                                    |  |   |        |  
|Total                                                                               |  | $ | 13,341 |  
|                                                                                    |  |   |        |  

The Company is in the process of obtaining an independent
appraisal of the fair values of the acquired assets and liabilities. The results of this appraisal may change the Companys preliminary allocation of the purchase consideration.

Included in other assets in the above table is Sonic Innovations common stock of $370,000 previously purchased by Sanomed. This amount was classified as
treasury stock in the consolidated financial statements for purchase accounting purposes.

The following table sets forth summary pro forma
consolidated financial information had the acquisition taken place at beginning of the periods presented:

|                                                      |  | Three months ended June 30, |        | Six months ended June 30, |  
|----------------------------------------------------- |  | --------------------------- | ------ | ------------------------- | -
|                                                      |  |                             |        |                           |  
|                                                      |  | 2003                        |        | 2002                      |  
|                                                      |  |                             |        |                           |  
|Net sales                                             |  | $                           | 23,502 |                           | $
|Operating profit (loss)                               |  |                             | 73     |                           |  
|Net income                                            |  |                             | 250    |                           |  
|Basic and diluted earnings per common share           |  |                             |        |                           |  
|Basic                                                 |  | $                           | 0.01   |                           | $
|                                                      |  |                             |        |                           |  
|Diluted                                               |  | $                           | 0.01   |                           | $
|                                                      |  |                             |        |                           |  
|Weighted average number of common shares outstanding: |  |                             |        |                           |  
|Basic                                                 |  |                             | 19,934 |                           |  
|                                                      |  |                             |        |                           |  
|Diluted                                               |  |                             | 20,620 |                           |  
|                                                      |  |                             |        |                           |  

3.     INVENTORIES

Inventories are stated at the lower of cost or market value using the first-in, first-out (FIFO) method and consisted of the following:

|                 |  | June 30, 2003 |       | December 31, 2002 |  
|---------------- |  | ------------- | ----- | ----------------- | -
|                 |  |               |       |                   |  
|Raw materials    |  | $             | 1,013 |                   | $
|Components       |  |               | 1,518 |                   |  
|Work in progress |  |               | 224   |                   |  
|Finished goods   |  |               | 4,812 |                   |  
|                 |  |               |       |                   |  
|Total            |  | $             | 7,567 |                   | $
|                 |  |               |       |                   |  

Provision is made to
reduce excess and obsolete inventories to their estimated net realizable value. As of June 30, 2003 and December 31, 2002, reserves for excess and obsolete inventories were $1,035 and $1,111, respectively.

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4.     INTANGIBLE ASSETS

Intangible assets are as follows:

|                                                |  | June 30, 2003 |       
|----------------------------------------------- |  | ------------- | ------
|                                                |  |               |       
|                                                |  | Original Cost |       
|                                                |  |               |       
|Definite-lived intangible assets                |  | $             | 4,190 
|Goodwill and indefinite-lived intangible assets |  |               | 20,909
|                                                |  |               |       
|Total intangibles assets                        |  | $             | 25,099
|                                                |  |               |       



|                                                |  | December 31, 2002 |       
|----------------------------------------------- |  | ----------------- | ------
|                                                |  |                   |       
|                                                |  | Original Cost     |       
|                                                |  |                   |       
|Definite-lived intangible assets                |  | $                 | 1,990 
|Goodwill and indefinite-lived intangible assets |  |                   | 12,083
|                                                |  |                   |       
|Total intangibles assets                        |  | $                 | 14,073
|                                                |  |                   |       
|                                                |  |                   |       

In 2003, intangibles and goodwill increased by $11,026 as a result of the Sanomed acquisition described in note 2 above and milestone
payments made in connection with a previous acquisition. During the six months ended June 30, 2003, the impact of currency translation increased the balance of intangibles $1,732. Amortization expense was $57 and $51 for the three-month periods
ended June 30, 2003 and 2002, respectively, and $115 and $103 for the six-month periods ended June 30, 2003 and 2002, respectively. Annual forecasted amortization expense for the years 2003 through 2007 is as follows:

|                            |  | 2003 |     | 2004 |   | 2005 |  | 2006 |     | 2007 |  
|--------------------------- |  | ---- | --- | ---- | - | ---- |  | ---- | --- | ---- | -
|                            |  |      |     |      |   |      |  |      |     |      |  
|Annual amortization expense |  | $    | 458 |      | $ | 575  |  | $    | 576 |      | $

Definite-lived intangible assets include technology
licenses, trade names, distribution agreements, customer lists and non-compete agreements.

5.     OTHER ASSETS

Other assets consisted of the following:

|                         |  | June 30, 2003 |       | December 31, 2002 |  
|------------------------ |  | ------------- | ----- | ----------------- | -
|                         |  |               |       |                   |  
|Investments and advances |  | $             | 2,008 |                   | $
|Other                    |  |               | 216   |                   |  
|                         |  |               |       |                   |  
|Total                    |  | $             | 2,224 |                   | $
|                         |  |               |       |                   |  

Investments and advances consisted of one investment and
one advance to two separate business partners and several advances to customers. The advances are secured by the assets of the business, life insurance policies and/or personal guarantees and bear interest at rates ranging from 5% to 8% with terms
from one to five years. Investments and advances are stated at cost, net of a valuation allowance of $116 and $110 at June 30, 2003 and December 31, 2002, respectively.

6.     SHORT TERM LOAN

The $13,000 purchase price of the Sanomed acquisition was funded by a
short term loan from a U.S. bank.  The interest rate applicable to the borrowings under the agreement is based on .4% above the LIBOR rate as defined in the agreement and the Company pledged $13,000 of its cash and cash equivalents as
security.  The Companys effective

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interest rate for the period through June 30, 2003 was 1.78%.  This short term loan and applicable interest is payable in full on August 23, 2003 and is expected to be
partially replaced with a longer-term loan from a German bank.

7.     INCOME TAXES

In 2003, certain of the Companys non-U.S. operations were profitable, resulting in a provision for income taxes of $341 and $465 for the three and six months ended June 30,
2003, respectively. The Companys provision for income taxes is based on the annualized effective tax rate for each tax jurisdiction. If changes in conditions cause actual results to be more or less favorable, adjustments to the effective
income tax rate would be required. The Company has not provided for U.S. deferred income taxes or foreign withholding taxes on the undistributed earnings of its non-U.S. subsidiaries since these earnings are intended to be reinvested
indefinitely.

For the three and six months ended June 30, 2002, no income tax provision or benefit was recorded because operating losses were
incurred in most tax jurisdictions and tax loss carry-forwards offset tax provisions in other tax jurisdictions.

8.     COMPREHENSIVE INCOME

Comprehensive income for the three and six months ended June 30, 2003 and 2002 consisted of the following:

|                                  |  | Three months ended June 30, |       | Six months ended June 30, |  
|--------------------------------- |  | --------------------------- | ----- | ------------------------- | -
|                                  |  |                             |       |                           |  
|                                  |  | 2003                        |       | 2002                      |  
|                                  |  |                             |       |                           |  
|Net income (loss)                 |  | $                           | 164   |                           | $
|Foreign currency translation gain |  |                             | 1,253 |                           |  
|                                  |  |                             |       |                           |  
|Comprehensive income              |  | $                           | 1,417 |                           | $
|                                  |  |                             |       |                           |  

Foreign currency translation gains reflect changes in the
exchange rates of foreign currencies relative to the US dollar on the translation of the Companys net investment in its foreign subsidiaries.

9.     STOCK-BASED
COMPENSATION

The Company accounts for stock options issued to employees, officers and directors under Accounting Principles Board
(APB) Opinion No. 25 and those issued to consultants or non-employees under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under APB Opinion No. 25,
compensation cost is recognized if an options exercise price is below the fair market value of the Companys common stock at the grant date. Under SFAS No. 123, compensation cost is recognized for the fair market value of each option as
estimated on the date of grant using the Black-Scholes option-pricing model.

SFAS No. 148 Accounting for Stock-Based Compensation 
Transition and Disclosure, amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair market value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require new prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
The Company has elected to adopt the disclosure only provisions of SFAS No. 148.

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If compensation expense for all stock options, including employee stock purchase plan (ESPP) options, had been determined in
accordance with SFAS No. 123, the Companys net income (loss) and basic and diluted earnings (loss) per share would have been as follows:

|                                                                        |  | Three months ended June 30, |       | Six months ended June 30, |  
|----------------------------------------------------------------------- |  | --------------------------- | ----- | ------------------------- | -
|                                                                        |  |                             |       |                           |  
|                                                                        |  | 2003                        |       | 2002                      |  
|                                                                        |  |                             |       |                           |  
|Net income (loss) as reported                                           |  | $                           | 164   |                           | $
|Stock-based compensation expense included in reported net income (loss) |  |                             | 34    |                           |  
|Pro forma after-tax impact of options at fair value                     |  |                             | (830  | )                         |  
|Pro forma after-tax impact of ESPP discount                             |  |                             | (57   | )                         |  
|                                                                        |  |                             |       |                           |  
|Pro forma net loss                                                      |  | $                           | (689  | )                         | $
|                                                                        |  |                             |       |                           |  
|Basic and diluted earnings (loss) per share as reported                 |  | $                           | 0.01  |                           | $
|                                                                        |  |                             |       |                           |  
|Pro forma basic and diluted loss per share                              |  | $                           | (0.03 | )                         | $
|                                                                        |  |                             |       |                           |  

The fair value of stock options is estimated on the date of grant using the Black-Scholes option-pricing
model.  The following table outlines the assumptions used in the Black-Scholes model:

|                              |  | Three months ended June 30, |      | Six months ended June 30, | 
|----------------------------- |  | --------------------------- | ---- | ------------------------- | 
|                              |  |                             |      |                           | 
|                              |  | 2003                        |      | 2002                      | 
|                              |  |                             |      |                           | 
|Stock Options:                |  |                             |      |                           | 
|Dividend yield                |  |                             | 0.0  | %                         | 
|Risk-free interest rate       |  |                             | 2.3  | %                         | 
|Expected option life in years |  |                             | 4.8  |                           | 
|Expected volatility           |  |                             | 75.6 | %                         | 
|ESPP:                         |  |                             |      |                           | 
|Dividend yield                |  |                             | 0.0  | %                         | 
|Risk-free interest rate       |  |                             | 1.6  | %                         | 
|Expected option life in years |  |                             | 0.5  |                           | 
|Expected volatility           |  |                             | 64.0 | %                         | 

10.     EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per share is calculated based upon the weighted average shares of common stock outstanding during the period. Diluted earnings (loss) per share is
calculated based upon the weighted average shares of common stock outstanding, plus the dilutive effect of common stock equivalents calculated using the treasury stock method. Dilutive common stock equivalents for the three months ended June 30,
2003 and 2002 consisted of 686 and 1,444 shares pertaining to 1,729 and 3,377 stock options, respectively. Antidilutive common stock equivalents, consisting of stock options of 3,074 and 971 for the three months ended June 30, 2003 and 2002,
respectively, were excluded from diluted earnings (loss) per share calculations. For the six months ended June 30, 2003 and 2002, antidilutive common stock options totaled 3,899 and 2,670, respectively.

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11.     SEGMENT INFORMATION

The table
below presents selected information for the Companys geographic segments. Rest-of-world (ROW) includes export sales from the U.S. to ROW countries.

|                                 |  | North America |        | Europe |   | ROW    |  | Total |       
|-------------------------------- |  | ------------- | ------ | ------ | - | ------ |  | ----- | ------
|                                 |  |               |        |        |   |        |  |       |       
|Three months ended June 30, 2003 |  |               |        |        |   |        |  |       |       
|Net sales to external customers  |  | $             | 10,705 |        | $ | 7,220  |  | $     | 3,962 
|Operating profit (loss)          |  |               | (929   | )      |   | 279    |  |       | 566   
|Three months ended June 30, 2002 |  |               |        |        |   |        |  |       |       
|Net sales to external customers  |  | $             | 9,892  |        | $ | 3,655  |  | $     | 3,804 
|Operating profit (loss)          |  |               | (1,001 | )      |   | 146    |  |       | 561   
|Six months ended June 30, 2003   |  |               |        |        |   |        |  |       |       
|Net sales to external customers  |  | $             | 20,209 |        | $ | 11,518 |  | $     | 7,174 
|Operating profit (loss)          |  |               | (2,456 | )      |   | 342    |  |       | 751   
|Six months ended June 30, 2002   |  |               |        |        |   |        |  |       |       
|Net sales to external customers  |  | $             | 19,163 |        | $ | 6,527  |  | $     | 6,765 
|Operating profit (loss)          |  |               | (2,459 | )      |   | 475    |  |       | 882   
|June 30, 2003                    |  |               |        |        |   |        |  |       |       
|Identifiable segment assets      |  | $             | 50,736 |        | $ | 34,712 |  | $     | 11,967
|Long-lived assets                |  |               | 9,345  |        |   | 18,074 |  |       | 8,449 
|December 31, 2002                |  |               |        |        |   |        |  |       |       
|Identifiable segment assets      |  | $             | 50,305 |        | $ | 14,047 |  | $     | 10,394
|Long-lived assets                |  |               | 8,776  |        |   | 6,764  |  |       | 7,143 

12.     WARRANTY

The Company provides for the cost of remaking and repairing products under warranty at the time of sale. These costs are included in cost of sales. The warranty period ranges
from one to three years. The Company analyzes the amount of historical warranty by product family and model when evaluating the adequacy of the reserve. Because of the length of the warranty period, adjustments to the originally recorded provisions
may be necessary from time to time. The following table reflects changes in the Companys reserve for warranty during the three and six months ended June 30, 2003.

|                           |  | Three months ended June 30, |       | Six months ended June 30, |  
|-------------------------- |  | --------------------------- | ----- | ------------------------- | -
|                           |  |                             |       |                           |  
|                           |  | 2003                        |       | 2002                      |  
|                           |  |                             |       |                           |  
|Beginning balance          |  | $                           | 3,598 |                           | $
|Provision and acquisitions |  |                             | 948   |                           |  
|Actual expenditures        |  |                             | (966  | )                         |  
|                           |  |                             |       |                           |  
|Ending balance             |  | $                           | 3,580 |                           | $
|                           |  |                             |       |                           |  

13.     LEGAL PROCEEDINGS

The Company is 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. Discovery has commenced, but no class has been certified and no trial date has been scheduled.

14.     RECENTLY ENACTED ACCOUNTING STANDARDS

In June 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires a liability to be recorded for costs associated with an exit or disposal activity when that
liability is incurred and can be measured at fair value. A liability is incurred when an event obligates the entity to transfer or use assets (i.e., when an event leaves the company little or no discretion to avoid transferring or using the assets
in the

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future). Under previous accounting rules, if a companys management approved an exit plan, the company generally could record the costs of that plan as a liability on the
approval date, even if the company did not incur the costs until a later date. Under SFAS No. 146, some of those costs might qualify for immediate recognition, while others might be recorded during one or more future periods. The Company adopted
SFAS No. 146 on January 1, 2003 with no impact on its results of operations and financial position.

In November 2002, the FASB issued Financial
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, (FIN 45), which expanded previously issued accounting guidance and
disclosure requirements for certain guarantees. FIN 45 requires recognition of an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be
applied on a prospective basis to guarantees issued or modified after December 31, 2002. The Company adopted FIN 45 on January 1, 2003 with no impact on its results of operations and financial position.

In January 2003, the FASB issued Financial Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, (FIN 46),
which addresses the consolidation by business enterprises of variable interest entities as defined therein and applies immediately to variable interests in variable interest entities created or obtained after January 31, 2003. The Company adopted
FIN 46 on January 31, 2003 with no impact on its results of operations and financial position.

In April 2003, the FASB issued SFAS No. 149
Amendments of Statement 133 on Derivative Instruments and Hedging Activities.  This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain instruments embedded in other
contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement requires that contracts with comparable characteristics be accounted for similarly. In particular, this
statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying hedged risk to
conform to language used in FIN 45 and amends certain other existing pronouncements. This statement, the provisions of which are to be applied prospectively, is effective for contracts entered into or modified after June 30, 2003. The Company does
not expect the adoption of SFAS No. 149 to have a material effect on its results of operations or financial position.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.  This statement establishes standards for how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that a company classify a financial instrument that is within SFAS No. 150s scope as a liability (or an asset in some circumstances)
because that financial instrument embodies an obligation of the company. Many of those instruments were previously classified as equity. SFAS No. 150 requires a company to classify the following instruments as liabilities (or assets in some
circumstances): mandatorily redeemable financial instruments; obligations to repurchase company equity shares by transferring assets; and certain obligations to issue a variable number of company equity shares. SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the adoption of SFAS No. 150 to have a
material effect on its results of operations or financial position.

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

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 factors: market transition from analog to digital hearing aids, particularly lower priced digital aids; shift of sales mix toward lower-priced
products and the resultant negative impact on average selling prices by product family and gross margin; anticipation of gross profit improvement due to increased unit sales; improvement in European sales beginning in the third quarter; gross margin
improvement due to the replacement of third party products in Germany with products manufactured by us, absorption benefits of additional volume and cost reduction efforts on several fronts; increased selling, general and administrative expense;
quarterly variations in selling and marketing expenses; increased research and development expense; amortization of deferred stock-based compensation; borrowing related to purchase of Sanomed; the use of cash to fund operations and acquisition; and
sufficiency of cash to fund our operations. 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 entitled, 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, 2002. Our critical accounting policies
are described in our Annual Report on Form 10-K for the year ended December 31, 2002.

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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 countries where we have a direct presence, we sell finished hearing aids principally to hearing care professionals, except in Australia and
Germany where we principally sell hearing aids directly to hearing impaired consumers.  In countries where we do not have a direct presence, we sell finished hearing aids and hearing aid kits principally to distributors.

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 statements of operations information for the periods
indicated expressed as a percentage of net sales.

|                                            |  | Three months ended June 30, |       | Six months ended June 30, | 
|------------------------------------------- |  | --------------------------- | ----- | ------------------------- | 
|                                            |  |                             |       |                           | 
|                                            |  | 2003                        |       | 2002                      | 
|                                            |  |                             |       |                           | 
|Net sales                                   |  |                             | 100.0 | %                         | 
|Cost of sales                               |  |                             | 48.6  |                           | 
|                                            |  |                             |       |                           | 
|Gross profit                                |  |                             | 51.4  |                           | 
|Selling, general and administrative expense |  |                             | 41.2  |                           | 
|Research and development expense            |  |                             | 10.4  |                           | 
|Stock-based compensation expense            |  |                             | 0.2   |                           | 
|                                            |  |                             |       |                           | 
|Operating loss                              |  |                             | (0.4  | )                         | 
|Other income, net                           |  |                             | 2.7   |                           | 
|                                            |  |                             |       |                           | 
|Income (loss) before income taxes           |  |                             | 2.3   |                           | 
|Provision for income taxes                  |  |                             | 1.5   |                           | 
|                                            |  |                             |       |                           | 
|Net income (loss)                           |  |                             | 0.8   | %                         | 
|                                            |  |                             |       |                           | 

Net Sales.Net sales consist of product sales less
a provision for sales returns, which is made at the time of the related sale. Net sales were $21,887 for the quarter ended June 30, 2003, a 26% increase from $17,351 recorded for the quarter ended June 30, 2002. The increase was mainly a result of
acquisitions and the favorable effect of foreign currency exchange rates.

By geography, North America hearing aid sales in the second quarter 2003
of $10,705 increased 8% from second quarter 2002 sales of $9,892. For the six months ended June 30, 2003, North America sales were $20,209 compared to $19,163 for the same period in 2002, an increase of 5%.  North America sales benefited from
the April 2003 introduction of our new Natura 3 product family, including a restyled, behind the ear product with greater amplification, as well as a full quarter impact of our Canadian operations, which we acquired in June 2002.  We believe
that the transition from lower priced analog aids to higher priced digital aids, along with the poor economic climate, have caused consumers to seek out lower priced digital aids. Because we do not sell analog products while our competitors do, we
believe customers that are shifting from analog aids find it easier to migrate to our competitors low priced digital aids. However, we have been pursuing the low-priced digital market with our Tribute product family in order to gain customers
in this growing market segment. This will negatively impact gross margin, but should improve gross profit due to increased unit sales.

Sales in
Europe of $7,220 in the second quarter 2003 were up 98% from second quarter 2002 sales of $3,655 and increased by 76% to $11,518 for the first six months of 2003, up from $6,527 for the corresponding period in the prior year, as a result of
acquisitions of businesses in Germany in May 2003 and the Netherlands in October 2002 and the favorable effects of foreign currency, offset somewhat by slowing sales in much of the rest of Europe.  Our new Natura 3 product line is beginning to
be introduced in Europe and we anticipate improvement in European sales beginning in the third quarter.  Rest-of-world hearing aid sales of $3,962 were up 4% from second quarter 2002 sales of $3,804 and increased by 6% to $7,174 for the first
six months of 2003, up from $6,765 for the corresponding period in the prior year, as continued growth of our Australian business offset the loss of business in Japan and Brazil.

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We generally have a 60-day return policy for our hearing aid products. Sales returns were $3,987 and $3,584 for the quarters
ended June 30, 2003 and 2002, respectively. Sales returns as a percentage of hearing aid sales were 18.2% in the second quarter 2003, down from 20.7% in the second quarter 2002. The decrease in returns was mainly a result of (i) a shift in U.S.
sales mix towards lower-priced products (lower-priced hearing aids are generally returned at a lower rate) and (ii) a higher level of non-U.S. sales (a lower return rate exists outside the U.S.).

Cost of Sales.Cost of sales consists of manufacturing costs, royalty expenses, quality assurance costs and costs associated with product remakes and repairs. Cost of
sales was $10,646 for the quarter ended June 30, 2003, an increase of $2,282 (27%) from cost of sales of $8,364 for the quarter ended June 30, 2002. Gross margin of 51.4% in the second quarter 2003 decreased from second quarter 2002 gross margin of
51.8%, despite a favorable currency impact, mainly due to lower initial gross margin from our newly acquired German acquisition and we incurred costs to increase our capacity to manufacture products for our German business in the future.  Cost
of sales was $18,441 for the six months ended June 30, 2003, an increase of $2,636 (17%) from cost of sales of $15,805 for the six months ended June 30, 2002. Gross margin of 52.6% in the six months ended June 30, 2003 increased from first half 2002
gross margin of 51.3% primarily due to cost reductions and the impact of acquisitions.  We expect gross margin to improve going forward as we replace third party products with Sonic Innovations manufactured products in Germany, experience the
absorption benefits of additional volume and continue with our cost reduction efforts on a number of fronts. However, an anticipated sales mix shift toward lower-priced products will put downward pressure on gross margin as well as the expected
overall average selling prices by product family.

We provide for the cost of remaking and repairing products under warranty. Warranty periods range
from one to three years for hearing aids. Warranty costs were $966 and $781 for the quarters ended June 30, 2003 and 2002, respectively and $1,733 and $1,543 for the six months ended June 30, 2003 and 2002, 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 $9,008, or 41.2% of net sales, for the quarter
ended June 30, 2003, an increase of $1,960 (28%) from selling, general and administrative expense of $7,048, or 40.6% of net sales, for the quarter ended June 30, 2002. Selling, general and administrative expense was $16,976, or 43.6% of net sales,
for the six months ended June 30, 2003, an increase of $3,615 (27%) from selling, general and administrative expense of $13,361, or 41.2% of net sales, for the six months ended June 30, 2002. The increase in selling, general and administrative
expense for the three and six months ended June 30, 2003 was principally a result of our acquisition activity and the negative effect of foreign currency exchange rates.

For the balance of the year, we expect selling, general and administrative expense to increase in dollars, although not necessarily as a percentage of sales. In addition, selling
and marketing expenses may vary from quarter to quarter as a result of our new product introductions, the timing of our advertising campaigns and convention costs.

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 $2,283, or 10.4% of net sales, for the quarter ended June 30, 2003, an increase of $143 (7%) from research and development expense of $2,140, or 12.4% of net sales, for the
quarter ended June 30, 2002. Research and development expense was $4,770, or 12.3% of net sales, for the six months ended June 30, 2003, an increase of $578 (14%) from research and development expense of $4,192, or 12.9% of net sales, for the six
months ended June 30, 2002. The increase in research and development expense for the three and six months ended June 30, 2003 was principally due to costs associated with the design, development and introduction of the Natura 3 product family and
assistance in the design and development of advanced integrated circuitry by a third-party contractor. We expect research and development expense to increase in 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 initial public offering and is being amortized over the vesting periods of the individual stock options, periodically adjusted for employee separations. For
the quarters ended June 30, 2003 and 2002, stock-based compensation expense was $34 and $93, respectively. For the six months ended June 30, 2003 and 2002, stock-based compensation expense was $77 and $199, respectively. As of June 30, 2003,
deferred stock-based compensation of $79 is expected to be amortized as follows: July 1 to December 31, 2003 - $42; 2004 - $26; and 2005 - $11.

Other Income. Other income in the second quarter 2003 was $589, an increase from other income of $451 in the second quarter 2002.  Other income in the six months
ended June 30, 2003 was $1,146, an increase from other income of $840 in the six months ended June 30, 2002.  This was a result of higher foreign currency exchange gains resulting from the impact of a weaker U.S. dollar on the intercompany
balances between out U.S. parent company and our non-U.S. subsidiaries, offset somewhat by a lower cash balance and reduced interest rates and the interest on our short term loan.

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Income Taxes.For the three and six months ended June 30, 2003, certain of the Companys non-U.S. operations were
profitable, resulting in a provision for income taxes of $341 for the three months ended June 30, 2003 and $465 for the six months ended June 30, 2003. We have not provided for U.S. deferred income taxes or foreign withholding taxes on the
undistributed earnings of our non-U.S. subsidiaries since these earnings are intended to be reinvested indefinitely.

Net Income (Loss).Net
income for the three months ended June 30, 2003 was $164 ($0.01 per share) compared to net income for the three months ended June 30, 2002 of $157 ($0.01 per share).  Net loss for the six months months ended June 30, 2003 was $682 ($0.03 per
share) compared to a net loss for the six months ended June 30, 2002 of $262 ($0.01 per share).

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities of $1,714 for the six months ended June 30, 2003 resulted from a net loss of $682 and changes in assets and liabilities of $1,391, offset in
part by net non-cash items of $359.

Net cash used in investing activities of $10,772 for the six months ended June 30, 2003 resulted from net cash
paid for acquisitions of $8,638, restricted cash of $13,000, purchases of property and equipment of $921 and net advances to certain customers of $215, offset in part by net proceeds from the maturity of marketable securities of $12,002.

Net cash provided by financing activities of $13,252 for the six months ended June 30, 2003 resulted from proceeds from a short term loan of $13,000 and stock
option exercises of $355, offset in part by repayment of long-term obligations of $103.

In May 2003, we signed a definitive purchase agreement to
acquire Sanomed Handelsgesellschaft mbH, a privately held company headquartered in Hamburg, Germany. Sanomed markets various manufacturers hearing aids throughout Germany. The initial purchase price was approximately $13,000, with the
potential for contingent purchase price of approximately $4,600 provided certain financial milestones are achieved over the next three years. The acquisition was funded by a short term loan from a U.S. bank, which is payable in full on August 23,
2003 and cash and cash equivalents of $13,000 was pledged against the loan.  We expect to partially replace this loan with a longer term loan from a German bank.

As of June 30, 2003, we had $37,647 in cash, cash equivalents and marketable securities, of which $13,000 is restricted. We anticipate using cash to fund operations and make
acquisitions of complementary businesses and technologies. While we do not expect net cash flows from operations to be significant in the near term, we do expect to have sufficient cash to fund our operating requirements for the next 12 months and
into the foreseeable future.

RECENTLY ENACTED ACCOUNTING STANDARDS

In
June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires a liability to be recorded for costs associated with an exit or
disposal activity when that liability is incurred and can be measured at fair value. A liability is incurred when an event obligates the entity to transfer or use assets (i.e., when an event leaves the company little or no discretion to avoid
transferring or using the assets in the future). Under previous accounting rules, if a companys management approved an exit plan, the company generally could record the costs of that plan as a liability on the approval date, even if the
company did not incur the costs until a later date. Under SFAS No. 146, some of those costs might qualify for immediate recognition, while others might be recorded during one or more future periods. We adopted SFAS No. 146 on January 1, 2003 with no
impact on our results of operations and financial position.

In November 2002, the FASB issued Financial Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, (FIN 45), which expanded previously issued accounting guidance and disclosure requirements for
certain guarantees. FIN 45 requires recognition of an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis
to guarantees issued or modified after December 31, 2002. We adopted FIN 45 on January 1, 2003 with no impact on our results of operations and financial position.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, which amends SFAS No. 123 Accounting for
Stock-Based Compensation, and gives companies electing to expense employee stock options three methods to do so. In addition, the statement amends the disclosure requirements to require more prominent disclosures about the method of accounting
for stock-based employee compensation and the effect of the method used on reported results in both annual and interim financial statements. We have elected to continue using the intrinsic value method of accounting for stock-based compensation.
Therefore, SFAS No. 148 will not have any effect on our results of operations and financial position. See Note 9 for additional disclosures regarding stock-based compensation.

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In January 2003, the FASB issued Financial Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51, (FIN 46), which addresses the consolidation by business enterprises of variable interest entities as defined therein and applies immediately to variable interests in variable interest entities created
or obtained after January 31, 2003. We adopted FIN 46 on January 31, 2003 with no impact on our results of operations and financial position.

In
April 2003, the FASB issued SFAS No. 149 Amendments of Statement 133 on Derivative Instruments and Hedging Activities.  This statement amends and clarifies financial accounting and reporting for derivative instruments, including
certain instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement requires that contracts with comparable characteristics be
accounted for similarly. In particular, this statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component, amends the
definition of an underlying hedged risk to conform to language used in FIN 45 and amends certain other existing pronouncements. This statement, the provisions of which are to be applied prospectively, is effective for contracts entered into or
modified after June 30, 2003. The Company does not expect the adoption of SFAS No. 149 to have a material effect on its results of operations or financial position.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.  This statement
establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that a company classify a financial
instrument that is within SFAS No. 150s scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the company. Many of those instruments were previously classified as equity. SFAS No.
150 requires a company to classify the following instruments as liabilities (or assets in some circumstances): mandatorily redeemable financial instruments; obligations to repurchase company equity shares by transferring assets; and certain
obligations to issue a variable number of company equity shares. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the adoption of SFAS No. 150 to have a material effect on its results of operations or financial position.

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

Interest Rate Risk. We generally invest our cash in money market funds and corporate debt securities that are subject to minimal credit and market risk considering that
they are short-term (expected maturities of 18 months or less from date of purchase) and provided that we hold them to maturity, which is our intention. The interest rates on our customer advances and capital lease obligations approximate the market
rates for comparable instruments and are fixed. We believe the market risks associated with these financial instruments are minimal.

Foreign
Currency Risk. We face foreign currency risks primarily as a result of the revenues we receive from sales made outside the U.S. and from intercompany account balances between our U.S. parent and our international subsidiaries. In the second
quarter 2003, approximately 52% of our net sales and 42% of our operating expenses were denominated in currencies other than the U.S. dollar. Inventory purchases were transacted primarily in U.S. dollars. The local currency of each foreign
subsidiary is considered the functional currency, and revenue and expenses are translated at average exchange rates for the reported periods. Therefore, our foreign sales and expenses will be higher in a period in which there is a weakening of the
U.S. dollar and will be lower in a period in which there is a strengthening of the U.S. dollar. The Australian dollar, Euro, Canadian dollar, British Pound Sterling and Danish Krone are our most significant foreign currencies. Given the uncertainty
of exchange rate fluctuations and the varying performance of our foreign subsidiaries, we cannot estimate the affect of these fluctuations on our future business, results of operations or financial condition. Fluctuations in the exchange rates
between the U.S. dollar and other currencies could effectively increase or decrease the selling prices of our products in international markets where the prices of our products are denominated in U.S. dollars. We regularly monitor our foreign
currency risks and may take measures to reduce the impact of foreign exchange fluctuations on our operating results.

Average currency exchange
rates to convert one U.S. dollar into each local currency for the three and six months ended June 30, 2003 and 2002 were as follows:

|                       |  | Three months ended June 30, |      | Six months ended June 30, | 
|---------------------- |  | --------------------------- | ---- | ------------------------- | 
|                       |  |                             |      |                           | 
|                       |  | 2003                        |      | 2002                      | 
|                       |  |                             |      |                           | 
|Australian dollar      |  |                             | 1.56 |                           | 
|Euro                   |  |                             | 0.88 |                           | 
|Canadian dollar        |  |                             | 1.39 |                           | 
|British pound sterling |  |                             | 0.62 |                           | 
|Danish krone           |  |                             | 6.54 |                           | 



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

Evaluation of disclosure
controls and procedures.  Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by
this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this
Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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.

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WE HAVE A HISTORY OF LOSSES AND NEGATIVE OPERATING CASH FLOWS

Although we reported net income of $0.2 million in the quarter ended June 30, 2003, we have a history of losses and an accumulated deficit of $52.3 million at June 30, 2003.
While cash and marketable securities increased from $35.6 million at December 31, 2002 to $37.6 million at June 30, 2003 (including $13,000 of restricted cash), we may incur net losses and negative operating cash flows in the future. Whether or not
we maintain profitability will depend in significant part on increasing our net sales, maintaining or improving our gross margin and reducing, or limiting increases to, our operating expenses. Consequently, it is possible that we will not maintain
profitability, or increase profitability on a quarterly or annual basis in the future.

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 monetary incentives to retail hearing aid operations. Although we have
implemented similar programs on a limited basis, we may not choose to, or be able to, match these incentives, which could put us at a competitive disadvantage. In addition, competitors may purchase or establish their own network of owned or
franchised retail hearing aid operations, which could cause us to lose existing customers. If we fail to compete effectively, our net sales and operating results will suffer.  The market is transitioning to less expensive digital hearing aids,
which will depress the overall average selling price of our products.

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 of or a reduction in orders from larger customers; 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; inability to forecast revenue accurately; nonpayment of accounts and notes receivable; write-offs of intangible assets created as a result of acquisitions; 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.

WE HAVE MADE A NUMBER
OF ACQUISITIONS AND ANTICIPATE MAKING ADDITIONAL ACQUISITIONS, WHICH COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE THE EQUITY OF OUR SHAREHOLDERS AND HARM OUR OPERATING RESULTS

We may not be able to meet performance expectations for, or successfully integrate, businesses we have acquired or may acquire on a timely basis or at all. To manage the
expansion of our operations and future growth, we will be required to (i) improve financial and management information controls and reporting systems and procedures; (ii) hire, train and manage additional qualified personnel; (iii) expand our direct
and indirect sales channels; and (iv) transition acquired businesses to sell more of our branded products.

As part of our business strategy, we
expect that we will continue to make acquisitions that complement or expand our existing business. Our acquisition of businesses and expansion of operations involve risks, including (i) the inability to successfully integrate acquired businesses or
to realize anticipated synergies, economies of scale or other expected value; (ii) difficulties in managing and coordinating operations at new sites; (iii) loss of key employees of acquired businesses; (iv) loss of key customers of acquired
businesses, (v) diversion of managements attention from other business concerns; and (vi) risks of entering markets in which we have no direct or limited prior experience.

Acquisitions of other businesses may result in the utilization of cash and marketable securities, dilutive issuances of equity securities and the incurrence of debt. In addition,
acquisitions may (i) result in the creation of certain definite-lived intangible

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assets that increase amortization expense, or (ii) result in the creation of goodwill and other indefinite-lived intangible assets that subsequently may result in large
write-offs should these assets become impaired.

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
larger 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 retail hearing aid clinics. We are subject to the risk of
losing our larger customers, incurring significant reductions in sales to these customers or reducing future prices in order to maintain our business. In addition, we are subject to the risk of being unable to collect accounts and notes receivable
balances from these customers. We had one hearing aid customer who accounted for 5% of net sales in the first six months of 2003 and 7% of net sales in 2002. This customer accounted for 5% of our gross accounts receivable balance at June 30, 2003.

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 affected. Discovery has commenced, but no class has been certified and no trial date has been scheduled.

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

Certain 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. This supplier may not be willing or able to satisfy our future advanced technology requirements. Under our agreement with this supplier, we are required to make minimum annual purchases, which may be higher than our
requirements. The receivers and microphones used in all our products are available from only two suppliers. We also rely on contractors for certain hearing aid component assembly and advanced integrated circuit design and development 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
contractors. Finding a substitute part, process, supplier or contractor 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. Sales returns were $7.6 million in the first six months of 2003, $16.3 million in 2002 and $15.7 million in 2001. Warranty costs for remakes and repairs were $1.7 million in the six months half of 2003, $3.1
million in 2002 and $2.7 million in 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.

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 (i) expert personnel who are difficult to find and attract, or (ii) external vendors to perform complex tasks. 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

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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.

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.  Additionally, some foreign laws do not protect our proprietary
rights to the same extent as United States laws.  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 initiatives could alienate our traditional hearing care professional customers. It is possible that our hearing care professional customers 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 and damage our competitive position.

WE ARE DEPENDENT ON INTERNATIONAL OPERATIONS, WHICH EXPOSES US TO A
VARIETY OF RISKS THAT COULD RESULT IN LOWER INTERNATIONAL SALES AND OPERATING RESULTS

We anticipate that international sales will continue to
account for a material portion of our net sales. Our reliance on international 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 (EU), we are required to have the EUs CE Mark certification. Any failure to maintain our CE Mark certification would significantly reduce our net sales and operating results. In
addition, we face foreign currency risks primarily as a result of the revenues we derive from sales made outside the U.S. and from the intercompany account balances between our U.S. parent company and our non-U.S. subsidiary 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.

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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. If we are unable to hire and retain sufficient technical and sales personnel our business and
operating results may suffer.

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

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

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

Although we have not experienced any significant product liability issues to date, we may be held liable if any product we develop causes injury or is found otherwise unsuitable.
If we are sued for an injury caused by our products, the resulting liability could result in significant expense beyond our products liability insurance limits, 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). 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 VENTURE CAPITAL SHAREHOLDERS OR 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 5.5 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 SIGNIFICANT
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 over 19% 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 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.

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PART II -
OTHER INFORMATION

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

The Company is 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, is being brought as a class action on behalf on all purchasers of the Companys common stock from May 2, 2000 to October 24,
2000 and seeks damages in an unspecified amount. The Company strongly denies the allegations in this action and will defend itself vigorously; however, litigation is inherently uncertain and there can be no assurance that the Company will not be
materially and adversely affected. Discovery has commenced, but no class has been certified and no trial has been scheduled.

|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

The
Companys annual meeting of shareholders was held on May 1, 2003. Directors elected at the meeting were:

|Director           |  | For |            | Withheld | 
|------------------ |  | --- | ---------- | -------- | 
|                   |  |     |            |          | 
|Andrew G. Raguskus |  |     | 16,884,313 |          | 
|Lawrence C. Ward   |  |     | 16,851,235 |          | 

Other directors whose terms of office continued after the
meeting were as follows: Lewis S. Edelheit, Anthony B. Evnin,  Kevin J. Ryan and Samuel L. Westover.  Allan M. Wolfe did not stand for re-election.

One other item of business concerned the ratification of the appointment of KPMG LLP as the Companys independent auditors, which was approved as follows:

|                                                                    |  |  | For        |  |  | Against |  |  | Abstain | 
|------------------------------------------------------------------- |  |  | ---------- |  |  | ------- |  |  | ------- | 
|                                                                    |  |  |            |  |  |         |  |  |         | 
|Ratification of the appointment of KPMG LLP as independent auditors |  |  | 16,939,204 |  |  | 23,024  |  |  | 1,300   | 



|ITEM 6(a). | EXHIBITS
|---------- | --------

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

|Exhibit # |  | Description                                                          
|--------- |  | ---------------------------------------------------------------------
|          |  |                                                                      
|10.1      |  | Amendment to 2000 Employee Stock Purchase Plan                       
|10.2      |  | Management Bonus Program                                             
|31.1      |  | Rule 13a-14(a) / 15-d-14(a) Certification of Chief Executive Officer 
|31.2      |  | Rule 13a-14(a) / 15-d-14(a) Certification of Chief Financial  Officer
|32.1      |  | Section 1350 Certification of Chief Executive Officer                
|32.2      |  | Section 1350 Certification of Chief Financial Officer                



|ITEM 6(b). | REPORTS ON FORM 8-K
|---------- | -------------------

On May 29, 2003, the registrant furnished a Current Report on Form 8-K (items 2 and
7) to announce that it had entered into an agreement to purchase all of the outstanding common stock of Sanomed Handelsgesellschaft mbH, a hearing aid distribution company headquartered in Hamburg, Germany.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 14, 2003

| | /s/ STEPHEN  L. WILSON                           
| | -------------------------------------------------
| |                                                  
| | Stephen L. Wilson                                
| | Senior Vice President and Chief Financial Officer
| | (Principal Financial Officer)                    

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