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

                                   FORM 10-K

               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                        Commission File No.  000-30335
                                             ---------

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

                    Delaware                             87-0494518
                    --------                             ----------
(State or other jurisdiction of incorporation   (I.R.S. Employer Identification
                or organization)                            No.)

                    2795 East Cottonwood Parkway, Suite 660
                        Salt Lake City, UT  84121-7036
                        ------------------------------
                   (Address of principal executive offices)

                                (801) 365-2800
                                --------------
             (Registrant's telephone number, including area code)

      Securities registered pursuant to section 12 (b) of the Act:  None
          Securities registered pursuant to section 12(g) of the Act:

                        Common Stock ($.001 Par Value)
                        -------------------------------
                               (Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                [X] Yes  [_] No

Indicate by check mark if disclosure of delinquent fliers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.

                                [X] Yes  [_] No

The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $76.5 million at March 19, 2001, when the closing
sale price of the stock, as reported on the Nasdaq National Market was $7.03 per
share.  Shares of the registrant's common stock held by executive officers,
directors and holders of five percent or more of the registrant's common stock
as of March 19, 2001 have been excluded because such persons may be deemed to be
affiliates.  This determination of affiliate status is not necessarily a
conclusive determination.

As of March 19, 2001, there were 19,866,043 shares of the registrant's common
stock outstanding.

                      Documents Incorporated By Reference

Portions of the Company's Annual Report to Shareholders for the year ended
December 31, 2000 are incorporated by reference in Part II of this Form 10-K.
Portions of the Company's Definitive Proxy Statement for the 2001 Annual Meeting
of Shareholders are incorporated by reference in Part III of this Form 10-K.
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                                    PART I

     This report contains forward-looking statements that involve risks and
uncertainties.  These statements refer to our future plans, objectives,
expectations and intentions.  These forward-looking statements include details
regarding the following: growth in the hearing impaired population; implied
growth of hearing aid sales generally and digital hearing aid sales in
particular; increase in the percentage of sales from the digital hearing aid
segment industry wide and its effect for us; expected filings of patent
applications; outsourcing production of the CONFORMA product; expansion of
facilities and hiring additional personnel; collaborative arrangements to
manufacture current products or new products; new distribution opportunities;
continuance of product improvements and new product development; ability to
compete; exemption of future products and enhancements from 510(k) process; and
future legal expenses. Our actual results could differ materially and adversely
from those anticipated in such forward-looking statements.  Factors that could
contribute to these differences are discussed in detail in the section titled
"Factors That May Affect Future Performance" beginning on page 10.  Investors
should not consider the factors listed as a complete statement of all potential
risks and uncertainties.  Investors should understand that it is not possible to
predict or identify all such factors that could cause actual results to differ
from expectations and we are under no obligation to update these factors.
Investors are cautioned not to place undue reliance on such statements, which
speak only as of the date made.

ITEM 1.   BUSINESS

OUR COMPANY

     Sonic Innovations, Inc. designs, manufactures and markets advanced digital
hearing aids and hearing aid components that are designed to provide the highest
levels of satisfaction for hearing impaired consumers. Capitalizing on a new
understanding of human hearing, we have developed patented digital signal
processing (DSP) technologies and embedded them in the smallest single-chip DSP
platform ever installed in a hearing aid.  Our NATURA(TM) and ALTAIR(TM) product
lines incorporate our DSP technologies, are among the smallest products
available today and can be purchased in the five common models for hearing aids:
behind-the-ear (BTE); in-the-ear (ITE); in-the-canal (ITC); mini-canal (MC); and
completely-in-the-canal (CIC).  Our CONFORMA(TM) product, a programmable,
instant-fit completely-in-the-canal model, also incorporates our DSP
technologies and is an innovative hearing aid that delivers a fast, comfortable
fit in the smallest digital-based hearing aid available. We believe our hearing
aids set a new standard for consumer satisfaction because they are smaller, more
comfortable, more reliable and deliver more natural sound than competing hearing
aids.

     We were formed as Sonix Technologies, a Utah corporation, in May 1991.  We
reincorporated in Delaware in 1997 and changed our name in 1998.  We were
primarily engaged in hearing aid research and development from our inception
through the fourth quarter 1998, at which time we introduced our first branded
product line, NATURA.  In the second quarter 1999, we began selling hearing aid
components consisting of our DSP platform to other hearing aid companies who
market under their own brand names, and hearing aid kits, or faceplates, to
distributors who market finished hearing aids generally under our brand names.
We introduced our second brand, CONFORMA, in the first quarter 2000 and
introduced our third branded line, ALTAIR, in the fourth quarter 2000.

INDUSTRY BACKGROUND

The Market

     The market for hearing aids is very large and has substantial unmet needs.
Industry researchers estimate that there are approximately 300 million people
worldwide, including nearly 30 million in North America, who have hearing
deficits sufficiently severe to interfere with their understanding of normal,
everyday speech.  However, only about 20% of these persons have purchased
hearing aids, and only half of these hearing aid owners routinely wear their
hearing aids.  It is estimated that more than two-thirds of hearing aid owners
are dissatisfied with the performance of their hearing aids in noisy
environments.
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     The use of hearing aids is particularly low among the mild and moderate
segments of the hearing impaired population.  These segments, which are
estimated to comprise over 80% of the hearing impaired population, often do not
purchase hearing aids due to the stigma associated with wearing a hearing aid
and because existing products are perceived as inadequate, uncomfortable,
unreliable, expensive and unattractive.  This is depicted in the chart below.

               ----------------------------------------------
                        Hearing Aid Market by Segment

               ----------------------------------------------

                Type of Hearing    Percentage       Market
                   Impairment        by Type      Penetration
               ----------------------------------------------

                      Mild             31%             4%
                    Moderate           50%            22%
                     Severe            15%            50%
                    Profound            4%            37%
               ----------------------------------------------


     Despite this low level of market penetration and high degree of
dissatisfaction, worldwide retail sales of hearing aids in 2000 were
approximately $5.0 billion and wholesale sales were approximately $2.0 billion.
We anticipate that demographic trends, such as the aging of "baby boomers," will
accelerate the growth in the size of the hearing impaired population.

     The hearing aid market can be categorized into two segments - analog and
digital.  Digital hearing aids were first introduced in 1996 and currently
represent approximately 18% of global hearing aid sales.  Despite their premium
pricing, digital hearing aids represent the fastest growing segment of the
market.  We believe that as companies exploit the full potential of the digital
platform over the next several years, the percentage of sales from digital
hearing aids will increase significantly.  As we are the world's only all-
digital hearing aid company, we expect to benefit from this movement.

Hearing Aids

     Early hearing aids simply amplified previously inaudible sounds to an
audible level, which caused sounds that were comfortable or fairly loud to
become uncomfortably loud. Hence, the wearer was often forced to adjust the
hearing aid volume control in order to avoid distortion and find the acceptable
balance between sounds of differing intensities. This problem severely limited
improvements in speech intelligibility, so hearing was, in reality, only
partially improved.

     In the 1980's, hearing aids emerged that amplified sounds at different
frequencies by predetermined amounts. These hearing aids were also able to limit
sound amplification beyond a specified level to avoid discomfort associated with
overamplification.  Although hearing aids employing this technology helped
somewhat and are still sold today, these hearing aids generally did not improve
speech recognition to a level that satisfied users.

     In the early 1990's, multiband compression was introduced into hearing
aids. This technology enabled differential amplification, which varies according
to input intensity level, of two or more separate "bands" of the frequency
spectrum. Many hearing aid companies have now developed analog multiband
compression circuits that improve speech intelligibility from previous levels.

     By 1996, technological advances based on digital signal processing led to
the first digital hearing aids. Digital technology allows for more bands to
further segregate the frequency range and for more effective sound processing
algorithms to be built into smaller integrated circuits that consume less power.
Analog circuits can provide similar sound processing benefits, but not in the
small size, low-power integrated circuits required for small hearing aids.

     Over 40% of today's hearing aids are classified as "premium" hearing aids.
Premium hearing aids are often called "programmables" because a prescriptive
correction adapted to an individual's hearing loss is programmed into each
hearing aid.  Sophisticated multiband compression circuits enable these hearing
aids to deliver differential

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amplification in the frequency bands where it is most needed. Some of these
hearing aids have analog signal processing and digital programming, while some
have digital signal processing and digital programming.

Hearing Impairment

     The major causes of hearing loss are aging, noise exposure, disease and
injury.  Hearing loss is usually gradual and painless, in many cases developing
so slowly that it can be unnoticeable to the hearing impaired person, even
though family, business associates and friends may be quite aware of it.  The
effects of any hearing loss can be severe, often dramatically changing the
affected person's lifestyle.  In adults, hearing loss creates coping mechanisms,
which may include isolation from family and friends and a reluctance to
participate in public events.  In children, hearing loss may negatively affect
the ability to learn, the development of communication skills and the ability to
interact with others.

     Approximately 90% of all permanent hearing impairments are characterized as
sensorineural losses, and the remaining 10% are characterized as conductive
losses.  Conductive losses, which are caused by structural imperfections in the
ear, can generally be corrected by surgery.  Sensorineural losses, which stem
from deterioration of or damage to the cochlea, typically cannot be improved by
medical or surgical means.  Hearing aids offer the most effective means of
overcoming sensorineural losses.

     In the case of sensorineural hearing loss, all sounds are not affected
equally.  Typically, higher frequencies are more difficult to perceive than
lower frequencies.  Accordingly, the first sounds to "disappear" are those that
have the highest pitches, such as women's and children's voices and birds
signing.  Furthermore, speech becomes much more difficult to comprehend since it
is the softer, higher-pitched consonants that provided essential information to
facilitate discrimination among words.  Consider the following word list:  cat,
hat, fat, sat.  Without the ability to clearly hear the first letter of each of
these words, a person is rendered helpless to comprehend what is being said.  As
a result, people with hearing losses often complain that they can hear others
talking but do not understand what is being said.  An example of the impact of
high-frequency hearing loss is illustrated by this chart which shows the high-
frequency sounds of consonants fall outside the hearing threshold of the hearing
impaired person.



              [GRAPH]              Normal hearing
                                   (softest sounds a normal
                                   hearing person hears)

                                   Normal sound levels for
                                   vowels and consonants

                                   Sound levels at which a
                                   representative hearing
                                   impaired person hears

                                   Very loud sounds

Many consonant sounds may be outside the
hearing impaired person's hearing range.

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Obtaining A Hearing Aid

     An individual who seeks help for a sensorineural hearing loss is often
referred by an ear-nose-throat physician to a hearing care professional - an
audiologist or a hearing aid dispenser.  Most hearing aids, particularly in the
United States, are custom-made to each individual's ear canal, particularly for
users in the mild to moderate loss category.  The hearing care professional
first performs an audiologic examination before taking an impression of the
person's ear canals with a liquid silicone material that hardens to the
approximate shape of the canal.  This impression is sent to the manufacturer who
then builds an aid with a custom shell that matches the impression.  This
process usually requires about one week.  There is considerable art and
craftsmanship associated with creating custom hearing aids that fit comfortably.
A great deal of judgment is involved in shaping the final shell.  If the aid
does not fit the patient properly, the hearing care professional may make small
modifications to the shell or send the hearing aid back to the manufacturer for
a remake.  It is quite common for a new hearing aid to require remaking, which
often requires an additional week.

OUR TECHNOLOGY

     Our technology strategy is to combine a number of distinct technologies,
supported by 47 patents and patent applications in process to date, to produce
premium digital hearing aids.  We seek to protect our intellectual property
through patents, licenses and non-disclosure agreements.  We hold 12 U.S.
patents, and we are the exclusive licensee for hearing aid and hearing
protection applications under two patents held by Brigham Young University.  We
have 31 patent applications pending and have drafted four other patent
applications we expect to file in 2001.  The core of our technology is our
proprietary digital signal processing platform, which is based on a significant
advancement in the understanding of human hearing.  Using state-of-the-art chip
design capabilities, we have embedded our proprietary algorithms into the
smallest, single-chip DSP platform available in a hearing aid today.  As a
result, our NATURA and ALTAIR products are among the smallest hearing aids
available, and our CONFORMA product is the smallest digital-based hearing aid
available today.

Digital Signal Processing Technologies

     Our proprietary DSP platform contains a patented set of algorithms that are
based on a new understanding of human hearing.  These algorithms pre-process the
incoming sound and present it to the impaired cochlea in a way that restores
natural loudness perception and preserves the cues necessary for speech
understanding.  In addition, our DSP platform processes sound at a rate we
believe to be significantly faster than other digital hearing aids.
Traditionally, these hearing aids have not processed sounds quickly enough to
allow a wearer to "localize" sounds, or ascertain which direction a sound is
coming from.  We believe that our products are the first to solve this problem,
thus providing a much more natural hearing experience and restoring lost
localization and directionality of sound.

Single Chip Solution

     Using state-of-the-art chip design capabilities, we have embedded our
proprietary DSP technologies into a single chip that is the smallest, most
sophisticated DSP chip available in a hearing aid today.  No other hearing aid
company has introduced a single-chip DSP solution.  This proprietary DSP chip is
an advanced, energy-efficient integrated circuit that powers frequency-specific,
level-dependent, multi-channel features.  The result of this convergence of
advanced hearing science and leading edge digital technology is a family of
hearing aids that we believe delivers a more natural, lifelike listening and
communication experience and addresses the specific auditory needs of the
hearing impaired.

OUR PRODUCTS

     We have packaged our proprietary technologies into a broad line of premium
digital hearing aids that offer what we believe is superior sound quality,
smaller size, enhanced personalization and increased reliability at competitive
prices.  All of our products incorporate our proprietary DSP platform and are
programmable to address the hearing loss of the individual user.  We currently
sell our branded products both as completed hearing aids and as hearing aid
kits, or faceplates, to distributors who then market finished hearing aids
generally under our brand names.  In addition, we sell hearing aid components
consisting of our DSP platform to other hearing aid manufacturers who then
market their private label products containing our DSP platform.

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     Our DSP platform used in NATURA 2 SE, ALTAIR and CONFORMA 2 SE provides
advanced, customized sound processing through its nine independent channels;
employs fast-acting, narrow-band compression to allow response to speech cues
and other sounds in real time; and utilizes proprietary expansion technology to
reduce the annoyance of some low-intensity sounds.  These features are described
in more detail below.

Nine Independent Channels

     Our products deliver a more natural, lifelike sound quality because they
incorporate unique design features based on the characteristics of the human
cochlea.  Like the cochlea, our DSP platform processes frequencies within narrow
bands.  Specifically, our DSP chip contains nine independent compression
channels programmable with one decibel (dB) accuracy.  This allows our products
to be personalized for each hearing loss with unprecedented accuracy.

Fast-Acting Narrow-Band Compression

     Our products contain the only DSP platform sophisticated enough to employ
both fast-acting and narrow-band compression, which produces virtually
instantaneous volume adjustments to sounds in the various frequencies.
Consequently, our products are designed to respond to speech cues and other
sounds in real time - without a delay.  Many of today's digital hearing aids use
wide-band compression.  With wide-band technology, signals that would be
distinct from each other to a person with normal hearing will not necessarily be
processed distinctly by the hearing aid.  Our nine channel narrow-band
compression can process these sounds separately and distinctly.

Expansion

     To address a common complaint with traditional wide dynamic range
compression (WDRC) hearing aids - the fact that they are noisy in relatively
quiet environments - we have adapted a technology called "expansion" from the
professional audio field. Traditional WDRC aids apply the highest level of gain
(volume) to the softest sounds, including non-speech sounds. As a result,
individuals often complain that non-speech soft sounds get too loud and become
annoying. The expansion technology in our products, however, actually reduces
the volume for low-intensity sounds and can be set to meet each individual's
needs. As a result, our products are quieter, without compromising volume for
normal-intensity sounds.

Program Tones

     We've also added tones that tell users when they have changed from one
program (memory) to another.  In addition, a set of distinct tones alert users
when the battery is low.  The volume of these tones is adjustable, so they can
be set to the appropriate level for each patient.

Noise Reduction

     Perhaps the number one complaint among hearing aid wearers is their
inability to hear conversation in the presence of background noise. Most
traditional hearing aids not only fail to reduce background noises - they
actually amplify them. Both our NATURA 2 SE and CONFORMA 2 SE hearing aids offer
our Personalized Noise Reduction(TM) technology. This patent-pending technology
detects and reduces many background noises to provide the hearing impaired
consumer with a more comfortable listening and communication experience. And
because it is based on each hearing impaired consumer's particular hearing
needs, NATURA 2 SE and CONFORMA 2 SE are the first and only hearing aids with
truly personalized noise reduction technology. Noise reduction reduces unwanted
background noises and applies gain (volume) only to speech-like inputs in each
of our nine independent channels. This results in an improved "signal-to-noise
ratio" because the amplitude (loudness) of the noise is reduced without altering
the amplitude of speech.

EXPRESSfit(TM) Software

     In order to ensure that our new model of human hearing and state-of-the-art
technologies are properly programmed to the individual needs of the hearing aid
wearer, we have developed a proprietary programming system, EXPRESSfit, which
enables our hearing aids to be easily configured by the hearing care
professional to the unique needs of each wearer.  The advanced technology of our
sophisticated DSP chip is programmed by our software to make sure that sounds
within each half octave frequency range are amplified appropriately in the right
contrast to sounds in every other channel.  Initially presented on a novel hand-
held PalmPilot platform, it has also

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been adapted to work within NOAH, a popular PC-based industry programming and
fitting standard. EXPRESSfit is an integral part of ensuring that our
technologically advanced hearing aids meet the needs of each individual hearing
aid wearer.

     Our NATURA and ALTAIR product lines incorporate our DSP platform, are among
the smallest products available today and can be purchased in the five common
models for hearing aids: behind-the-ear (BTE); in-the-ear (ITE); in-the-canal
(ITC); mini-canal (MC); and completely-in-the-canal (CIC).

     Our CONFORMA product is an innovative hearing aid configuration that also
contains our DSP platform and delivers a fast, comfortable fit in the smallest
digital-based hearing aid available.  CONFORMA physically consists of two parts:
a tiny core about the size of a pencil eraser that contains the product's
electronics, and a soft disposable tip that conforms to the shape of the
wearer's ear canal.  This compressible, foam tip eliminates the need to custom
mold a hard plastic shell to fit the wearer's ear canal, both increasing comfort
for the wearer and enabling a custom fit in a single visit.  CONFORMA fits in
the ear canal of the wearer, making it nearly invisible and eliminating the
stigma of wearing a hearing aid.  We have priced CONFORMA to provide a superior
price/value package to the consumer.  Because CONFORMA is not custom-molded,
should a wearer choose to return CONFORMA, the hearing care professional can
simply repackage it for resale to another consumer rather than returning it to
the manufacturer for credit.  As a standardized product, CONFORMA eliminates the
need for costly remakes.  The disposable nature of the tip eliminates the major
cause of manufacturer repairs by allowing the wearer to simply replace the tip
at regular intervals to avoid the build-up of earwax in the device.

     We are capitalizing on the rapid growth of the digital segment of the
hearing impaired market not only by selling our branded products, but also by
selling hearing aid components consisting of our DSP platform to established
hearing aid companies that lack a satisfactory digital product line. These
companies incorporate our DSP platform into hearing aids of their own design
that they then sell under their own brand names. This aspect of our business is
not as strategically important for us as selling our branded products.

MANUFACTURING

     We have manufacturing facilities in Salt Lake City, Utah; Eagan, Minnesota;
and near Copenhagen, Denmark. We perform the majority of our manufacturing at
our Eagan facility near Minneapolis, where the presence of many major hearing
aid and medical device companies has created a skilled labor pool that we have
been able to access. Our manufacturing operations consist of the following
activities:

     .  overseeing the production of the DSP platform used in our products;
     .  assembling and testing the electronic subsystems;
     .  fabricating custom hearing aid shells;
     .  integrating the electronic components into the hearing aid shell; and
     .  testing and calibrating the finished hearing aid.

     We assemble our custom NATURA and ALTAIR completely-in-the-canal, mini-
canal, in-the-canal and in-the-ear products according to specifications received
from hearing care professionals. After receiving an impression of the wearer's
ear canal and programming requirements of the hearing aid, the custom shell and
electronic subsystems are assembled. Our NATURA and ALTAIR behind-the-ear
products are assembled using a standard plastic housing and are not custom-
molded for a wearer's ear.

     In contrast, CONFORMA is assembled using standardized components,
consisting of an electronic subsystem, a metal housing, or core, and disposable
foam tips, and thus eliminates custom-molding steps associated with
traditionally configured hearing aids. We are currently producing CONFORMA
products internally and externally. However, we anticipate that we will
eventually outsource all production of the CONFORMA product.

     To be successful, we must manufacture our products in commercial quantities
in compliance with regulatory requirements at acceptable costs. In the third
quarter of 1999, we relocated our manufacturing facility from Salt Lake City,
Utah to Eagan, Minnesota and we are currently expanding our facility and
increasing our production

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capacity. We could incur significant expenses as we expand our facilities and
hire additional personnel. We may seek collaborative arrangements with other
companies to manufacture current products or new products. If we rely on third
parties to manufacture our products, our profit margins and our ability to
develop and deliver these products on a timely basis may suffer. Moreover, these
third parties may not perform adequately, and any failures by these parties may
impair our ability to deliver products on a timely basis or otherwise harm our
competitive position and market success.

     A number of key components used in our products are currently available
only from a single or limited number of suppliers. For example, our proprietary
digital signal processing chips are manufactured by a single supplier. Our
relationship with this supplier is critical to our business because our
proprietary DSP chip is integral to our products and because only a small number
of suppliers would be able or willing to produce our chip in the relatively
small quantities and with the exacting specifications we require. Under our
agreement with this supplier, we are required to make minimum annual purchases,
which may be higher than our requirements. In addition, the disposable tips used
in our CONFORMA hearing aid are produced by a single supplier, and the receivers
and microphones used in all our products are available from only two suppliers.
We also rely on contract manufacturers and are therefore subject to their
performance, over which we have little control. We may be forced to cease
producing our products if we experience significant shortages of critical
components from these key suppliers or lose the services of our contract
manufacturers. Finding a substitute part, process, supplier or manufacturer may
be expensive, time-consuming or impossible.

PRODUCT RETURNS, REPAIRS AND REMAKES

     The hearing aid industry experiences high levels of product returns,
remakes and repairs due to factors such as statutorily required liberal return
policies and product performance inconsistent with consumers' expectations. This
has been particularly true for companies like ours that sell premium-
performance, premium-priced devices. We generally offer a 90-day return policy
and a minimum of a one-year warranty for our branded products. To date, we have
experienced high levels of returns, remakes and repairs. We experienced product
quality issues during the first half of 1999, which added to these high levels
of returns, remakes and repairs. Sales returns were $12.9 million in 2000 and
$8.4 million in 1999. Our warranty (remake and repair) costs were $1.6 million
in 2000 and $1.0 million in 1999. Although we have taken measures to reduce the
levels of returns, remakes and repairs on our products, we may not be able to
attain lower levels and these levels may increase, either of which could reduce
our net sales and operating results.

SALES AND MARKETING

     Hearing aids have traditionally been dispensed (sold to the consumer) by
hearing care professionals.  Due to the hearing care professional's influence
over a consumer's choice of a hearing aid brand, we believe that developing and
maintaining strong relationships with hearing care professionals is the most
critical aspect of our sales and marketing strategy.  As a result, we aim to
deliver a high level of customer service and support to our hearing care
professionals.  In addition, we believe that this high level of customer service
is imperative for building our brands.

     In the U.S., there are approximately 5,000 degreed audiologists and 7,000
hearing aid dispensers who sell hearing aids.  We position our products as
premium-priced, premium-performance hearing aids and therefore, our direct sales
force targets select hearing care professionals who are capable of and
interested in dispensing premium digital hearing aids.  We currently sell our
branded products directly to over 1,000 hearing care professional accounts in
the U.S.

     As of December 31, 2000, our U.S. sales force was comprised of
approximately 24 sales people, including external sales people, inside sales
people and trainers. In addition, we extensively utilize contract trainers. This
group both sells to and trains hearing care professionals in order to
differentiate our brands and to ensure proficiency with programming and fitting.
We also advertise our products to hearing care professionals through promotional
materials, trade publications and conventions. Our sales force is responsible
for executing loyalty programs and cooperative advertising programs with
specific customers to generate demand for our brands.

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     Outside the U.S., we sell our branded products through a network of
established distributors throughout much of Europe, Japan, Canada and Australia.
In 1998, we established Sonic Innovations A/S, a wholly owned subsidiary located
in Denmark, to drive European sales and marketing efforts.  Sonic Innovations
A/S sells to hearing aid distributors in most European markets, who in turn sell
to hearing care professionals.  Sonic Innovations A/S also sells our branded
products on a direct basis to hearing care professionals in Germany, Europe's
largest hearing aid market.  In Japan, we have entered into an agreement with
Hoya Healthcare Corporation to serve as our exclusive distributor of branded
products.  Distribution agreements generally cover multi-year periods and are
terminable for non-performance.

     To further our marketing effort, we sometimes use advertising, public
relations and market research agencies. These organizations work in tandem with
our internal marketing team to communicate our brands' advantages to customers.
We may in the future implement direct-to-consumer advertising and promotion
campaigns that reflect our belief that both consumers and hearing care
professionals are important to the success of our products.

     We believe that the evolution of the current distribution channel, combined
with the characteristics of our branded products, particularly the ease of
fitting and reduced hearing aid returns, remakes and repairs, will create new
distribution opportunities.  We are exploring alternative and emerging
distribution channels, and are currently selling to large hearing care chains
and other chain-based retailers.

CUSTOMERS

     In addition to selling finished hearing aids to a large number of hearing
care professionals and distributors, we also sell hearing aid components to a
limited number of hearing aid manufacturers. These arrangements have accounted
for a significant portion of our net sales to date, but that portion is
declining as our branded product sales have increased and our component sales
have decreased. One component customer, Starkey Laboratories, Inc., accounted
for $12.3 million, or 24%, of net sales in 2000 and $7.3 million, or 26%, of net
sales in 1999. Starkey has placed purchase orders with us for $2 million of
components for delivery in each of the first two quarters of 2001. If Starkey
fails to honor these orders or decides not to buy components after the second
quarter 2001, our net sales and operating results would decline and our gross
margin would be negatively affected.

     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. If any of our larger customers were to stop or delay purchases, our net
sales and operating results would be adversely affected, particularly on a
quarterly basis. We may be unable to retain our current customers, and we may be
unable to recruit replacement or additional customers. We are selling an
increasing number of branded products to several audiology clinic consolidators
who have a large number of owned or franchised hearing aid clinics. If sales to
these consolidators increase, we will become subject to the risk of losing these
customers or incurring significant reductions in sales to these customers. In
addition, we may become subject to the risk of collecting accounts receivable
balances from these companies.

RESEARCH AND DEVELOPMENT

     We continue to work on both product improvements and new product
development, and expect to continue both activities in the future at increasing
levels. We intend to use product improvements and new product development to
enhance our competitive position in the market. As of December 31, 2000, there
were 46 employees actively involved in research, development, clinical and
regulatory activities. Their skills include audiology, clinical research,
integrated circuit engineering, software engineering and materials science. For
the years ended December 31, 2000, 1999 and 1998, we expended $7.9 million, $7.0
million and $5.8 million, respectively on research and development.

                                       8
<PAGE>

COMPETITION

     We encounter aggressive competition from a number of hearing aid
competitors worldwide. We compete principally with larger companies - Siemens
GmbH, Starkey Laboratories, Inc., Widex A/S, William Demant Holding A/S (through
its Oticon and Bernafon divisions), Phonak S.A. and Great Nordic A/S (through
its GN ReSound division) - all of which have established products and
substantially greater financial, sales and marketing, manufacturing and
development resources than we currently possess. Our competitors may develop
products that are more effective in treating hearing loss than our own products,
thus rendering our technologies and products obsolete or uncompetitive. We may
not be able to compete effectively with these competitors. Consolidation within
the industry has accelerated in the last several years, and further
consolidation could produce stronger competitors. The number of companies who
have a manufacturing and marketing presence in the hearing aid industry is
approximately one-half of what it was in 1990. Consolidation in the hearing aid
industry has accelerated in the last two years, as evidenced by the acquisitions
of Beltone, Dahlberg/Miracle Ear, ReSound, Philips and Unitron. In addition,
some of our larger competitors have enhanced their competitive positions
relative to ours by buying hearing aid distribution operations and bundling
products and services to hearing care professionals. If we fail to compete
effectively, our net sales and operating results will suffer. For instance, we
may have to reduce the prices of our products to stay competitive.

     The digital segment of the hearing aid industry is characterized by
increasing competition and rapid new product introductions. The proliferation of
digital hearing aids is likely to lead to increasing price pressure and intense
marketing campaigns as each company tries to differentiate its product from the
others. We compete primarily on the basis of sound quality; technology; size,
particularly in completely-in-the-canal models; quality; comfort; reliability;
price; ease of fitting the hearing aid; marketing, sales and distribution
capabilities; and customer service, support and training. We believe we compete
favorably on each of these factors.

PATENTS, LICENSES AND TRADE SECRETS

     We currently hold 12 U.S. patents and are the exclusive licensee for
hearing aid and hearing protection applications under two patents held by
Brigham Young University. We also have 31 patent applications pending.

     Under our 1995 license agreement with BYU, as amended in 1996 and 2000, we
have an exclusive worldwide license to utilize certain technology, including
patents and patents pending involving hearing aid signal processing, audio
signal processing and hearing compression, including the fundamental sound
processing algorithm incorporated into our DSP platform. Under this agreement,
which expires in 2013 on the expiration of the last claim of the patents, we are
responsible for the payment of all fees and costs associated with filing and
maintaining patent rights. As consideration for the license, we issued 105,567
shares of our common stock, paid $330,000 to date, and will pay an additional
$250,000 in 2001.

     In 1997, we entered into another license agreement with BYU giving us the
perpetual right to use specified "noise suppression" technologies owned by BYU.
We have exclusive worldwide rights to use these technologies in hearing aid and
hearing protection applications and a non-exclusive right to use them for other
applications. We are required to make royalty payments to BYU equal to 0.5% of
gross sales derived from products containing the licensed technologies.

  In 2000, we paid $1,800,000 to K/S HIMPP, a Danish partnership that owns
approximately 200 patents that are considered essential for the sale of
programmable hearing aids, for a fully paid up license.  No further royalties
are owed to K/S HIMPP for the use of the licensed patents.

     In 1999, in order to resolve a claim of patent infringement made by one of
our competitors, we entered into a license agreement under which we agreed to
pay a royalty of 1.5% on all net sales of hearing aids and components from
October 1998 through September 2001.

                                       9
<PAGE>

     Our success depends in large part on our proprietary technology. We rely on
a combination of patents, copyrights, trademarks, trade secrets, confidentiality
procedures and licensing arrangements to establish and protect our proprietary
technology. If we fail to successfully enforce our intellectual property rights,
our competitive position will suffer. We also rely on trade secret information,
technical know-how and innovation to expand our proprietary position. We require
our employees and consultants to execute non-disclosure and assignment of
inventions agreements upon commencement of their employment or engagement.

     We may be required to spend significant resources to monitor and police our
intellectual property rights.  We may not be able to detect infringement and may
lose our competitive position in the market before we do so.  In addition,
competitors may design around our proprietary technology or develop competing
technologies.  Intellectual property rights may also be unavailable or limited
in some foreign countries.  Our pending patent and trademark registration
applications may not be allowed or competitors may challenge the validity or
scope of these registrations. In addition, our patents may not provide us with a
significant competitive advantage.


GOVERNMENT REGULATION

     Our products are considered to be medical devices and are, accordingly,
subject to regulation in the United States by the Food and Drug Administration
(FDA), which may hamper the timing of our product introductions or subject us to
costly penalties in the event we fail to comply.

     Generally, medical devices must either receive premarket clearance from the
FDA through the 510(k) process or be an exempt product.  Although we received
510(k) clearance for our EXPRESSfit fitting and programming system and CONFORMA
hearing aid, we believe our future products and enhancements are exempt from the
510(k) process.  We must comply with facility registration and product listing
requirements of the FDA and adhere to its Quality System regulations.  The FDA
enforces the Quality System regulations through periodic inspections, which we
have yet to undergo.  If we or any third-party manufacturers of our products do
not conform to the Quality System regulations, we will be required to find
alternative manufacturers that do conform, which could be a long and costly
process.  Noncompliance with applicable FDA requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production or criminal prosecution.

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


EMPLOYEES

     As of December 31, 2000, we had 342 employees, including 32 in
administration, 57 in sales and marketing, 46 in research, development, clinical
and regulatory, 165 in operations and 42 in Europe. None of our employees are
represented by a labor union. We have not experienced any work stoppages, and
consider relations with our employees to be good.

FACTORS THAT MAY AFFECT FUTURE PERFORMANCE

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

                                       10
<PAGE>

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

     We have an accumulated deficit of $46.0 million for the period from
inception through December 31, 2000. We incurred a net loss of $3.2 million and
negative cash flow of $7.1 million from operating activities for the year ended
December 31, 2000. We have not achieved profitability on an annual basis. We may
incur net losses and negative cash flows in the future. We intend to increase
our operating expenses and therefore, must generate additional revenue to
achieve profitability on an annual basis. The size of our losses and whether or
not we achieve profitability will depend in significant part on the rate of
growth of our net sales. Consequently, it is possible that we will not achieve
profitability, and even if we do achieve profitability, we may not sustain or
increase profitability on a quarterly or annual basis in the future.

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

     Our quarterly and annual operating results have fluctuated in the past and
may fluctuate significantly in the future. These fluctuations could cause our
stock price to fluctuate significantly or decline. Factors that may cause
fluctuations in our operating results include the following: cancellation or
changes in the timing of product orders, particularly significant orders from
other hearing aid manufacturers for our hearing aid components or from audiology
clinic consolidators for our branded products; demand for and market acceptance
of our products; manufacturing problems; high levels of returns, remakes and
repairs; litigation expenses; changes in our product or customer mix;
competitive pressures resulting in lower selling prices or significant
promotional costs; unanticipated delays or problems in the introduction of new
products; inaccurate forecasting of revenues; and the announcement or
introduction of new products or services by our competitors.

     If net sales for a particular period were below our expectations, it is
unlikely that we would proportionately reduce our operating expenses for that
period.  Therefore, any revenue shortfall would have a disproportionately
negative effect on our operating results for the period.  You should not rely on
our results for any one quarter as an indication of our future performance.  In
future quarters, our operating results may be below the expectations of public
market analysts or investors.  If this occurs, our stock would very likely
decrease.

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

     We anticipate that our operating results in any given period will continue
to depend upon revenues from a small number of large customers. Our customers
are not generally contractually obligated to purchase any fixed quantities of
products, and they may stop placing orders with us at any time regardless of any
forecast they may have previously provided. We may be unable to retain our
current customers, and may be unable to recruit replacement or additional
customers. We are selling an increasing number of branded products to several
audiology clinic consolidators who have a large number of owned or franchised
hearing aid clinics. If sales to these consolidators increase, we will become
subject to the risk of losing these customers or incurring significant
reductions in sales to these customers. In addition, we may become subject to
the risk of collecting accounts receivable balances from these companies.

     We also sell hearing aid components to a limited number of hearing aid
manufacturers.  These arrangements have accounted for a significant portion of
our net sales to date.  The loss of any of these large customers, or a
significant reduction in sales to these customers, would significantly reduce
our net sales and have a negative effect on our operating results.  For example,
sales of components to Starkey Laboratories, Inc., one of our large competitors,
accounted for approximately $12.3 million, or 24%, of net sales for the year
ended December 31, 2000.  Although Starkey has placed purchase orders with us
for approximately $2 million of components for delivery in each of the first two
quarters of 2001, if Starkey were not to honor its purchase orders, or were not
to buy components after the second quarter 2001, our net sales and operating
results would decline and our gross margin would be negatively affected.  While
Starkey's account receivable balance with us is current (they have paid for all
products shipped to them through December 31, 2000), we are subject to the
risk of collecting the outstanding accounts receivable balance of $2.0 million
as it comes due.

                                       11
<PAGE>

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

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

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

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

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

     We launched NATURA, our first hearing aid line, in the fourth quarter 1998.
We introduced our CONFORMA product in the first quarter 2000; our second-
generation NATURA line, NATURA 2SE, and our second-generation CONFORMA product,
CONFORMA 2SE, in the second quarter 2000; and our ALTAIR line in the fourth
quarter 2000.  We have been generating revenue from selling hearing aid
components for approximately two years.  Accordingly, we have a limited selling
history on which investors can base an evaluation of our products, business and
prospects.  Our revenue and income potential are unproven, and our business
model will continue to evolve.  For example, our "SE" products, which contain a
noise reduction feature that we introduced in the second quarter 2000, now
comprise the majority of our branded product sales.  If our current and new
products do not gain market share as rapidly as we anticipate, our operating
results will suffer.

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

     We generally offer a 90-day return policy and a minimum of a one-year
warranty on our branded products. Our components warranty is generally 30 to 120
days. To date, we have experienced high levels of returns, remakes and repairs.
Our sales returns were $12.9 million for the year ended December 31, 2000. We
believe that the hearing aid industry, particularly in the United States,
experiences a high level of product returns due to factors such as statutorily
required liberal return policies and product performance inconsistent with
consumers' expectations. We believe our return levels are within the range
experienced by other hearing aid manufacturers with premium-performance,
premium-priced products. Our warranty cost for remakes and repairs was $1.6
million for the year

                                       12
<PAGE>

ended December 31, 2000. We may not be able to attain lower levels of returns,
remakes and repairs and, in fact, these levels may increase, which could reduce
our net sales and operating results.

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

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

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

     In order to be successful, we must develop new products and be a leader in
the commercialization of new technology innovations in the hearing aid market.
Technological innovation is expensive and unpredictable and may require hiring
expert personnel who are difficult to find and attract. Without the timely
introduction of new products, our existing products are likely to become
technologically obsolete over time, which would harm our business. We may not
have the technical capabilities necessary to develop further technologically
innovative products. In addition, any enhancements to or new generations of our
products, even if successfully developed, may not generate revenue in excess of
the costs of development. Our products may be rendered obsolete by changing
consumer preferences or the introduction of products embodying new technologies
or features by us or our competitors.

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

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

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

     To be successful, we must manufacture our products in commercial quantities
in compliance with regulatory requirements at acceptable costs. We may not be
able to expand our manufacturing capabilities at acceptable costs or enter into
agreements with third parties with respect to these activities. We could incur
significant expenses, particularly as we expand our facilities and hire
additional personnel. We may seek collaborative arrangements with other
companies to manufacture current products or new products. We are currently
involved in doubling the physical size of our Minnesota based production
facility and are planning to more than double our hearing aid production
capability. We may be unsuccessful in this endeavor which could cause us to be
unable to meet our current or future customer demand.

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

     Third parties may claim that we are infringing their intellectual property
rights.  We have been accused of infringing two patents owned by a third party.
We believe that this claim of infringement is without merit, and to that end, we
commenced an action on August 4, 2000 in Federal District Court in Utah by which
we seek a declaratory judgment that the patents are invalid and not infringed by
us.  We anticipate that we will incur associated

                                       13
<PAGE>

litigation expense in future quarters. Although we believe that we do not
infringe these patents, that they are invalid and that the ultimate outcome of
this action (and any potential countersuits) will not have a material adverse
effect on us, litigation is inherently uncertain and there can be no assurance
that we will not be materially affected. While we do not believe that any of our
products infringe the proprietary rights of third parties, we may be unaware of
intellectual property rights of others that may cover some of our technology.
Whether or not we actually infringe a third party's rights, any litigation
regarding patents or other intellectual property could be costly and time-
consuming and divert our management and key personnel from our business
operations. Claims of intellectual property infringement might also require us
to enter into costly royalty or license agreements.

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

     Our success depends in large part on our proprietary technology. We rely on
a combination of patents, copyrights, trademarks, trade secrets, confidentiality
procedures and licensing arrangements to establish and protect our proprietary
technology. If we fail to successfully enforce our intellectual property rights,
our competitive position will suffer.

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

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

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

     We anticipate that international sales will continue to account for a
material portion of our sales. Our reliance on international sales and
operations exposes us to related risks and uncertainties which, if realized,
could cause our international sales and operating results to decrease. For
example, in order to market our products in the European Union, we are required
to have the EU's CE mark certification. Any failure to maintain our ISO 9001
certification or CE mark would significantly reduce our net sales and operating
results. In addition, we face foreign currency risks primarily as a result of
the revenues we receive from sales made outside the U.S. and from the
intercompany account balance between our U.S. and Danish companies. Fluctuations
in the exchange rates between the U.S. dollar and other currencies could
increase the sales price of our products in international markets where the
prices of our products are denominated in U.S. dollars or lead to currency
exchange losses where the prices of our products are denominated in local
currencies.

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

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

                                       14
<PAGE>

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

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

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

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

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

     Our products are considered to be medical devices and are, accordingly,
subject to regulation in the United States by the Food and Drug Administration
("FDA"), which may hamper the timing of our product introductions or subject us
to costly penalties in the event we fail to comply. We must comply with facility
registration and product listing requirements of the FDA and adhere to its
Quality System regulations. Noncompliance with applicable FDA requirements can
result in fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production or criminal prosecution.

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

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

THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK BY PRE-INITIAL
PUBLIC OFFERING SHAREHOLDERS, AND THESE SALES COULD CAUSE OUR STOCK PRICE TO
FALL

     Sales of substantial amounts of our common stock in the public market, or
the perception that such sales will occur, could adversely affect the market
price of our common stock. Approximately 15.5 million of the approximately 19.8
million shares of our common stock outstanding became available for resale in
the public market upon the expiration of the 180-day IPO lock-up period in
October 2000. A large portion of our outstanding shares continue to be held by
venture capital firms that have not yet distributed their shares to their
limited partners.

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

     Our officers, directors and their affiliated entities together control a
significant portion of our outstanding common stock.  As a result, these
shareholders, if they acted together, would be able to exert a significant
degree of influence over our management and affairs and over matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions.  In addition, this concentration of
ownership may delay or prevent a change in control, which could cause our stock
price to decline.

                                       15
<PAGE>

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

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


ITEM 2.   PROPERTIES

     We lease approximately 24,000 square feet of manufacturing and office space
in Eagan, Minnesota, under two leases expiring in December 2004 and June 2003.
In Salt Lake City, Utah, we lease approximately 55,000 square feet of
manufacturing and office space under a five-year lease expiring in August 2004.
Our Denmark subsidiary leases approximately 5,000 square feet of office and
manufacturing space near Copenhagen under a four-year lease expiring in August
2004. While we have sufficient manufacturing capacity to satisfy current demand,
any significant increase in demand will require an increase in manufacturing
capacity.


ITEM 3.   LEGAL PROCEEDINGS

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

     We have been accused of infringing two patents owned by Audio Technology
Partners LLC.  We believe that we do not infringe these patents, and to that
end, commenced an action on August 4, 2000 in Federal District Court in Utah by
which we seek a declaratory judgment that the patents are invalid and not
infringed by us.  Although we believe that we do not infringe these patents,
that they are invalid and that the ultimate outcome of this action (and any
potential countersuits) will not have a material adverse effect on us,
litigation is inherently uncertain and there can be no assurance that we will
not be materially affected.

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

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

No matters were submitted to a vote of our shareholders during the fourth
quarter ended December 31, 2000.

                                       16
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth our executive and other officers and their ages
as of December 31, 2000:

<TABLE>
<CAPTION>
Name                               Age  Position
----                               ---  --------
<S>                                <C>  <C>
Andrew G. Raguskus...............   55  President and Chief Executive Officer
Stephen L. Wilson................   47  Vice President and Chief Financial Officer
Jorgen Heide.....................   62  Vice President International and OEM
Gregory N. Koskowich.............   40  Vice President Research and Development
Robert P. Wolf...................   40  Vice President Sales and Marketing
Victor H. Bray, Jr...............   46  Vice President Clinical Research
Jerry L. DaBell..................   54  Vice President Business Development
Weston O. Ison...................   60  Vice President Quality and Regulatory
Michael D. Monahan...............   54  Vice President U.S. Professional Division
Ross C. Ryding...................   46  Vice President Operations
H. Jakob Skadegaard..............   61  President Sonic Innovations A/S
</TABLE>

Andrew G. Raguskus joined Sonic Innovations in September 1996 as President,
Chief Executive Officer and director.  Mr. Raguskus was Chief Operating Officer
of Sonic Solutions, Inc., a maker of digital audio workstations, during 1996.
He was Senior Vice President of Operations of ReSound Corporation, a hearing aid
company, from 1991 to 1995.  Prior to joining ReSound, Mr. Raguskus held
positions with various technology companies, including Sun Microsystems, Inc.
and General Electric's Medical Systems Division, where he developed computer
systems for GE's line of CAT scanners.  He earned a bachelor's degree in
electrical engineering from Rensselaer Polytechnic Institute and is a graduate
of GE's MPA management program.


Stephen L. Wilson joined Sonic Innovations in October 1999 as Vice President and
Chief Financial Officer.  From 1997 to 1999, Mr. Wilson was Executive Vice
President and Chief Financial Officer and Secretary of Computer Motion, Inc., a
medical robotics company.  From 1990 to 1997 he was Vice President Finance and
Chief Financial Officer of St. Jude Medical, Inc., a cardiovascular medical
device company.  He earned a bachelor's degree in accounting from University of
Connecticut and is a Certified Public Accountant.

Jorgen Heide joined Sonic Innovations in March 1997 as Vice President Operations
and became Vice President International and OEM in February 1998.   From 1992 to
1997, Mr. Heide held three separate Vice President positions at ReSound
Corporation, a hearing aid company.  He earned a master's degree in electronic
engineering from Frederiksberg Tekniske Skole in Copenhagen, Denmark.

Gregory N. Koskowich, Ph.D., joined Sonic Innovations in June 1997 as Vice
President Research and Development.  From 1995 to 1997, he was Vice President
Product Development at IMP, Inc., a semi-conductor manufacturer.  From 1992 to
1995, he was Manager of Microelectronics Engineering at ReSound Corporation, a
hearing aid company.  Dr. Koskowich's career also included positions at ELDEC
Corporation and IBM.  He earned a bachelor's degree and a master's degree in
electrical engineering from University of Calgary and a Ph.D. in electrical
engineering from University of Washington.

Robert P. Wolf joined Sonic Innovations in August 2000 as Vice President
Marketing and e-Business and became Vice President Sales and Marketing in
February 2001.  During 1999, he was President and Chief Executive Officer of
Audiology Online, Inc., a web-based audiology information company.   From 1994
to 2000, he was Vice President Sales and Marketing at Siemens Hearing
Instruments, USA, a division of Siemens GmbH.  He earned a master of clinical
science degree in audiology and bachelor's degree in microbiology and immunology
from University of Western Ontario.

                                       17
<PAGE>

Victor H. Bray, Jr., Ph.D., joined Sonic Innovations in August 1997 as Vice
President Clinical Research.  From 1993 to 1997, Dr. Bray was Director of
Clinical Research, Clinical Research Manager and Senior Clinical Research
Audiologist at ReSound Corporation, a hearing aid company.  From 1986 to 1993,
he was Director of Audiology and Clinical Audiologist at the Austin Ear Clinic.
He earned a bachelor's degree in biochemistry from the University of Georgia, a
master's degree in audiology from Auburn University and a Ph.D. in speech and
hearing science from University of Texas at Austin.

Jerry L. DaBell joined Sonic Innovations in July 2000 as Vice President Business
Development.  He was Senior Vice President of Business Development at IMP, Inc.,
a semi-conductor manufacturer, where he was employed from 1988 to 2000.  He
earned a bachelor's degree and a master's degree in electrical engineering from
Brigham Young University.

Weston O. Ison joined Sonic Innovations in October 1999 as Vice President
Quality and Regulatory.  From 1992 to 1999, he served as Vice President of
Quality, Customer Service and Operations Planning at American National Can, a
packaging company.  Mr. Ison's career also included positions at Case
Corporation, Picker Medical and General Electric.  He earned a bachelor's degree
in electrical engineering from University of Utah.

Michael D. Monahan joined Sonic Innovations in March 1998 as Vice President
Sales and became Vice President U.S. Professional Division in November 1999.
From 1997 to 1998, he was Director of Sales of Enact, Inc., a tele-health
information company.  Prior to that, he was National Sales Manager of HDC
Corporation, a medical company, from 1996 to 1997; and Sales Manager of Menlo
Care, Inc., a medical device company, from 1992 to 1996.  He earned a bachelor's
degree in business administration from California State College.

Ross C. Ryding joined Sonic Innovations in January 1999 as Vice President
Operations.  From 1996 to 1999, he was Vice President of Engineering of Sonic
Solutions, a maker of digital audio workstations.  From 1991 to 1996, he was
Director of Engineering of SuperMac Technologies, a maker of desktop publishing
products.  His career also included positions at Sun Microsystems and Hewlett
Packard.  He earned a bachelor's degree in computer science from Oregon
Institute of Technology and a bachelor's degree in electrical engineering from
Oregon State University.

H. Jakob Skadegaard joined Sonic Innovations in August 1998 as President of
Sonic Innovations A/S, a wholly owned subsidiary of Sonic Innovations, Inc.
From 1994 to 1998, he was Manager of Business Development and Distributor Sales
for ReSound Corporation's European Operation.  His career also included
positions as President of Oticon Switzerland, Oticon USA and Bernafon USA and
Executive Vice President of Rexton Switzerland, all of which are hearing aid
companies.

     Executive officers are elected by the board of directors and serve until
their successors have been duly elected and qualified.

                                    PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

     The information set forth under the captions "Stock Exchange Listing",
"Price Range of Sonic Innovations, Inc. Common Stock", and "Dividends" in the
inside back cover of our 2000 Annual Report to Shareholders is incorporated
herein by reference.

During 2000, we issued unregistered securities as follows:

 .  In the portion of the year prior to our initial public offering ("IPO"), we
   issued 199,047 shares of common stock upon the exercise of stock options.

 .  In March 2000, we issued a $3,000,000 convertible promissory note to a
   distributor. The principal and interest converted into 230,415 shares of
   common stock upon the closing of the IPO.

 .  In May 2000, we issued a $3,000,000 convertible promissory note to a
   distributor. The principal converted into 214,285 shares of common stock upon
   the closing of the IPO.

                                       18
<PAGE>

          None of the foregoing transactions involved any underwriters or any
     public offering. Each transaction was exempt from the registration
     requirements of the Securities Act by virtue of Section 4(2) thereof,
     Regulation D promulgated thereunder or Rule 701 pursuant to compensatory
     benefit plans and contracts relating to compensation as provided under Rule
     701.

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

          Of the $58.0 million aggregate proceeds we raised in the IPO, (i) $4.1
     million was paid to underwriters in connection with the underwriting
     discount, and (ii) approximately $1.6 million was paid in connection with
     offering expenses, printing fees, filing fees, and legal and accounting
     fees. There were no other direct or indirect payments to directors or
     officers of Sonic Innovations or any other person or entity. Through
     December 31, 2000, approximately $1.6 million of the IPO proceeds were used
     to purchase property and equipment and $5.4 million was used to fund
     working capital increases. The balance has been invested in investment-
     grade debt securities and money market instruments. These funds may be used
     for general corporate purposes, including research and development;
     repayment of remaining capital lease obligations; working capital; and
     possible acquisitions or investments. The amounts and timing of our actual
     expenditures for each of these purposes may vary significantly depending
     upon numerous factors, including customer order levels, the status of our
     product development efforts, competition, marketing and sales activities
     and market acceptance of our products. Pending use for these or other
     purposes, we intend to continue to invest the balance of the IPO proceeds
     in short-term, investment-grade securities.

     ITEM 6.  SELECTED FINANCIAL DATA (in thousands, except per share and other
     data)

<TABLE>
                                    2000          1999         1998           1997          1996
                                 -----------   ----------   -----------    ----------    ----------
<S>                              <C>           <C>          <C>            <C>           <C>
Statements of Operations:
Net sales                        $    51,660   $   28,694   $     2,143            --            --
Gross profit                     $    25,473   $   11,632   $        87            --            --
 Percent of sales                       49.3%        40.5%          4.0%           --            --
Operating expenses               $    29,224   $   25,383   $    14,276    $    5,326    $    1,545
 Percent of sales                       56.6%        88.5%        670.2%          N/M           N/M
Operating loss                   $    (3,751)  $  (13,751)  $   (14,189)   $   (5,326)   $   (1,545)
Net loss applicable to common
 shareholders                    $    (4,204)  $  (17,337)  $   (15,439)   $   (5,828)   $   (1,733)
Loss per share                   $      (.31)  $   (12.72)  $    (15.61)   $    (8.23)   $    (3.21)
Weighted average number of
 common shares outstanding            13,479        1,363           989           708           539

Balance Sheets:
Cash and marketable securities   $    52,210   $    5,939   $    11,930    $   11,945    $    2,305
Long-term obligations            $       451   $    2,085   $     1,690    $      625    $      438
Total assets                     $    76,248   $   18,462   $    16,872    $   13,091    $    2,619
Shareholders' equity (deficit)   $    64,271   $  (38,801)  $   (23,853)   $   (8,549)   $   (2,801)

Other:
Current ratio                       6.1 to 1      .7 to 1      2.6 to 1      8.2 to 1      6.8 to 1
Number of employees                      342          211           107            30            12
</TABLE>

                                       19
<PAGE>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

     The information set forth under the caption "Management's Discussion And
Analysis of Results of Operations and Financial Condition" on pages 13 through
17 of our 2000 Annual Report to Shareholders is incorporated herein by
reference.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The information set forth under the caption "Quantitative and Qualitative
Disclosure About Market Risk" on page 17 of our 2000 Annual Report to
Shareholders is incorporated herein by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The following consolidated financial statements of Sonic Innovations, Inc.
and report of independent public accountants set forth on pages 18 through 31 of
our 2000 Annual Report to Shareholders are incorporated herein by reference:

     Consolidated Balance Sheets as of December 31, 2000 and 1999

     Consolidated Statements of Operations for the years ended December 31,
     2000, 1999 and 1998

     Consolidated Statements of Shareholders' Equity (Deficit) for the years
     ended December 31, 2000, 1999 and 1998

     Consolidated Statements of Cash Flows for the years ended December 31,
     2000, 1999 and 1998

     Notes to Consolidated Financial Statements

     Report of Independent Public Accountants

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.


                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information concerning our directors as set forth under the captions
"Election of Directors" and "Directors" in our definitive Proxy Statement for
the May 9, 2001 Annual Meeting of Shareholders is incorporated herein by
reference.  Information concerning our executive officers is set forth in Part
I, Item 4 hereto.  The information set forth under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" in our definitive Proxy Statement for
the May 9, 2001 Annual Meeting of Shareholders is incorporated herein by
reference.


ITEM 11.  EXECUTIVE COMPENSATION

     The information set forth under the captions "Executive Compensation and
Other Information" and "Directors Compensation" in our definitive Proxy
Statement for the May 9, 2001 Annual Meeting of Shareholders is incorporated
herein by reference.

                                       20
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information set forth under the caption "Share Ownership by Certain
Beneficial Owners and Named Executive Officers" in our definitive Proxy
Statement for the May 9, 2001 Annual Meeting of Shareholders is incorporated
herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information set forth under the captions "Directors and Nominees" and
"Directors" in our definitive Proxy Statement for the May 9, 2001 Annual Meeting
of Shareholders is incorporated herein by reference.


                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a)  LIST OF DOCUMENTS FILED AS PART OF THIS REPORT

          (1)  FINANCIAL STATEMENTS

               The following consolidated financial statements and report of
               independent public accountants as set forth on pages 18 through
               31 of our 2000 Annual Report to Shareholders are incorporated
               herein by reference:

               Consolidated Balance Sheets as of December 31, 2000 and 1999

               Consolidated Statements of Operations for the years ended
               December 31, 2000, 1999 and 1998

               Consolidated Statements of Shareholders' Equity (Deficit) for the
               years ended December 31, 2000, 1999 and 1998

               Consolidated Statements of Cash Flows for the years ended
               December 31, 2000, 1999 and 1998

               Notes to Consolidated Financial Statements

               Report of Independent Public Accountants


          (2)  FINANCIAL STATEMENT SCHEDULE

               The following financial statement schedule is filed as part of
               this Annual Report on Form 10-K:

               SCHEDULE                                           PAGE
                NUMBER                DESCRIPTION                NUMBER
               --------  -------------------------------------   ------
                   II      Valuation and Qualifying Accounts       23

               The report of the Company's independent public accountants with
               respect to the financial statement schedule is on page 24.

                                       21
<PAGE>

               All other financial statements and schedules not listed have been
               omitted because the required information is included in the
               consolidated financial statements or notes thereto, or is not
               applicable.

          (3)  EXHIBITS

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

   3.1*  Amended and Restated Certificate of Incorporation of the registrant.
   3.2*  Amended and Restated Bylaws of the registrant.
  10.1*  Form of indemnification agreement entered into by the registrant with
         each of its directors and executive officers.
 10.2*#  1993 Stock Plan and form of agreements thereunder.
 10.3*#  2000 Stock Plan and form of agreements thereunder.
 10.4*#  2000 Employee Stock Purchase Plan.
  10.5*  Registration Rights Agreement dated October 23, 1998 between the
         registrant and certain shareholders, as amended.
  10.6*  OEM Agreement dated April 1, 1999 between the registrant and Starkey
         Laboratories, Inc., as amended in December 1999.
   10.7  December 2000 Amendment to OEM Agreement dated April 19, 1999 with
         Starkey Laboratories, Inc.
  10.8*  License and Manufacturing Agreement dated February 20, 1997 between the
         registrant and Atmel Corporation.
 10.9**  Amendment to License and Manufacturing Agreement dated February 20,
         1997 between the registrant and Atmel Corporation.
 10.10*  Amended and Restated License Agreement dated March 21, 2000 between the
         registrant and Brigham Young University.
 10.11*  Amended and Restated Exclusive License Agreement dated March 21, 2000
         between the registrant and Brigham Young University.
 10.12*  Distribution Agreement dated December 30, 1999 between the registrant
         and Hoya Healthcare Corporation.
 10.13*  Lease Agreement dated April 28, 1999 between the registrant and 2795 E.
         Cottonwood Parkway, L.C.
10.14*#  Letter Agreement dated February 8, 1998 between the registrant and
         Michael D. Monahan.
10.15*#  Letter Agreement dated May 4, 1997 between the registrant and Gregory
         N. Koskowich.
10.16*#  Letter Agreement dated September 24, 1999 between the registrant and
         Stephen L. Wilson.
 10.17*  Warrant to purchase stock issued in connection with Silicon Valley Bank
         Loan dated December 22, 1999.
  10.18  Subscription Agreement between K/S HIMPP and the registrant dated
         September 13, 2000.
  10.19  Patent License Agreement between K/S HIMPP and the registrant dated
         September 13, 2000.
   13.1  Annual Report to Shareholders for the year ended December 31, 2000, but
         only to the extent of those sections specifically incorporated by
         reference in this Annual Report on Form 10-K.
  21.1*  Subsidiaries of registrant.
   23.1  Consent of Arthur Andersen LLP.

________________
*    Incorporated by reference from the registrant's Registration Statement on
     Form S-1 (file no. 333-30566), as amended.
#    Designates a management contract or compensatory plan or arrangement
     required to be filed as an exhibit.
**   Confidential treatment has been requested for portions of this exhibit.

(b)  REPORTS ON FORM 8-K
     There were no reports on Form 8-K filed during the quarter ended December
     31, 2000.

(c)  EXHIBITS
     See Item 14(a)(3).

(d)  FINANCIAL STATEMENT SCHEDULE
     See Item 14(a)(2).

                                       22
<PAGE>

                            Sonic Innovations, Inc.
                Schedule II - Valuation and Qualifying Accounts
                                (in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                           Beginning                             Ending
                                            balance   Additions    Deductions    balance
                                            -------  -----------  ------------  ---------
<S>                                 <C>    <C>       <C>          <C>           <C>
Allowance for sales returns         2000     $1974     $13,721       $12,928     $2,767
                                    1999       282      10,088         8,396      1,974
                                    1998        --         696           414        282

Allowance for doubtful accounts     2000       461         344           129        676
                                    1999        51         595           185        461
                                    1998        --          51            --         51

Reserve for remakes and repairs     2000       364       2,504         1,639      1,229
                                    1999        83       1,317         1,036        364
                                    1998        --         200           117         83
</TABLE>

                                       23
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To Sonic Innovations, Inc.:

We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in Sonic
Innovations, Inc.'s Annual Report to Shareholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated January 24, 2001.  Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole.  The schedule referred to in Item 14 (a)(2) is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements.  This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.


/s/Arthur Andersen LLP



Salt Lake City, Utah
January 24, 2001

                                       24
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                           SONIC INNOVATIONS, INC.

Date:     March 26, 2001

                                By:  /s/ Andrew G. Raguskus
                                   ---------------------------------------------
                                     Andrew G. Raguskus
                                     President and Chief Executive Officer
                                     (Principal Executive Officer)


                                By:  /s/ Stephen L. Wilson
                                   ---------------------------------------------
                                     Stephen L. Wilson
                                     Vice President and Chief Financial Officer
                                     (Principal Financial and Accounting
                                      Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following directors on behalf of the registrant on
March 26, 2001.

     /s/ Anthony B. Evnin
--------------------------------
     Anthony B. Evnin


     /s/ Luke B. Evnin
--------------------------------
     Luke B. Evnin


     /s/ Andrew G. Raguskus
--------------------------------
     Andrew G. Raguskus


     /s/ Kevin J. Ryan
--------------------------------
     Kevin J. Ryan


     /s/ G. Gary Shaffer
--------------------------------
     G. Gary Shaffer


     /s/ Sigrid Van Bladel
--------------------------------
     Sigrid Van Bladel


     /s/ Allan M. Wolfe
--------------------------------
     Allan M. Wolfe

                                       25