This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve inherent risks and uncertainties. Any statements about our plans, objectives, expectations, strategies, beliefs, or future performance or events constitute forward-looking statements. Such statements are identified as those that include words or phrases such as "believes," "expects," "anticipates," "plans," "trend," "objective," "continue" or similar expressions or future or conditional verbs such as "will," "would," "should," "could," "might," "may" or similar expressions. Forward-looking statements involve known and unknown risks, uncertainties, assumptions, estimates and other important factors that could cause actual results to differ materially from any results, performance or events expressed or implied by such forward-looking statements. All forward-looking statements are qualified in their entirety by reference to the factors discussed in this report and the following risk factors discussed more fully in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007: (i) our continued losses; (ii) aggressive competitive factors; (iii) fluctuations in our financial results; (iv) negative impact of our recent acquisition activities; (v) ineffective internal financial control systems; (vi) dependence on significant customers; (vii) dependence on critical suppliers and contractors; (viii) uncertainty and impact of product returns;
(ix) inability to introduce new and innovative products; (x) undiscovered product errors or defects; (xi) potential infringement on the intellectual property rights of others; (xii) uncertainty of intellectual property protection; (xiii) dependence on international operations; (xiv) potential product liability; (xv) failure to comply with FDA regulations; (xvi) our stock price could suffer due to sales of stock by our directors and officers; and
(xvii) our charter documents and shareholder agreements may prevent certain acquisitions.

Because the foregoing factors could cause actual results or outcomes to differ materially from those expressed or implied in any forward-looking statements, undue reliance should not be placed on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of future events or developments.

OVERVIEW

Sonic Innovations, Inc. is a hearing aid company focused on the therapeutic aspects of hearing care. We design, develop, manufacture and market high-performance digital hearing aids intended to provide the highest levels of satisfaction for hearing impaired consumers. We have developed patented Digital Signal Processing ("DSP") technologies based on what we believe is an advanced understanding of human hearing. In those countries where we have direct (owned) operations, we sell our products to hearing care professionals or directly to hearing impaired consumers. In other parts of the world where we do not have direct operations, we sell principally to distributors.

Our restructuring activities in 2008 have been centered mostly in Europe with the goal of streamlining processes, eliminating non-performing business units, and focusing on profitable opportunities. On September 1, 2008, we sold one European operation and closed a second European operation. As of September 30, 2008, there are no material balances related to these operations remaining in the Condensed Consolidated Balance Sheet. These operations have been classified as discontinued operations in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007, and in the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008. In February 2007, we sold our Auditory Testing Equipment division to a group of private investors, which is classified as a discontinued operation in the accompanying condensed consolidated financial statements.

Market

The hearing aid market is large at both the wholesale level (over $2 billion) and the retail level (over $6 billion). It is estimated less than 24% (up from approximately 20% five years ago) of those who could benefit from a hearing aid actually own one. There are many factors that cause this low market penetration rate, such as the high cost of hearing aids, the stigma associated with wearing hearing aids, the discomfort of wearing hearing aids and the difficulty in adjusting to amplification. We believe that these negative factors will decrease in importance in the future because we expect the stigma aspect to decrease as improvements in technology make the devices smaller, less conspicuous and more comfortable and as hearing loss becomes more prevalent in society. Therefore, in the future, we expect that more people who could benefit from hearing aids will buy them, and we believe that the growth rate of the hearing impaired population could be significant, particularly as the developed world's population ages.

Offsetting this trend are the following market conditions affecting us in a negative way:

• Competition is intense and new product offerings by our competitors are coming to market more quickly than in the past.

• The performance, features and quality of lower-priced products continue to improve.

• Many consumers feel that hearing aids are simply too expensive and they cannot justify purchase on a cost-benefit basis.

• Our operations and performance depend on general economic conditions. The global economy recently experienced, and could continue to experience, an economic downturn due to the crisis in credit markets, slower economic activity, concerns about inflation, increased energy costs, decreased consumer confidence, and other adverse business conditions. Such fluctuations in the global economy could cause, among others, deterioration and continued decline in consumer spending and increase in the cost of labor and materials. As a result, our operating results could be significantly harmed.

• The available wholesale market continues to shrink as our competitors implement vertical integration strategies and buying groups limit the number of manufacturers with whom they do business. Thus, we plan to develop and acquire additional distribution capacities.

Product Developments

The current global economic situation makes it more important than ever to provide our customers with pricing flexibility in selling to the hearing impaired consumer. In third quarter 2008, Sonic Innovations launched four new products specifically designed to provide additional price options for our customers. Velocity 24, our new premium product, combines a superior set of algorithms to provide the consumer with hands-free operation in a variety of listening environments. Our new advanced-level product, Velocity 12, offers many sophisticated features, such as automatic and adaptive directionality, data logging, and auto telephone. With Velocity 6, we have added a highly competitive mid-level product line. Velocity 4, our newest entry-level offering, makes Sonic Innovations' patented and proven noise reduction available at a price-point that is particularly attractive to cost-sensitive consumers. All Velocity products are available in a full line of custom models and feature a robust standard BTE that can accommodate a severe hearing loss. Velocity 24, Velocity 12, and Velocity 6 also offer a miniBTE model that provides both open-fit and standard fittings, a powerful fitting range and extendable functionality such as Bluetooth and direct audio import support.

The ion family of products - ion 400, ion 200, and ion - continues to be an important part of Sonic Innovations' strategy to provide outstanding products in every market segment. Ion 400, launched March 2008, offers premium features in the smallest open-fit product available on the market. The market for open-fit products has grown rapidly. The market is using open-fit products primarily to target the first-time hearing aid wearer, who currently represents 40% of the purchasers of hearing aids in the United States. The popularity of open fittings can be seen in the Hearing Industries Association ("HIA") data. The Behind-the-ear ("BTE") category, which open-fit products fall within, have seen continued growth in 2008, representing 55% of the units sold in the United States, up from 51% in 2007 and 44% in 2006.

With the release of the Velocity product series, Sonic Innovations now has 11 active product families - Velocity 24, Velocity 12, Velocity 6, Velocity 4, ion 400, ion 200, ion, Balance, Applause, Natura Pro, and Natura 2SE.

We have a number of additional products scheduled for launch in 2009 which will improve our competitiveness as these fill the few remaining gaps in our product line.

Distribution Developments

We are competing in an industry that includes six much larger competitors who have significantly more resources and have established relationships and reputations. Their product offerings are broad, their infrastructure and marketing and distribution capabilities are well established, and they continue to vertically integrate. This makes it difficult for us to compete in the traditional distribution fashion. For this reason, we are interested in both new and existing distribution methods. We believe we are making progress with this strategy. In certain cases, we sell direct to the consumer utilizing the ear-nose-throat doctor to perform the hearing aid fitting, while in other cases, we sell direct to the consumer through various retail stores. We believe a combination of wholesale and direct-to-consumer distribution will continue to be critical for us in certain geographies. Accordingly, we are pursuing a vertical integration strategy focusing on opening new stores or acquiring existing retail hearing aid practices. We are also using customer advances in situations where customers are seeking to grow their businesses.

In parts of the world where we do not have direct operations, we sell principally to distributors with payment terms ranging from 30-120 days. Certain distributors are offered volume discounts which are earned upon meeting unit volume targets. Distributor agreements do not convey price protection or price concessions rights.

Overhead and Expense Reduction Initiative (Restructuring Charge)

During April 2008, we announced an initiative to reduce expenses and focus management and resources on those markets that provide the greatest opportunity for increased profitability. We have four European operations that represent the bulk of this restructuring initiative. Two operations have transferred profitable activities in July 2008 to other existing locations. Another operation was closed. Finally, one operation was sold effective September 1, 2008. The overhead and expense reduction initiative was substantially completed in the third quarter 2008. The total cost of this plan will be approximately $2,500 in non-cash and $2,400 in cash restructuring charges all to be recorded in 2008. We expect that this overhead and expense reduction initiative will result in lower

sales, but higher profitability for those operations. The expected charges in the fourth quarter for the announced restructuring will be an additional $200. In addition, we continue to react to the worsening world economic situation and as a result are continuing to adjust our expense base and expect an additional $500 in restructuring charges in the fourth quarter 2008, for a total of approximately $700.

Financial Results

Our operating loss of $132 for the three months ended September 30, 2008, compared with an operating income of $435 in the three months ended September 30, 2007 was impacted mainly by two items:

1. The restructuring charge of $232.

2. A softening in North American wholesale sales primarily resulting from the downturn in the economy.

Our sales and financial results are expected to improve because of the following:

• We hired a President and Chief Operating Officer in August 2008, who will focus on our North American wholesale operation.

• Focusing on improving the results of retail audiology practices we acquired in 2006, 2007 and 2008. We have assigned our Australian marketing department to oversee our United States marketing efforts, and also have replaced personnel.

• Increased spending as a result of opening new stores and sales and marketing initiatives, particularly in our larger markets outside the United States where we are vertically integrated, which is driving sales increases.

• Implemented cost savings initiatives in manufacturing including lowering purchased component costs, lower personnel costs, outsourcing to lower cost geographies, and improving manufacturing efficiencies.

• Lowered return and repair rates by improving the quality of our products.

• Launched new products, specifically Velocity and ion related products which will appeal to more consumers in that they are featured and priced competitively. We believe these products will assist our North American wholesale operation in the fourth quarter 2008 and beyond.

• An overhead and expense reduction initiative, primarily in Europe.

Notwithstanding the aforementioned actions and expectations, we cannot predict the extent to which the current economic conditions may deteriorate and thus offset, in whole or in part, our expectations above. During the remainder of 2008, we expect to continue to focus on reducing costs, strengthening cash flow, expanding distribution channels, enhancing customer service, improving product quality, launching new products, and improving operational efficiency.

RESULTS OF OPERATIONS

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



                                                       Three months ended         Nine months ended
                                                          September 30,             September 30,
                                                       2008           2007        2008          2007
Net sales                                               100.0 %        100.0 %     100.0 %      100.0 %
Cost of sales                                            35.7           37.1        36.5         37.2

Gross profit                                             64.3           62.9        63.5         62.8
Selling, general and administrative expense              57.6           54.5        56.4         54.2
Research and development expense                          6.4            7.0         6.5          7.5
Restructuring charge                                      0.7             -          1.6           -

Operating income (loss)                                  (0.4 )          1.4        (1.0 )        1.1
Other income (loss), net                                 (0.4 )          1.3         0.1          0.8

Income (loss) from continuing operations before
income taxes                                             (0.8 )          2.7        (0.9 )        1.9
Provision (benefit) for income taxes                     (2.8 )          0.3        (0.4 )        0.7

Income (loss) from continuing operations                  2.0            2.4        (0.5 )        1.2
Loss from discontinued operations, net of income
taxes                                                    (1.1 )         (0.8 )      (3.8 )       (0.5 )

Net income (loss)                                         0.9 %          1.6 %      (4.3 %)       0.7 %

Net Sales. Net sales consist of product sales less a provision for sales returns, which is made at the time of the related sale. Net sales by reportable operating segment were as follows:

                                  Three months ended                Nine months ended
                                    September 30,                     September 30,
                               2008       2007     Change        2008       2007     Change
   Hearing aids:
   North America             $ 11,899   $ 12,578     (5.4 %)   $ 36,131   $ 35,314      2.3 %
   Europe                      11,726     10,769      8.9 %      38,557     33,896     13.8 %
   Rest-of-world                7,686      6,674     15.2 %      22,910     17,944     27.7 %

   Total                     $ 31,311   $ 30,021      4.3 %    $ 97,598   $ 87,154     12.0 %

   Discontinued operations   $    276   $    757    (63.5 %)   $  1,265   $  3,387    (62.7 %)

The following table reflects the significant components of net sales growth for the three months ended September 30, 2007 compared to the three months ended September 30, 2008.

                                       North America              Europe             Rest-of-world             Total
                                        $           %           $          %            $        %          $          %
Net sales for the three months
ended September 30, 2007             $ 12,578                $ 10,769               $   6,674            $ 30,021
Organic growth (reduction)             (2,645 )   (21.0 %)        (41 )   (0.4 %)         621    9.3 %     (2,065 )   (6.9 %)
Acquisitions                            1,958      15.6 %          -       0.0 %           -     0.0 %      1,958      6.5 %
Foreign currency                            8       0.0 %         998      9.3 %          391    5.9 %      1,397      4.7 %

Net sales for the three months
ended September 30, 2008             $ 11,899      (5.4 %)   $ 11,726      8.9 %    $   7,686   15.2 %   $ 31,311      4.3 %

The following table reflects the significant components of net sales growth for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2008.

                                       North America             Europe           Rest-of-world             Total
                                        $           %           $        %           $        %          $          %
Net sales for the nine months
ended September 30, 2007             $ 35,314                $ 33,896            $  17,944            $ 87,154
Organic growth (reduction)             (6,251 )   (17.7 %)        455    1.3 %       2,959   16.5 %     (2,837 )   (3.3 %)
Acquisitions                            6,709      19.0 %          -     0.0 %          -     0.0 %      6,709      7.7 %
Foreign currency                          359       1.0 %       4,206   12.5 %       2,007   11.2 %      6,572      7.6 %

Net sales for the nine months
ended September 30, 2008             $ 36,131       2.3 %    $ 38,557   13.8 %   $  22,910   27.7 %   $ 97,598     12.0 %

Net sales in the three months ended September 30, 2008 of $31,311 were up $1,290, or 4.3% from three months ended September 30, 2007 net sales of $30,021. Net sales in the nine months ended September 30, 2008 of $97,598 were up $10,444, or 12.0% from the nine months ended September 30, 2007 net sales of $87,154. The increase in sales in the third quarter and for the nine months ended September 30, 2008 is due to acquisitions and the weakening of the U.S. dollar against foreign currencies during those periods. Organic changes in Europe were significantly impacted by locations which are subject to the restructuring initiative. Excluding these locations, organic growth in our European segment was 4.9% and 9.6% for the three and nine months ended September 30, 2008, respectively. We have a number of initiatives to improve the organic growth, particularly in North America. We launched a family of Velocity products late in the third quarter 2008 in the North American market that significantly strengthen our product offerings, particularly at the low and mid-priced segments.

North American hearing aid sales of $11,899 in the three months ended September 30, 2008 decreased by $679, or 5.4%, from last year's three months ended September 30, 2007 sales level of $12,578. North American hearing aid sales of $36,131 in the nine months ended September 30, 2008 were up $817, or 2.3%, from last year's nine months ended September 30, 2007 sales level of $35,314. The North American market was positively impacted by our vertical integration strategy as we acquired retail audiology practices. We have slowed the pace of acquisitions for two reasons, first is that most retail practices have lower profitability in the past six to nine months due to the current economic environment, and since our acquisition price is based on profits, our prices are lower, which generally is not agreeable to the owner. The second reason for the slower acquisition pace is to conserve our capital base given the current economic environment. Offsetting the sales growth due to completed acquisitions, the U.S. economic downturn caused a delay in purchases by the hearing impaired. During the third quarter, a buying group representing 11.5% of North American sales added a third manufacturing partner, which may reduce the Company's sales volumes. We are taking steps to improve profitability in North America by launching new products, reducing costs, and have recently hired a President and Chief Operating Officer, who will focus on our North American wholesale operation.

European hearing aid sales of $11,726 in the three months ended September 30, 2008 were up $957, or 8.9%, from the three months ended September 30, 2007 sales of $10,769. European hearing aid sales of $38,557 in the nine months ended September 30, 2008 were up $4,661, or 13.8%, from the nine months ended September 30, 2007 sales of $33,896. As previously stated, the restructured operations had an impact on net sales. For the three and nine months ended September 30, 2008, sales at the restructured operations locations decreased 5.3% and 8.3%, respectively, and increased at our continuing operations by 4.9% and 9.6%, respectively. The restructuring was substantially completed during the third quarter 2008. Local currency sales in the fourth quarter 2008 are expected to be higher because September and October 2008 orders in our largest European retail operation were higher than our September and October 2007 orders, and September and October orders are recorded as sales in the fourth quarter. However the strengthening of the U.S. dollar will have a negative impact on reported sales.

Rest-of-world hearing aid sales of $7,686 in the three months ended September 30, 2008 were up $1,012, or 15.2%, from the three months ended September 30, 2007 sales of $6,674. Rest-of-world hearing aid sales of $22,910 in the nine months ended September 30, 2008 were up $4,966, or 27.7%, from nine months ended September 30, 2007 sales of $17,944 primarily as a result of opening new stores and favorable foreign currency fluctuations.

We generally have a 60-day return policy for wholesale hearing aid sales and 30-days for our retail sales. Provisions for sales returns for continuing operations were $2,217, or 6.6% of gross hearing aid sales, and $3,795, or 11.2% of gross hearing aid sales, in the three months ended September 30, 2008 and 2007, respectively, and $8,113, or 7.7% of gross hearing aid sales, and $10,211, or 10.5% of gross hearing aid sales, in the nine months ended September 30, 2008 and 2007, respectively. The decrease is a result of lower gross sales in North America wholesale, the mix of wholesale and retail sales, improvements in existing products, additional training of our customer base, and, generally, the return rate for a product improves the longer a product is in the market. We believe that the hearing aid industry, particularly in the U.S., experiences a high level of product returns due to factors such as statutorily required liberal return policies and product performance that is inconsistent with hearing impaired consumers' expectations. Retail sales are recognized upon customer acceptance, and therefore, sales returns for retail are considerably lower than in the balance of our business.

Gross Profit. Cost of sales primarily consists of manufacturing costs, royalty expenses, quality costs and costs associated with product remakes and repairs (warranty). Gross profit and gross margin by reportable operating segment were as follows:

                                  Three months ended                       Nine months ended
                                     September 30,                           September 30,
                               2008                2007                2008                2007
Hearing aids:
North America             $  7,085   59.5 %   $  7,826   62.2 %   $ 22,155   61.3 %   $ 22,006   62.3 %
Europe                       7,385   63.0 %      6,441   59.8 %     23,163   60.1 %     20,146   59.4 %
Rest-of-world                5,648   73.5 %      4,616   69.2 %     16,699   72.9 %     12,612   70.3 %

Total                     $ 20,118   64.3 %   $ 18,883   62.9 %   $ 62,017   63.5 %   $ 54,764   62.8 %

Discontinued operations   $    195            $    422            $    778            $  1,932

Gross margin increased from 62.9% in the three months ended September 30, 2007 to 64.3% in the three months ended September 30, 2008 and from 62.8% in the nine months ended September 30, 2007 to 63.5% in the nine months ended September 30, 2008 as a result of a stronger mix of retail sales to wholesale sales (retail provides a higher margin than wholesale), lower manufacturing costs, lower returns and repairs, and the impact of foreign currency. These were partially offset by lower average selling prices in wholesale. We expect gross margin in the fourth quarter to be negatively impacted by the strengthening of the U.S. dollar.

North America's gross margin decreased from 62.2% in the three months ended September 30, 2007 to 59.5% in the three months ended September 30, 2008 and decreased from 62.3% in the nine months ended September 30, 2007 to 61.3% in the nine months ended September 30, 2008 primarily as a result of lower selling prices in North America wholesale as a result of the economic environment partially offset by a mix of retail sales.

Europe's gross margin increased to 63.0% in the three months ended September 30, 2008 from 59.8% in the three months ended September 30, 2007. Europe's gross margin increased from 59.4% in the nine months ended September 30, 2007 to 60.1% in the nine months ended September 30, 2008. These increases are due to a higher mix of retail sales and overall lower wholesales sales. The restructured operations that are continuing are wholesale operations (high volume business with low gross margins). In addition, the weakening of the Euro will have an impact on reported sales, gross margin and operating expenses. The net result will be lower profitability because we source most of our cost of sales in U.S. dollars.

. . .