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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


|           |  |                                                                                              
|---------- |  | ---------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                              
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934     
|          
|           |  | For the fiscal year ended December 28,
    2002                                              
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15
    (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                              

Commission file number 0-16453



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HearUSA, Inc.

Exact Name of Registrant as Specified in Its
Charter


|                                                                                                  |  |                                         
|------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                          |  | 22-2748248                              
|(State of Other Jurisdiction of
    Incorporation or Organization)                                |  | (I.R.S. Employer
    Identification No.)
|1250 Northpoint Parkway,
    West Palm Beach, Florida(Address of Principal Executive
    Offices) |  | 33407(Zip Code)                         

Registrants Telephone Number, Including
Area Code

(561) 478-8770


Securities registered pursuant to
Section 12(b) of the Act:

|                                      |  |                                          
|------------------------------------- |  | -----------------------------------------
|Title of each class                   |  | Name of each exchange on which registered
|                                      |  |                                          
|Common Stock, par value .10 per share |  | American Stock Exchange                  

Securities registered pursuant to
Section 12(g) of the Act:

None


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.    Yes þ         No o

Indicate by check mark if disclosure of
delinquent filers pursuant to item 405 of
Regulation S-K is not contained herein and will not be
contained, to the best of the 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. o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes    o         No þ

As of June 28, 2002, the aggregate market
value of the Registrants Common Stock held by
non-affiliates (based upon the closing price of the Common Stock
on the American Stock Exchange) was approximately $11,238,111.

On March 14, 2003, 30,428,618 shares of the
Registrants common stock were outstanding, including
3,295,105 of exchangeable shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrants definitive Proxy
Statement for the 2003 Annual Meeting of the Registrants
Stockholders (2003 Proxy Statement), to be filed
with the Securities and Exchange Commission, are incorporated by
reference in Part III hereof.



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PART I

Item 1.     Business

HearUSA, Inc. (HearUSA or the
Company) owns or manages a network of hearing care
centers in the States of Florida, New York, New Jersey,
Massachusetts, Ohio, Michigan, Wisconsin, Minnesota, Missouri,
Washington, California and the Provinces of Ontario and Quebec,
Canada, which provide a full range of audiological products and
services for the hearing impaired. The Company intends, as its
long-term goal, to establish a nationwide network of affiliated
providers and company-owned hearing care centers. The
Companys strategy for increasing market penetration
includes advertising to the non-insured self-pay market and
positioning itself as the leading provider of hearing care to
the managed care marketplace in its geographic markets. The
Company believes it is well positioned to successfully address
the concerns of access, quality and cost for the patients of
managed care and other health insurance companies, diagnostic
needs of referring physicians and, ultimately, the hearing
health needs of consumers.

The Company and its subsidiary HEARx West LLC
(HEARx West), a joint venture with Kaiser
Permanente, currently receive a per-member-per-month fee for
more than 1.3 million managed care members. In total,
HearUSA services over 170 benefit programs for hearing care with
various health maintenance organizations
(HMOs), preferred provider organizations
(PPOs), insurers, benefit administrators, and
healthcare providers. The Company has also increased its
attention to the self-pay market, focusing on advertising and
marketing programs directed to the uninsured patient.

HearUSA was incorporated in Delaware on
April 11, 1986. HearUSA formed HEARx West, its joint
venture with Kaiser Permanente, in 1998.

Helix Acquisition

On July 11, 2002, the Company completed its
acquisition of Helix Hearing Care of America Corp., a Canadian
corporation (Helix). Helix owned or managed, prior
to the combination, 126 hearing healthcare clinics located in
Massachusetts, New York, Ohio, Michigan, Wisconsin, Minnesota,
Washington and Missouri as well as in the Provinces of Ontario
and Quebec, Canada. The transaction was effective for financial
reporting purposes on June 30, 2002, the first day of the
Companys third quarter of 2002. The transaction resulted
in Helix becoming an indirect wholly owned subsidiary of the
Company. At the effective time of the merger, each outstanding
share of Helix common stock converted into the right to receive
..3537 shares of HearUSA common stock or .3537 exchangeable
shares of HEARx Canada, Inc. In connection with the transaction
on July 8, 2002, the Company changed its name from HEARx
Ltd. to HearUSA, Inc. Management believes that the combined
entities will result in a stronger and more competitive company
capable of achieving greater financial strength, better access
to capital markets and greater potential than either company
would have on its own. As a result of the combination, the
Company has a network consisting of 173 company owned or managed
centers in 11 states and 2 Canadian provinces and approximately
1400 affiliated providers in 49 states.

Siemens Transaction

On December 7, 2001, HearUSA and Siemens
Hearing Instruments, Inc. (Siemens) entered into a
credit agreement and supply agreement. The credit agreement
provides for a $51,875,000 secured credit facility from Siemens.
The credit facility is comprised of (a) a $10,875,000
secured five-year term loan credit facility; (b) a
$25,000,000 secured five-year revolving loan credit facility;
(c) a $3,000,000 secured five-year term loan facility; and
(d) a $13,000,000 secured five-year term loan credit
facility. As of December 28, 2002, an aggregate of
$24,004,000 in loans was outstanding under the credit facility.
Each of the loans contemplated by the credit facility has
certain restrictions and related covenants.

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If HearUSA cannot maintain compliance with these
requirements, Siemens may decline to make funds available to
HearUSA and declare all then outstanding amounts under the
credit facility immediately due and payable. The credit facility
is secured by a first priority security interest in
substantially all of the assets of HearUSA.

In connection with the credit facility, HearUSA
and Siemens entered into a supply agreement, pursuant to which
HearUSA agreed to purchase from Siemens certain minimum
percentages of HearUSAs hearing aid purchases for a period
of ten years (an initial five year term and a five year renewal
term) at specified prices. The Companys supply agreement
requires full payment for hearing aids purchased from Siemens
within 60 days. As of December 28, 2002, the Company
was not in compliance with those payment provisions. Upon such
noncompliance, Siemens may declare the Company to be in default
of the supply agreement by written notification, which, if not
cured within 60 days of the date of written notification,
would be an event of default under the Companys credit
agreement with Siemens. The Company has obtained a waiver of the
non-compliance with the 60-day payment term of the supply
agreement from Siemens as of December 28, 2002. Future
non-compliance with the supply agreement could have a material
adverse effect on the Companys financial condition and
continued operations.

Pursuant to the agreements with Siemens, in the
event of a change of control of the Company (as defined) and the
surviving entity of such change of control does not assume the
Companys obligations under the agreements, the entire
outstanding amounts under the credit facilities will be
immediately due and payable and the supply arrangements may be
terminated upon payment to Siemens of a $50 million breakup
fee.

National Ear Care Plan Transaction

On November 16, 2001, the Company loaned
$700,000 to Helix for use by Helix as part of the
$3.5 million acquisition by Helix of substantially all of
the capital stock of Auxiliary Benefits Corporation, a Colorado
corporation doing business as National Ear Care Plan
(NECP). The note was secured by substantially all of
the assets of NECP, bore interest at a rate of prime plus one
percent per annum and matured on November 16, 2002. On
January 10, 2002, HearUSA loaned to Helix an additional
$2 million to complete the NECP transaction. On
January 14, 2002, the Company and Helix entered into a
subscription agreement pursuant to which the Company purchased
4,853,932 common shares of Helix for an aggregate purchase price
of $2.7 million. The purchase price was paid using the
$2.7 million in loans to Helix. Upon consummation of the
purchase of the 4,853,932 Helix common shares, the Company
became a greater than 10% owner of Helix common shares.

Facilities and Services

Each HearUSA center is staffed by a licensed and
credentialed audiologist or hearing aid dispenser and at least
one patient care coordinator. Experienced audiologists supervise
clinical operations. The majority of the Companys centers
is conveniently located in shopping or medical centers, and are
typically 1000  2500 square feet in size. The
Companys goal is to have all centers similar in design,
exterior marking and signage, as a uniform appearance reinforces
the message of consistent service and quality of care.

Each center provides hearing services that meet
or exceed applicable state and federal standards, including:



| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | Comprehensive hearing testing using standardized
    practice guidelines
|
| |  | Interactive hearing aid selection and fitting
    process               

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| |   |                                                        
| | - | -------------------------------------------------------
| |  | Aural rehabilitation and consistent follow up care     
|
| |  | Standardized reporting and physician
    communications

In some markets, a full range of audiovestibular
testing is also available to aid in the diagnosis of medical and
vestibular disorders. Such testing is billable to healthcare
insurers, patients and Medicare.

Products

HearUSA has selected a range of hearing aids,
assistive listening devices and other products to provide
quality hearing care for HearUSA patients, including the latest
digital technology. While HearUSA may order a hearing aid from
any manufacturer, it is likely the majority of the hearing aids
sold by HearUSA will be manufactured by Siemens and its
subsidiary Rexton. HearUSA will also sell hearing aids
manufactured by Phonak, Oticon, Starkey and Unitron.

HearUSA centers also offer a large selection of
assistive listening devices. Assistive listening devices are
household and personal technology products designed to assist
the hearing impaired in their day-to-day interactions, including
such devices as telephones and television amplifiers,
telecaptioners and decoders, pocket talkers, specially adapted
telephones, alarm clocks, doorbells and fire alarms.

Marketing

HearUSAs marketing plan focuses on:



| |   |                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Newspaper and Special Events: HearUSA places
    print ads in its markets promoting different hearing aids at a
    variety of technology levels and prices along with special
    limited time events. Advertising also emphasizes the need to
    seek help for hearing loss as well as the qualitative
    differences and advantages offered by HearUSA.                 
|
| |  | Direct Marketing: Utilizing HearUSAs
    database, HearUSA makes direct mailings and offers free seminars
    on hearing and hearing loss.                                                                                                                                                                                                                                  
|
| |  | Physician Marketing: HearUSA attempts to educate
    both physicians and their patients on the need for regular
    hearing testing and the importance of hearing aids and other
    assistive listening devices. HearUSA works to further its image
    as a provider of highly professional services, quality products,
    and comprehensive post-sale consumer education.
|
| |  | Telemarketing: HearUSA has a national call
    center, which supports all HearUSA centers. The national call
    center is responsible for both inbound and outbound
    telemarketing.                                                                                                                                                                                      

For the fiscal years 2002, 2001 and 2000, HearUSA
revenues were $59,591,774, $48,796,110 and $56,114,832,
respectively. During 2002 and 2001, the Company did not have
sales totaling 10% or more of total net sales to a single
customer. In 2000, the Company had sales of 10% or more of
consolidated revenues to a single customer of approximately
$5.7 million, or 10.2%, to Kaiser Permanente Health Plan.

Segments

Centers

At the end of 2002, the Company owned or managed
a total of 173 centers located in Florida, New York, New Jersey,
Massachusetts, Ohio, Michigan, Wisconsin, Minnesota, Missouri,
Washington, California and the Provinces of Ontario and Quebec,
Canada. In general, centers owned or managed by the Company
offer people afflicted with hearing loss a complete range of
services and

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products, including diagnostic audiological
testing, the latest technology in hearing aids and assistive
listening devices to improve their quality of life.


The Companys Quebec subsidiaries (the
Quebec subsidiaries) provide management services to
a single client, Forget & Sauvé, audioprothesistes,
s.e.n.c. operating under the name Le Groupe Forget
(Le Groupe Forget). Le Group Forget is
controlled by Steve Forget, a director and former president of
the Company. Le Groupe Forget operates a network of 16
hearing healthcare centers in the Province of Quebec. The
services provided to Le Groupe Forget by the Quebec
subsidiaries include inventory purchasing and management, office
service support, general administration and patient management
software and related training. The aforementioned services are
rendered to Le Groupe Forget by the Quebec subsidiaries
pursuant to management agreements entered into by each of the
subsidiaries and Le Groupe Forget. Two of the three
management agreements are set to expire on November 30,
2003. There can be no assurance that the management agreements
between Le Groupe Forget and the Quebec subsidiaries will
be renewed on favorable terms or at all. The failure to renew
these management agreements could adversely affect the
operations of the Company in the Province of Quebec.

During August 1998, HearUSA formed HEARx West, a
joint venture with the Permanente Federation LLC (an affiliate
of Kaiser Permanente), to create and operate a network of retail
centers to serve the needs of the hearing impaired principally
in California. The joint venture agreement provides for a 50/50
ownership by HearUSA and Kaiser Permanente, with the centers
bearing the HEARx name. HearUSA is responsible for the daily
operation of the centers, however all clinical and quality
issues are the responsibility of a joint committee comprised of
HearUSA and Permanente clinicians.

HEARx West centers concentrate on providing
hearing aids and audiology testing to Kaiser Permanentes
members and self-pay patients in the state of California. At the
end of 2002, HearUSA operated 20 full-time and 2 part-time HEARx
West centers in southern California, which are included in the
173 centers described above.

Under the terms of the joint venture agreement,
HEARx West has the right of first refusal for any new HearUSA
centers in Southern California; Atlanta, Georgia; Hawaii;
Denver, Colorado; Portland, Oregon; Cleveland, Ohio; Washington,
DC and Baltimore, Maryland. In addition, should HearUSA make a
center acquisition in any of these markets, HEARx West has the
right to purchase such center. Such a sale would be done at
arms length, with HEARx West paying HearUSA an equivalent
value for any of the centers it acquires.

Network

During 2001, the Company began participating with
Siemens in the development of a network of independent hearing
care providers. The development of the network expanded to
include Helix once the Company and Helix had signed their letter
of intent to merge. This network is called the HearUSA Hearing
Care Network (the Network). Unlike the
Companys owned and operated hearing centers, the Network
business is comprised of hearing care practices owned by
independent operators. Through the Network, the Company is now
in a position to pursue national hearing care contracts and
offer managed hearing benefits in areas outside of the Company
owned markets. Although there is strong interest among
independent practitioners in the Network, there can be no
assurance that the Network will generate enough revenue for it
to be an economically viable business.

E-commerce

The Company offers on-line information about
hearing loss, hearing aids, assistive listening devices and the
services offered by hearing health care professionals. The
Companys web site also offers on-line purchases of hearing
related products, such as batteries, hearing aid accessories and
assistive listening devices. In addition to on-line product
sales, e-commerce operations are also

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designed as a marketing tool to inform the public
and generate referrals for Company owned centers and for members
of the Network.


The Registrant has not provided financial
information about geographical areas because it is not practical
to do so at this time.

Financial information regarding our three
business segments is provided in Note 1 to the consolidated
financial statements included herein.

Managed Care and Institutional
Contracts

Since the beginning of 1991, the Company has
entered into arrangements with institutional buyers relating to
the provision of hearing care products and services. HearUSA
believes that contractual relationships with institutional
buyers of hearing aids are essential. These institutions include
managed care companies, health maintenance organizations,
insurance companies, senior citizen buying groups and unions. By
developing contractual arrangements for the referral of
patients, marketing costs are reduced and relationships with
local area physicians are enhanced. Critical to providing care
to members of these groups is the availability of distribution
sites, quality control and the standardization of products and
services. The Company believes its system of high quality,
uniform centers meets the needs of the patients and their
providers.

HearUSA enters into provider agreements with
health insurance or managed care organizations for the
furnishing of hearing care on three different basis:
(a) fee for service basis based on a contractual rate
offered by HearUSA to providers members (all paid for by
the patient); (b) a per capita basis, which is a fixed
payment per patient per month from the provider to HearUSA,
determined by the number of patients to be served and the amount
to be paid by the insurance or managed care organization (the
balance is paid by the individual member); or (c) an
encounter basis where HearUSA is paid a fixed fee by the
insurance or managed care organization for each hearing aid sold
(with the balance paid to HearUSA by the individual member).

The terms of most of these agreements are to be
renegotiated annually, and most of these agreements may be
terminated by either party on 90-days notice at any time. The
early termination of or failure to renew the agreements could
adversely affect the operation of the hearing care centers
located in the related market area. In addition, the early
termination of or failure to renew the agreements that provide
for payment to the Company on a per capita basis would cause the
Company to lower its estimates of revenues to be received over
the life of the agreements and could have an adverse effect on
the Companys results of operations. The Company is not
aware of any likely contract terminations at this time.

Effective at the beginning of the calendar year
for each of 2000, 2001 and 2002, several insurance companies
with which the Company had contracts significantly changed their
contract benefits or service areas. While some insurance
companies increased their Medicare benefits, others either
limited or discontinued hearing benefits for Medicare patients.
The Company believes these changes will not have a long-term
material adverse effect on the Companys financial
condition or results of operations. The Company also believes
that the loss of any single managed care contract will not have
a long term material adverse effect on its financial condition
or results of operations.

Distinguishing Features

Integral to the success of HearUSAs
strategy is increased awareness of the impact of hearing loss
and the medical necessity of treatment, in addition to
strengthening of consumer confidence

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and the differentiation of HearUSA from other
hearing care providers. The Company has accomplished unique
objectives in this process:


Joint Commission on Accreditation of Healthcare
Organizations

During 1998, the Company distinguished itself as
an accredited healthcare organization when it earned a three
year accreditation by the Joint Commission. The Company was
re-accredited in 2002, demonstrating its willingness to provide
safe, high quality care and to be measured against high
standards of performance. Accreditation means that the Company
volunteered to undergo a comprehensive evaluation by a team of
physicians and nurses, who personally conducted a review to
assess provider credentialing, training and orientation, patient
rights and care, organizational leadership and ethics,
management of information, and performance improvement. Although
at this time only the 82 Company centers doing business as HEARx
are accredited, the Companys long-term goal is to accredit
all Company owned centers, as well as willing Network providers.

Center Management System, Medical Reporting and
HearUSA Data Link

The Company has developed a proprietary center
management and data system called the Center Management System
(CMS). CMS primarily has two functions: to manage
patient information and to process point-of-sale customer
transactions. The CMS system is operated over a wide area
network (installed in 2001) that links all locations with the
corporate office. The Company is developing further capabilities
for the wide area network.

The Companys corporate system is tightly
integrated with CMS to provide additional benefits and
functionality that can be better supported centrally. Data
redundancy is built into the system architecture as data is
currently stored both at the regional facilities and at the
central facility. The consolidated data repository is
constructed to support revenues in excess of $550 million,
to accommodate 500+ unique business units and to manage 500,000
new patients annually.

One of the outputs of CMS is a computerized
reporting system that provides referring physicians the test
results and recommended action for every patient examined by
HearUSA staff. To the Companys knowledge, no other
dispenser or audiologist presently offers any referring
physician similar documentation. Consistent with the
Companys mission of making hearing care a medical
necessity, this reporting system makes hearing a part of the
individuals health profile, and increases awareness of
hearing conditions in the medical community.

Competition

The US hearing care industry is highly fragmented
with approximately 11,000 practitioners providing hearing care
products and services. Of this group, 57% practice in office
buildings, 32% in retail outlets, and the remainder work in
medical centers or clinics. Surveys by Hearing Review in June
2001 indicate that over 60% of the hearing aids are sold by
audiologists.

In Canada, the traditional hearing instrument
distribution system is a multitude of small independent
practices where associations are limited to two or three
centers. Most centers are relatively small and are located in
medical centers, professional centers or in small shopping
centers.

It is difficult to determine the precise number
of competitors of the Company in every market where the Company
has operations, or the percentage of market share enjoyed by the
Company. Some competitors are large distributors, including:
(1) Amplifon of Italy, which owns a national network of
approximately 1,000 franchised stores (Miracle Ear) including
400 located in Sears Roebuck & Co. stores and approximately
250 company owned centers operating in British Columbia and the
United States under the Sonus name; and (2) Beltone
Electronics Corp., a hearing aid manufacturer owned by Great
Nordic that distributes its products primarily through a
national network of approximately 700 authorized
distributors in the United States and Canada. Large

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discount retailers, such as Costco, also sell
hearing aids and present a competitive threat in selected
HearUSA markets. All these networks are owned by companies
having greater resources than HearUSA, and there can be no
assurance that one or more of these competitors will not expand
and/or change their operations to capture the market targeted by
HearUSA.


The Companys network business will also
face competition by companies offering similar network services,
including Hearingplanet.com, AVADA and AHAA (minority interest
owned by William Demant, a hearing aid manufacturer) and the
Sonus Network/ HearPO owned by Amplifon. These companies attempt
to aggregate demand for hearing products and sell marketing and
other services to network participants. In addition, some of
these networks are able to offer discounts to managed care
payors, insurers, as well as membership organizations. Many
independent hearing care providers belong to more than one
network. In addition, contract terms for membership are
typically short and may be terminated by either party at will.
There is no assurance, however, that the largely fragmented
hearing care market cannot be successfully consolidated by the
establishment of co-operatives, alliances, confederations or the
like, which would then compete more directly with HearUSAs
network and its company-owned centers.

Reliance on Manufacturers

The Companys supply agreement with Siemens
requires that a certain portion of the Companys sales will
be of Siemens devices. According to a 1998 survey, Siemens was
the worlds largest manufacturer of hearing devices,
producing 21% of the units sold in the world market. Siemens has
a well-diversified product line (including Rexton and other
brands) with a large budget devoted to research and development.
However, there is no guaranty that Siemens technology or
product line will remain desirable in the marketplace.
Furthermore, if Siemens manufacturing capacity cannot keep
pace with the demand of HearUSA and other customers,
HearUSAs business may be adversely affected.

In the event of a disruption of supply from
Siemens or another of the Companys current suppliers, the
Company believes it could obtain comparable products from other
manufacturers. Few manufacturers offer dramatic product
differentiation. HearUSA has not experienced any significant
disruptions in supply in the past.

Qualified Hearing Professionals

The Company currently employs 183 licensed
hearing professionals, of which 140 are audiologists and 43 are
Licensed Hearing Aid Specialists. The inability of the Company
to attract and retain qualified licensed hearing professionals
would reduce the Companys ability to distinguish itself
from competing networks of hearing aid retailers and thus
adversely affect its business. The Company believes that it will
be able to attract and retain qualified licensed hearing
professionals sufficient to staff its centers for the
foreseeable future.

Regulation

Federal

The practice of audiology and the dispensing of
hearing aids are not presently regulated on the Federal level in
the United States. The United States Food and Drug
Administration (FDA) is responsible for monitoring
the hearing care industry. The FDA requires that first time
hearing aid purchasers receive medical clearance from a
physician prior to purchase; however, patients may sign a waiver
in lieu of a physicians examination. The FDA has mandated
that states adopt a return policy for consumers offering them
the right to return their products, generally within
30 days. HearUSA offers all its customers a full 30-day
return period and extends the return period to 60 days for
patients who participate in the family hearing counseling
program. FDA regulations require hearing aid dispensers to
provide customers with certain warnings and statements regarding
the

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use of hearing aids. Also, the FDA requires
hearing aid dispensers to review instructional manuals for
hearing aids with patients before the hearing aid is purchased.


In addition, a portion of the Companys
revenues come from participation in Medicare and Medicaid
programs. Federal laws prohibit the payment of remuneration in
order to receive or induce the referral of Medicare or Medicaid
patients, or in return for the sale of goods or services to
Medicare or Medicaid patients. In addition, Federal law limits
physicians and other healthcare providers from referring
patients to providers of certain designated services in which
they have a financial interest. HearUSA believes that none of
its managed care or other provider contracts or its relationship
with referring physicians are violative of these Federal laws.

The Health Insurance Portability and
Accountability Act of 1996 (HIPPAA) requires the use
of uniform electronic data transmission standards for health
care claims and payment transactions submitted or received
electronically. On August 17, 2000, the Department of
Health and Human Services (HHS) published final
regulations establishing electronic data transmission standards
that all health care providers must use when submitting or
receiving certain health care transactions electronically.
Compliance with these regulations was required by
October 16, 2002. In addition, HIPPA required HHS to adopt
standards to protect the security and privacy of health-related
information. Final regulations containing privacy standards
become effective on April 14, 2003 and HearUSA has taken
steps to comply with these regulations. The privacy regulations
regulate the use and disclosure of individually identifiable
health-related information, whether communicated electronically,
on paper or orally. The regulation also provides patients with
significant new rights related to controlling how their health
information is utilized or disclosed. The Company cannot predict
the impact these regulations will have on its operations.

The Company cannot predict the effect of future
changes in federal laws, including changes that may result from
proposals for federal health care reform legislation being
considered by the U.S. Congress, or the impact that changes in
existing federal laws or in the interpretation of those laws
might have on the Company. The Company believes it is in
material compliance with all existing federal regulatory
requirements.

State

Generally, state regulations, where they exist,
are concerned primarily with the formal licensure of
audiologists and those who dispense hearing aids and with
practices and procedures involving the fitting and dispensing of
hearing aids. There can be no assurance that regulations do not
exist in jurisdictions in which the Company plans to open
centers or will not be promulgated in states in which the
Company currently operates centers which may have a material
adverse effect upon the Company. Such regulations might include
more stringent licensure requirements for dispensers of hearing
aids, inspections of centers for the dispensing of hearing aids
and the regulation of advertising by dispensers of hearing aids.
The Company knows of no current or proposed state regulations
with which it, as currently operated, could not comply.

State regulation may include the oversight of the
Companys advertising and marketing practices as a provider
of hearing aid dispensing services. The Companys
advertisements and other business promotions may be found to be
in violation of these regulations from time to time, and may
result in fines or other sanctions, including the prohibition of
certain marketing programs that may ultimately harm financial
performance.

The Company employs licensed audiologists and
hearing aid dispensers. Under the regulatory framework of
certain states, business corporations are not able to employ
audiologists or offer hearing services. California has such a
law, restricting the employment of audiologists to professional
corporations owned by audiologists or similar licensees.
However, the Company believes there is precedent for the
employment of audiologists because the state of
Californias Department of Consumer Affairs has indicated
that speech-language pathologists may be employed by business
corporations. The similarity of this profession to audiology,
and the fact that speech-language

8



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pathologists and audiologists are regulated under
similar statutes and regulations, leads the Company to believe
that business corporations and similar entities may employ
audiologists. No assurance can be given that the Companys
interpretation of Californias laws will be found to be in
compliance with laws and regulations governing the corporate
practice of audiology or, if its activities are not in
compliance, that the legal structure of the Companys
California operations can be modified to permit compliance.


In addition, state laws prohibit any remuneration
for referrals, similar to Federal laws discussed above.
Generally, these laws follow the federal statues described
above. HearUSA cannot predict the impact that these regulations
will have on operations.

The Company believes it is in material compliance
with all applicable state regulatory requirements. However, the
Company cannot predict future state legislation which may affect
its operations in the states in which it does business. Nor can
the Company assure that existing interpretations of state law
remain consistent with the Companys understanding of the
state law as reflected through its operations.

Canada

The laws in force in the Province of Quebec,
Canada do not allow hearing health care professionals to
practice their profession through an incorporated legal entity.
The selling, fitting, adjusting or replacing of a hearing aid
may only be done by hearing health care professionals qualified
to practice their profession of hearing aid acoustician under
the Hearing Aid Acoustician Act(the Acousticians
Act) and who are members of the Ordre des
audioprothésistes du Québec. Quebec hearing aid
acousticians may also practice their profession along with other
members of the Ordre des audioprothésistes du
Québec through a general partnership.

The Acousticians Act does not forbid, however,
hearing-aid acousticians from having administrative support such
as accounting and other clerical activities done by third
parties. Furthermore, the Acousticians Act does not forbid
hearing-aid acousticians from renting space from a business
whose principal activity is real estate rental.

The Quebec based hearing-aid acousticians
partnership, Forget & Sauvé, audioprothesistes,
s.e.n.c., operating under the name Le Groupe Forget has entered
into management agreements with the Companys subsidiaries
in Quebec to outsource its administrative, supply and management
activities. The Company through its Quebec subsidiaries provides
these services pursuant to those agreements. The Company
believes that the services it provides Forget and Souvé,
audioprothesistes, s.e.n.c. under the agreements do not violate
the Acousticians Act. No assurance can be given, however, that
these activities comply with the Acousticians Act and, if these
activities are not in compliance, that the legal structure of
the Companys relationship with Forget and Sauvé,
audioprothesistes, s.e.n.c. can be modified to permit compliance.

Laws and regulations for the Province of Ontario,
Canada are concerned primarily with the formal licensure of
audiologists and dispensers who dispense hearing aids and with
practices and procedures involving the fitting and dispensing of
hearing aids. All Ontario audiologists must be members of the
College of Audiologists and Speech and Language Pathologists of
Ontario and hearing aid dispensers practicing in Ontario must be
members of the Association of Hearing Instrument Practitioners.
Both audiologists and hearing instrument practitioners are
governed by a professional code of conduct. There can be no
assurance that regulations will not be promulgated in the
Province of Ontario which may have a material adverse effect
upon the Company. Such regulations might include more stringent
licensure requirements for dispensers of hearing aids,
inspections of centers for the dispensing of hearing aids and
the regulation of advertising by dispensers of hearing aids. The
Company knows of no current or proposed Ontario regulations with
which it, as currently operated, could not comply. The Company
employs licensed audiologists and hearing aid dispensers in the
Province of Ontario.

9



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Ontario regulation and code of conducts of
audiologists and hearing instrument practitioners may include
the oversight of the Companys advertising and marketing
practices as a provider of hearing aid dispensing services. The
Companys advertisements and other business promotions may
be found to be in violation of these regulations from time to
time, and may result in fines or other sanctions, including the
prohibition of certain marketing programs that may ultimately
harm financial performance.

In addition, Ontario regulation and code of
conducts of audiologists and hearing instrument practitioners
prohibit any remuneration for referrals.

Product and Professional Liability

In the ordinary course of its business, HearUSA
may be subject to product and professional liability claims
alleging the failure of, or adverse effects claimed to have been
caused by, products sold or services provided by the Company.
The Company maintains insurance at a level which the Company
believes to be adequate. A successful claim in excess of the
policy limits of the Companys liability insurance, however
could adversely affect the Company. As the distributor of
products manufactured by others, the Company believes it would
properly have recourse against the manufacturer in the event of
a product liability claim; however, there can be no assurance
that recourse against a manufacturer by the Company would be
successful or that any manufacturer will maintain adequate
insurance or otherwise be able to pay such liability.

Seasonality

The Company is subject to regional seasonality
the impact of which is minimal.

Employees

At December 28, 2002, HearUSA had 513
full-time employees, of which 78 were employed by HEARx West,
and 101 were employed by Helix and its subsidiaries.

The operations of the Company are dependent in
large part upon the efforts of Paul A. Brown, M.D., Chairman of
the Board, and Stephen J. Hansbrough, Chief Executive Officer
and Director. The loss of the services of Dr. Brown or Mr.
Hansbrough could adversely affect the conduct and operation of
the Companys business. The Company purchased a key
man insurance policy on Dr. Browns life in the
amount of $3,000,000 for the benefit of the Company.

Forward-looking Statements

Except for historical information, the foregoing
includes forward-looking statements, including statements
regarding the Companys belief it is well positioned to
successfully address certain concerns and needs of patients of
managed care and other health insurance companies, referring
physicians and consumers; Managements belief that the
combined entities of HearUSA and Helix will result in a stronger
and more competitive company; the Companys goal to have
all centers similar in design, exterior marketing and signage;
the effect on the Companys financial condition or results
of operations from changes in benefits provided by insurance
companies or the loss of any single managed care contract; the
Companys long-term goal for Joint Commission
accreditation; the effect of CMS to increase awareness of
hearing conditions in the medical community; the Companys
ability to attract and retain qualified licensed hearing
professionals; and available recourse against the manufacturer
in the event of a product liability claim.

Such statements involve certain risks and
uncertainties that could cause actual results to differ
materially from those in the forward-looking statements.
Potential risks and uncertainties include industry and market
conditions, especially those affecting managed health care;
financial performance of Helix continuing at historical levels;
and the accuracy of Managements assumptions.

10



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Item 2.     Properties

HearUSAs corporate offices and national
call center are located in 19,600 square feet of space in West
Palm Beach, Florida. The leases on these properties are for five
years and expire in 2006. As of December 28, 2002, the
Company operated 31 centers in Florida, 15 in New Jersey and 15
in New York, 10 in Massachusetts, 10 in Ohio, 9 in Michigan, 3
in Wisconsin, 6 in Minnesota, 8 in Missouri, 14 in Washington
and 22 HEARx West centers in California. HearUSA also owns 14
centers in the Province of Ontario, Canada and manages 16
centers in the Province of Quebec, Canada. All of the locations
are leased for one to ten year terms pursuant to generally
non-cancelable leases (with renewal options in some cases). Each
center consists of between 200 and 4,000 square feet with annual
base rents ranging from approximately $765 to $93,000. The
Company believes these locations are suitable to serve their
patient needs.

Item 3.     Legal
Proceedings

The Company has from time to been a party to
lawsuits and claims arising in the normal course of business. In
the opinion of management, there are no pending claims or
litigation, in which the outcome would have a material effect on
the Companys consolidated financial position or results of
operations.

Item 4.     Submission
of Matters to a Vote of Security Holders

None

EXECUTIVE OFFICERS OF THE COMPANY

The following sets forth certain information as
of the date hereof with respect to the Companys executive
officers. Each of Dr. Brown and Mr. Hansbrough are serving
pursuant to employment agreements with 5 year terms
expiring in 2004 unless renewed or extended. Mr. Chouinard
and Ms. Taylor each has been appointed to a term that will
expire at the earlier of the annual meeting of Board of
Directors held at the time of the 2003 Annual Meeting of
Stockholders, or their resignation or removal:

|                                                             |  |     |    |                      |  |  |      | 
|------------------------------------------------------------ |  | --- | -- | -------------------- |  |  | ---- | 
|                                                             |  |     |    | First Served        
|Name and Position                                            |  | Age |    | as Executive Officer
|                                                             |  |     |    |                     
|Paul A. Brown, M.D.
    Chairman of the Board                |  |     | 65 |                      |  |  | 1986 | 
|Stephen J. Hansbrough
    Chief Executive Office Director    |  |     | 56 |                      |  |  | 1993 | 
|Gino Chouinard
    Chief Financial Officer                   |  |     | 34 |                      |  |  | 2002 | 
|Donna L. Taylor
    Senior Vice President Sales & Operations |  |     | 46 |                      |  |  | 2000 | 

There are no family relationships among any of
the executive officers and directors of the Company.

Paul A. Brown, M.D., holds an A.B. from Harvard
College and an M.D. from Tufts University School of Medicine.
Dr. Brown founded HearUSA in 1986 and has served as
Chairman of the Board since that time and Chief Executive
Officer until July 2002. From 1970 to 1984, Dr. Brown was
Chairman of the Board and Chief Executive Officer of MetPath
Inc. (MetPath), a New Jersey-based corporation
offering a full range of clinical laboratory services to
physicians and hospitals, which he founded in 1967 while a
resident in pathology at Columbia Presbyterian Medical Center in
New York City. MetPath developed into the largest clinical
laboratory in the world with over 3,000

11



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employees and was listed on the American Stock
Exchange prior to being sold to Corning in 1982 for
$140 million. Dr. Brown is formerly Chairman of the
Board of Overseers of Tufts University School of Medicine, an
Emeritus member of the Board of Trustees of Tufts University, a
past member of the Visiting Committee of Boston University
School of Medicine and part-time lecturer in pathology at
Columbia University College of Physicians and Surgeons.


Stephen J. Hansbrough, Chief Executive Officer
and Director, was formerly the Senior Vice President of Dart
Drug Corporation and was instrumental in starting their
affiliated group of companies (Crown Books and Trak Auto). These
companies along with Dart Drug Stores had over 400 retail
locations, generated approximately $550 million in annual
revenues and employed over 3,000 people. Mr. Hansbrough
subsequently became Chairman and CEO of Dart Drug Stores with
annual revenues in excess of $250 million. After leaving
Dart, Mr. Hansbrough was an independent consultant
specializing in turnaround and start-up operations, primarily in
the retail field, until he joined HearUSA in December 1993.

Gino Chouinard, Chief Financial Officer, joined
HearUSA in July 2002 with its acquisition of Helix.
Mr. Chouinard served as Helixs Chief Financial
Officer from November 1999 until its acquisition by HearUSA.
Mr. Chouinard is a Chartered Accountant who previously
worked for Ernst & Young LLP, an international accounting
firm, as Manager from 1996  1999 and as Senior
Accountant from 1994  1996. He received a Certificate
in Business Law from the University of Montreal in 1997.

Donna L. Taylor, Senior Vice President Sales and
Operations, joined HearUSA in July 1987 as an audiologist. She
was later promoted to Area Manager and Director of Operations
for the Company in Florida. She assumed her role as Vice
President Sales and Operations in December 1993 and in October
2000 was promoted to Senior Vice President  Sales and
Operations, Ms. Taylor received her B.S. from the
University of Iowa in May 1979, her M.A. from the University of
Iowa in May 1981, and earned her CCC (Certificate of Clinical
Competency) in March 1982.

PART II

Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters

The Common Stock of the Company is traded on the
American Stock Exchange (AMEX) under the symbol
EAR and the exchangeable shares of HEARx Canada Inc.
are traded on The Toronto Stock Exchange under the symbol
HUX. Holders of exchangeable shares may tender their
holdings for Common Stock on a one-for-one basis at any time. As
of March 14, 2003, we had 30,428,618 shares of Common Stock
outstanding, including 3,295,105 exchangeable shares. The
closing price on March 14, 2003 was $0.34 for the Common
Stock and Canadian $0.49 for the exchangeable shares. The
following table sets forth the high and low sales prices for the
Common Stock as reported by the AMEX for the fiscal quarters
indicated:

|               |  |              |      |     |  |   |      | 
|-------------- |  | ------------ | ---- | --- |  | - | ---- | 
|               |  |             
|               |  | Common Stock
|               |  |             
|Fiscal Quarter |  | High         |      | Low
|               |  |              |      |    
|2001           |  |              |      |     |  |   |      | 
|First          |  | $            | 2.00 |     |  | $ | 1.20 | 
|Second         |  |              | 2.00 |     |  |   | 1.14 | 
|Third          |  |              | 1.75 |     |  |   | .63  | 
|Fourth         |  |              | 1.28 |     |  |   | .60  | 
|2002           |  |              |      |     |  |   |      | 
|First          |  | $            | 1.25 |     |  | $ | .80  | 
|Second         |  |              | 1.25 |     |  |   | .75  | 
|Third          |  |              | .88  |     |  |   | .39  | 
|Fourth         |  |              | .49  |     |  |   | .22  | 

12



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As of February 26, 2003, there were 1,822
holders of record of the Common Stock. The Company estimates
that included within the holders of record are approximately
17,300 beneficial owners of the Common Stock.

Dividend Policy

HearUSA has never paid and does not anticipate
paying any dividends on the Common Stock in the foreseeable
future but intends to retain any earnings for use in the
Companys business operations.

13



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Item 6.     Selected
Financial Data

The following selected financial data of the
Company should be read in conjunction with the consolidated
financial statements and notes thereto and the following
Managements Discussion and Analysis of Financial Condition
and Results of Operations. The financial data set forth below
has been derived from the audited consolidated financial
statements of the Company:

OPERATING STATEMENT DATA:

|                                                                           |  |             |            |             |  |             |            |             |  |             |            |   |  |   |            |   |  |   |             |    
|-------------------------------------------------------------------------- |  | ----------- | ---------- | ----------- |  | ----------- | ---------- | ----------- |  | ----------- | ---------- | - |  | - | ---------- | - |  | - | ----------- | ---
|                                                                           |  |            
|                                                                           |  | Year Ended 
|                                                                           |  |            
|                                                                           |  | December 28 |            | December 29 |  | December 29 |            | December 31 |  | December 25
|                                                                           |  | 2002(3)     |            | 2001        |  | 2000        |            | 1999(1)     |  | 1998       
|                                                                           |  |             |            |             |  |             |            |             |  |            
|Net Revenues                                                               |  | $           | 59,591,774 |             |  | $           | 48,796,110 |             |  | $           | 56,114,832 |   |  | $ | 47,476,764 |   |  | $ | 26,891,186  |    
|Total operating costs and expenses                                         |  |             | 64,225,672 |             |  |             | 56,995,460 |             |  |             | 59,696,818 |   |  |   | 52,010,728 |   |  |   | 39,159,599  | (2)
|                                                                           |  |             |            |             |  |             |            |             |  |             |            |   |  |   |            |   |  |   |             |    
|Loss from operations                                                       |  |             | (4,633,898 | )           |  |             | (8,199,350 | )           |  |             | (3,581,986 | ) |  |   | (4,533,964 | ) |  |   | (12,268,413 | )  
|Non-operating income(expense)                                              |  |             |            |             |  |             |            |             |  |             |            |   |  |   |            |   |  |   |             |    
|Interest income                                                            |  |             | 114,152    |             |  |             | 222,349    |             |  |             | 294,132    |   |  |   | 210,104    |   |  |   | 602,663     |    
|Interest expense                                                           |  |             | (1,729,399 | )           |  |             | (652,530   | )           |  |             | (28,723    | ) |  |   | (27,713    | ) |  |   | (62,492     | )  
|Other expense                                                              |  |             | (523       | )           |  |             |           |             |  |             |           |   |  |   |           |   |  |   |            |    
|                                                                           |  |             |            |             |  |             |            |             |  |             |            |   |  |   |            |   |  |   |             |    
|Loss before minority interest and equity in loss
    of affiliated company |  |             | (6,249,668 | )           |  |             | (8,629,531 | )           |  |             | (3,316,577 | ) |  |   | (4,351,573 | ) |  |   | (11,728,242 | )  
|Minority Interest                                                          |  |             |           |             |  |             |           |             |  |             |           |   |  |   | 347,677    |   |  |   |             |    
|Equity in loss of affiliated company                                       |  |             | (630,801   | )           |  |             |           |             |  |             |           |   |  |   |           |   |  |   | (615,420    | )  
|                                                                           |  |             |            |             |  |             |            |             |  |             |            |   |  |   |            |   |  |   |             |    
|Net Loss                                                                   |  |             | (6,880,469 | )           |  |             | (8,629,531 | )           |  |             | (3,316,577 | ) |  |   | (4,003,896 | ) |  |   | (12,343,662 | )  
|Dividends on preferred stock                                               |  |             | (696,541   | )           |  |             | (812,205   | )           |  |             | (1,346,872 | ) |  |   | (821,387   | ) |  |   | (587,893    | )  
|                                                                           |  |             |            |             |  |             |            |             |  |             |            |   |  |   |            |   |  |   |             |    
|Net loss applicable to common stockholders                                 |  | $           | (7,577,010 | )           |  | $           | (9,441,736 | )           |  | $           | (4,663,449 | ) |  | $ | (4,825,283 | ) |  | $ | (12,931,555 | )  
|                                                                           |  |             |            |             |  |             |            |             |  |             |            |   |  |   |            |   |  |   |             |    
|Loss per common share:                                                     |  |             |            |             |  |             |            |             |  |             |            |   |  |   |            |   |  |   |             |    
|Basic and diluted, including dividends on
    preferred stock              |  | $           | (0.34      | )           |  | $           | (0.72      | )           |  | $           | (0.39      | ) |  | $ | (0.45      | ) |  | $ | (1.28       | )  
|                                                                           |  |             |            |             |  |             |            |             |  |             |            |   |  |   |            |   |  |   |             |    
|Weighted average number of common shares
    outstanding                   |  |             | 22,534,393 |             |  |             | 13,120,137 |             |  |             | 11,834,388 |   |  |   | 10,775,006 |   |  |   | 10,126,979  |    
|                                                                           |  |             |            |             |  |             |            |             |  |             |            |   |  |   |            |   |  |   |             |    
|Cash dividends per common Share                                            |  |             | None       |             |  |             | None       |             |  |             | None       |   |  |   | None       |   |  |   | None        |    
|                                                                           |  |             |            |             |  |             |            |             |  |             |            |   |  |   |            |   |  |   |             |    

BALANCE SHEET DATA:

|                                       |  |             |             |             |  |             |            |             |  |             |            |  |  |   |            |  |  |   |            | 
|-------------------------------------- |  | ----------- | ----------- | ----------- |  | ----------- | ---------- | ----------- |  | ----------- | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|                                       |  |            
|                                       |  | As of      
|                                       |  |            
|                                       |  | December 28 |             | December 29 |  | December 29 |            | December 31 |  | December 25
|                                       |  | 2002(3)     |             | 2001        |  | 2000        |            | 1999        |  | 1998       
|                                       |  |             |             |             |  |             |            |             |  |            
|Total assets                           |  | $           | 64,865,807  |             |  | $           | 21,341,522 |             |  | $           | 21,872,123 |  |  | $ | 21,377,110 |  |  | $ | 25,208,317 | 
|Working capital (deficit)              |  |             | (10,231,372 | )           |  |             | (738,562   | )           |  |             | 2,350,832  |  |  |   | 938,815    |  |  |   | 7,614,042  | 
|Long-term debt, net of current portion |  |             | 22,082,389  |             |  |             | 8,750,999  |             |  |             | 175,887    |  |  |   | 322,332    |  |  |   | 123,316    | 



---



|    |                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Commencing in 1999 the Companys
    Consolidated Financial Statements include the accounts of HEARx
    West, its 50% subsidiary.                                  
|   
|(2) | During December 1998, the Company recorded a
    restructure charge of $2,233,857 in connection with the closing
    of 12 centers in the northeast in January 1999.
|   
|(3) | As discussed in Note 6 to the Consolidated
    Financial Statements, effective June 30, 2002, the Company
    completed its business combination with Helix.        

14



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|        |                                                                                                 
|------- | ------------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Results of Operations and of
    Financial Condition

GENERAL

On July 11, 2002, the Company completed its
acquisition of Helix. Helix owned or managed, prior to the
combination, 126 hearing healthcare clinics located in
Massachusetts, New York, Ohio, Michigan, Wisconsin, Minnesota,
Washington and Missouri as well as in the Provinces of Ontario
and Quebec. The transaction is effective for financial reporting
purposes on June 30, 2002, the first day of the
Companys third quarter of 2002. In connection with the
completion of the Helix combination, on July 8, 2002 the
Company changed its name from HEARx Ltd. to HearUSA, Inc. and
increased its authorized capital. The Companys common
stock continues to trade on the American Stock Exchange under
the symbol EAR. The exchangeable shares of HEARx
Canada, Inc., the Companys Canadian subsidiary, trade on
the Toronto Stock Exchange under the symbol HUX.

As a result of the recent combination with Helix,
the Company has a network consisting of 173 company owned or
managed centers in 11 states and 2 Canadian provinces and
approximately 1400 affiliated providers in 49 states.

The Company intends, as its long-term goal, to
establish a nationwide network of affiliated providers and
company-owned hearing care centers.

CRITICAL ACCOUNTING POLICIES

Management believes the following critical
accounting policies affect the significant judgments and
estimates used in the preparation of the financial statements:

Goodwill and Intangible Assets:

The majority of the Companys goodwill and
other intangible assets resulted from the combination with
Helix. On at least an annual basis, the Company is required to
assess whether its goodwill is impaired. In order to do this,
management applied judgment in determining its reporting
units, which represent distinct parts of the
Companys business. The definition of the Companys
reporting units affects the Companys goodwill impairment
assessments. The Companys annual goodwill impairment
assessment involves estimating the fair value of a reporting
unit and comparing it with its carrying amount. If the carrying
value of the reporting unit exceeds its fair value, additional
steps are required to calculate a potential impairment loss.
Calculating the fair value of the reporting units requires
significant estimates and long-term assumptions. Any changes in
key assumptions about the business and its prospects, or changes
in market conditions, interest rates or other externalities,
could result in an impairment charge. The Company estimates the
fair value of its reporting units by applying a weighted average
of three methods: quoted market price, external transactions,
and discounted cash flow.

Revenue Recognition

HearUSA recognizes revenues from the sale of
audiological products at the time of delivery and revenues from
hearing care services at the time those services are performed.

The Company has capitation contracts with certain
health care organizations under which the Company is paid an
amount for each enrollee of the health maintenance organization
to provide to the enrollee a once every three years discount on
certain hearing products and services. The amount paid to the
Company by the healthcare organization is calculated on a
per-capita basis and is referred to as capitation revenue. The
Company defers recognition of capitation revenue until the
earlier of the actual utilization by the member populations of
the benefit, or the end of the contract term.

15



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Sales returns

The Company provides to all patients purchasing
hearing aids a specific return period of at least 30 days
if the patient is dissatisfied with the product. The Company
provides an allowance in accrued expenses for returns. The
return period can be extended to 60 days if the patient
attends the Companys H.E.L.P. program.

Estimates

The Companys consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States. The
preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing
basis, management evaluates these estimates, including those
related to allowances for doubtful accounts receivable and sales
returns. Management bases these estimates on historical
experience and on various other assumptions that are believed to
be reasonable under the circumstances. These estimates form the
basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.

RESULTS OF OPERATIONS

2002 Compared to 2001

Net revenues increased $10,795,664, or 22.1%, to
$59,591,774 in 2002 from $48,796,110 in 2001. The increase in
revenues is related to Helixs revenues of approximately
$13,400,000 for 2002. HearUSAs net revenues, excluding
Helix, for 2002, decreased $2,650,579, to $46,145,531 from
$48,796,110 for 2001. This decrease is primarily the result of
the economic downturn. Management believes that continuing
economic uncertainties are causing the Companys primary
market, the nations elderly population, to reduce
discretionary spending, which has had and could have in the
future an adverse effect on the Companys net revenues.

Cost of products sold increased $2,523,784, or
16.4%, to $17,945,371 in 2002 from $15,421,587 in 2001. The
increase in cost of goods sold is related to Helixs cost
of goods of approximately $4,900,000 for 2002. HearUSAs
cost of goods sold, excluding Helix, decreased $2,400,126 to
$13,021,461 in 2002 from $15,421,587 in 2001. This decrease in
cost of goods sold is primarily the result of the increase in
preferred pricing reductions of approximately $2,130,000 from
$1,665,000 in 2001 to $3,795,000 in 2002 from Siemens for
achieving certain sales levels pursuant to the supply agreement
with the Company, which are accounted for as a reduction of cost
of products sold for financial reporting purposes, offset by an
increase in the non-hearing aid cost of goods sold, such as
repairs, batteries and assistive listening devices. The cost of
products sold as a percent of net revenues, was 30.1% and 31.6%
for 2002 and 2001, respectively.

Center operating expenses increased $3,357,459,
or 11.7%, to $32,080,126 in 2002 from $28,722,667 in 2001. This
increase is related to Helixs center operating expenses of
approximately $6,100,000 for 2002. HearUSAs center
operating expenses, excluding Helix, decreased approximately
$2,600,000 to approximately $26,100,000 for 2002 from
approximately $28,700,000 for 2001. This decrease is
attributable to the cost reduction program the Company first
implemented in May 2001. The Company reduced its marketing
programs, reducing center advertising expense to $4,710,130, or
7.9% of revenue, in 2002 down from $5,983,573, or 12.3% in 2001.
In addition, Center wages expense and regional office costs also
decreased $623,161 or 4.7%, and $578,752 or 26.7%, respectively,
to $12,684,759 and $1,585,318, respectively, in 2002 from
$13,307,920 and $2,164,070, respectively in 2001. Finally, a
$78,000 write off of leasehold improvements due to a center
relocation occurred in 2001.

16



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General and administrative expenses increased
$1,130,972, or 10.8% to $11,572,018 in 2002 from $10,441,046 in
2001. This increase is related to Helixs corporate general
and administration expense of approximately $900,000 in 2002.
HearUSA general and administrative expenses, excluding Helix,
increased $168,347 to $8,418,592 in 2002 from $8,250,245 in
2001. This increase is attributable to an increase of $226,000
in telephone expenses due to the full implementation of the call
center in the fourth quarter of 2001, approximately $139,000
loss on the disposition of equipment, and an increase of
approximately $347,000 in professional fees. This was offset by
the Companys cost reduction program. The Company reduced
its marketing programs, reducing corporate advertising $382,142
to $405,245 in 2002 compared with $787,387 in 2001. Shareholder
relations expense decreased $178,541 or 44.8%, to $219,815 in
2002 from $398,356 in 2001. This decrease is primarily the
result of the Companys retention of an investment banking
firm beginning in December 2000 through August 2001 to render
services with respect to financial consulting and public
relations. No such fees were incurred in 2002.

Depreciation and amortization expense increased
$217,997, or 9.0%, to $2,628,157 in 2002 from $2,410,160 in
2001. HearUSA depreciation and amortization expenses, excluding
Helix, decreased $389,694 to $2,020,466 for 2002 from $2,410,160
in 2001, which was primarily the result of certain equipment
becoming fully depreciated during 2002. This decrease was offset
by Helixs depreciation and amortization expense of
approximately $439,000 for 2002, and additional amortization of
approximately $154,000 of certain intangible assets acquired in
the combination.

Interest income decreased $108,197, or 48.7%, to
$114,152 in 2002 from $222,349 in 2001. This decrease is
attributable to the decline in average interest rates earned
primarily on cash and cash equivalents. Interest expense
increased $1,076,869 to $1,729,399 in 2002 from $652,530 in
2001. This increase is primarily attributable to the addition of
interest on the line of credit with Siemens, beginning in
December 2001.

2001 Compared to 2000

Net revenues decreased $7,318,722, or 13.0%, to
$48,796,110 in 2001 from $56,114,832 in 2000. The decrease in
revenues consisted of decreases in revenues from the
Companys Florida, Northeast and California centers. Net
revenues in Florida, the Northeast and California decreased
$4.0 million, or 16.7%, $2.3 million, or 16.2%, and
$1.0 million, or 5.6% to $20.0 million,
$11.9 million and $16.9 million, respectively, for the
year ended December 29, 2001. Management believes the
decrease in revenues for fiscal year end 2001 as compared with
2000 is the result of the overall downward trend in the
nations economy. Management believes that the slowing
economy has caused the Companys primary market, the
nations elderly population, to reduce discretionary
spending. In response to the slowdown, the Company implemented a
cost reduction program in May 2001. The Companys program
called for a $6 million reduction in annual expenses
exclusive of an expected $1.3 million cost increase
associated with implementation of the Companys national
call center during 2001. During the last three quarters of 2001,
the Company reduced total center operating expenses by
approximately $3.1 million to $20.8 million, from the
$23.9 million it would have incurred had it continued such
costs at the levels incurred in the 1st Quarter of 2001, which
totaled approximately $8.0 million. Further, during the last
three quarters of 2001, the Company reduced total general and
administrative expenses (exclusive of the national call center
expenses) by approximately $600,000 to $6.6 million, from
the $7.2 million (exclusive of the national call center
expenses) it would have incurred had it continued such costs at
the levels incurred in the 1st Quarter of 2001, which totaled
approximately $2.4 million (exclusive of the national call
center costs).

Cost of products sold decreased $3,544,523, or
18.7%, to $15,421,587 in 2001 from $18,966,110 in 2000.
Approximately $1,665,000 of the decrease in the cost of products
sold is the result of the rebates received from Siemens pursuant
to the supply agreement with the Company. Additionally, the
decrease in the cost of products sold is a direct result of the
decrease in net revenues. The cost of products sold as a percent
of net revenues, which was 31.6% and 33.8% for

17



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2001 and 2000, respectively, fluctuates from
period to period due to retail pricing and product promotions.


Center operating expenses decreased $605,447, or
2.1%, to $28,722,667 in 2001 from $29,328,114 in 2000. This
decrease is attributable to the cost reduction program the
Company implemented in May 2001. The Company reduced its
marketing programs, reducing center advertising expense to
$5,983,573, or 12.3% of revenue, down from $7,161,400, or 12.8%
in 2000. Center wages expense also decreased $598,941 or 4.3%,
to $13,307,920 in 2001 from $13,906,861 in 2000. These decreases
were offset by an increase in center occupancy expense of
$617,092, or 16.0%, to $4,464,738 in 2001 from $3,847,646 in
2000, resulting primarily from increased operating lease expense
from the relocation of five existing centers during 2001.

General and administrative expenses increased
$1,610,500, or 18.2% to $10,441,046 in 2001 from $8,830,546 in
2000. This increase is partially due to the expansion of
corporate administrative functions, which includes the full
implementation in 2001 of the national call center. The national
call center will be responsible for both inbound and outbound
marketing. The costs associated with the call center were
approximately $1.3 million, which included salaries and
wages of $724,000 and occupancy costs, including rent, common
area maintenance charges and utilities of $525,200. In addition,
professional service fees increased $139,289, or 29.0%, to
$619,820 in 2001 from $480,531 in 2000. This increase is
primarily the result of additional fees paid to the
Companys independent public accountants and attorneys for
additional services. Shareholder relations expense increased to
$392,865 in 2001 from $225,300 in 2000. This increase is
primarily the result of the Companys retention of an
investment banking firm beginning in December 2000 to render
services with respect to financial planning and public relations.

Depreciation and amortization expense decreased
$161,888, or 6.3%, to $2,410,160 in 2001 from $2,572,048 in
2000, which was primarily the result of certain equipment
becoming fully depreciated during 2001.

Interest income decreased $71,783, or 24.4%, to
$222,349 in 2001 from $294,132 in 2000. This decrease is
attributable to the decline in average interest rates earned
primarily on cash and cash equivalents. Interest expense
increased $623,807 to $652,530 in 2001 from $28,723 in 2000.
This increase is attributable to the addition of interest on the
line of credit with Siemens, beginning in April 2001.

LIQUIDITY AND CAPITAL RESOURCES

Working capital decreased $9,492,810 to a
negative $10,231,372 as of December 28, 2002 from a
negative $738,562 as of December 29, 2001. The working
capital of negative $10,231,372 includes approximately
$1.2 million of dividends payable at December 28,
2002, which at the option of the Company may be paid in shares
of the Companys common stock rather than cash, and
approximately $2.9 million which represents the current
portion of the long-term debt to Siemens, which may be repaid
through preferred pricing reductions. In addition, approximately
$2.1 million of the decrease in working capital resulted
from the combination of Helixs current assets of
approximately $6.5 million less current liabilities of
approximately $8.6 million as of June 30, 2002.

On December 7, 2001, HearUSA obtained a
$51,875,000 secured credit facility from Siemens comprised of
(a) a $10,875,000 secured five-year term loan credit
facility (the Tranche A Loan); (b) a $25,000,000
secured five-year revolving loan credit facility (the
Tranche B Loan); (c) a $3,000,000 secured five-year
term loan facility (the Tranche C Loan); and (d) a
$13,000,000 secured five-year term loan credit facility (the
Tranche D Loan). At December 28, 2002, $8,200,000,
$104,000, $2,700,000 and $13,000,000, representing the
Tranche A, Tranche B, Tranche C and
Tranche D Loans, respectively, were outstanding. As of
December 28, 2002, approximately $24,900,000 is available
to the Company for acquisitions under the Tranche B of the
credit facility.

18



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The Tranche A Loan proceeds were used as
follows: (i) the repayment of $6,875,000 owed at
December 7, 2001 to Siemens by the Company under the
April 23, 2001 agreement (which included a
$7.5 million line of credit); (ii) a $2,000,000 loan
from the Company to Helix to fund the NECP acquisition
(described in the Companys Form 10-K at Part I,
Item 1  Business) and
(iii) $2,000,000 for the exchange and redemption of all of
the outstanding Series I Convertible Preferred Stock. The
Tranche B Loan proceeds of $104,000 were used for the
December 2002 asset acquisition of three centers of Hear
America, Inc. The Tranche C Loan proceeds have been used to
repay a term loan payable by Helix to Siemens. The
Tranche D loan proceeds were use to repay all of
Helixs existing convertible debt and portions of its
non-convertible debt. The Siemens credit facility imposes
certain financial and other covenants on the Company, which are
customary for loans of this size and nature. If the Company
cannot maintain compliance with these covenants, Siemens may
terminate future funding under the credit facility and declare
all then outstanding amounts under the facility immediately due
and payable.

The Tranche A, B and C Loans are payable
quarterly over five years with the outstanding principal and
interest at 10%, due and payable on the final maturity date.
Principal and interest, at the prime rate (as defined) plus one
percent, on the Tranche D Loan is payable on the final
maturity date. Quarterly principal and interest payments on the
Tranche A, B and C Loans may be paid through preferred
pricing reductions received from Siemens by HearUSA as long as
the Company purchases certain minimum percentages of its
requirements of hearing aids from Siemens.

As of December 28, 2002, the Company has an
excess of current liabilities over current assets of
approximately $10.2 million. For the year ended
December 28, 2002, the Company incurred a net loss of
approximately $6.9 million. The Company is dependent upon
generating sufficient cash flow from operations or financings to
repay its liabilities. Additionally, the Companys supply
agreement with Siemens requires full payment for hearing aids
purchased from Siemens within 60 days. As of
December 28, 2002, the Company was not in compliance with
those payment provisions. Upon such noncompliance, Siemens may
declare the Company to be in default of the supply agreement by
written notification, which, if not cured within 60 days of
the date of written notification, would be an event of default
under the Companys $51,875,000 secured credit facility
with Siemens. The Company obtained a waiver of the
non-compliance with the 60-day payment term of the supply
agreement from Siemens as of December 28, 2002. Future
non-compliance with the supply agreement could have a material
adverse effect on the Companys financial condition and
continued operations.

On March 14, 2003, the Company obtained
additional funding of $3,500,000 in the form of a five-year note
payable to Siemens with 10% interest. The Company is required to
make monthly payments of interest only in the first year. In
years two through five, the Company must make monthly principal
and interest payments. The additional funding was obtained
pursuant to an amendment to the Companys credit agreement
with Siemens and is otherwise subject to the terms and
conditions of the credit agreement and related security
agreement.

As a result of the completion of the combination
with Helix and significant cost cutting initiatives taken
throughout 2001 and 2002, the Company believes that funds
available under the Siemens credit facility, current cash,
investment securities and revenues from operations, at current
net revenue levels, will be sufficient to support the
Companys operational needs through the next twelve months,
although there can be no assurance that the Company can maintain
compliance with Siemens loan covenants, meet the 60-day
payment terms of the Siemens supply agreement, that net
revenue levels will remain at or higher than current levels or
that unexpected capital needs will not arise for which the
credit facility, cash, investments and revenues from operations
will be sufficient. In the event the Company needs to raise
additional money to fund unexpected cash needs or otherwise to
meet requirements, one or more of the following opportunities
will be evaluated: accounts receivable financing, short term
debt or equity offerings. There can be no assurance; however,
that such financing would be available to the Company on
favorable terms or at all.

19



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Below is a chart setting forth the Companys
contractual cash payment obligations, which have been aggregated
to facilitate a basic understanding of the Companys
liquidity as of December 28, 2002.

Payments Due by Period

|                                   |  |       |            |             |  |             |           |             |  |         |            |  |  |   |            |  |  |   |   | 
|---------------------------------- |  | ----- | ---------- | ----------- |  | ----------- | --------- | ----------- |  | ------- | ---------- |  |  | - | ---------- |  |  | - | - | 
|                                   |  |       |            |             |  |             |           |             |  |        
|Contractual                        |  |       |            | Less than 1 |  |             |           |             |  | After 5
|Obligations                        |  | Total |            | Year        |  | 1  3 Years |           | 4  5 Years |  | Years  
|                                   |  |       |            |             |  |             |           |             |  |        
|Long-Term Debt                     |  | $     | 26,156,000 |             |  | $           | 4,073,000 |             |  | $       | 8,697,000  |  |  | $ | 13,386,000 |  |  | $ |  | 
|Operating Leases                   |  |       | 17,238,000 |             |  |             | 5,887,000 |             |  |         | 9,984,000  |  |  |   | 1,367,000  |  |  |   |  | 
|                                   |  |       |            |             |  |             |           |             |  |         |            |  |  |   |            |  |  |   |   | 
|Total Contractual Cash Obligations |  | $     | 43,394,000 |             |  | $           | 9,960,000 |             |  | $       | 18,681,000 |  |  | $ | 14,753,000 |  |  | $ |  | 
|                                   |  |       |            |             |  |             |           |             |  |         |            |  |  |   |            |  |  |   |   | 

Net cash used by operating activities decreased
from $5,001,007 in 2001, to cash being provided by operating
activities of $678,963 in 2002. The decrease in net cash used by
operating activities was primarily the result of a decrease in
net loss between periods of approximately $1,750,000, a net
decrease in the change in accounts receivable, inventories and
prepaid expenses of approximately $1,126,000 and an increase in
the change in accounts payable and accrued expenses of the
periods of approximately $3,423,000.

Net cash used by investing activities increased
from $2,473,322 in 2001, to $12,762,605 in 2002. In 2002,
purchases of investment securities in excess of proceeds were
approximately $285,000 compared to purchases of investment
securities in excess of proceeds from maturities of investments
of approximately $843,000 in 2001. Purchases of property and
equipment decreased approximately $1,118,000. Cash used to fund
a note receivable and advances to Helix prior to the merger as
of June 30, 2002 totaled approximately $9,547,000, less
cash acquired in the combination with Helix of approximately
$1,163,000. Cash used to purchase a common stock investment in
Helix prior to the combination totaled approximately $2,000,000.
Costs incurred for the Helix acquisition during the 2002 were
approximately $1,571,000, compared to approximately $977,000 in
2001.

Net cash provided by financing activities
increased from $8,785,524 in 2001 to $9,288,602 in 2002. This
increase is primarily the result of the net proceeds of
$13,000,000 from the Siemens Tranche D Loan and $1,500,000 from
the 2002 private placement of common stock, offset by
approximately $2,700,000 in repayments under the Siemens Tranche
A loan, approximately $1,002,000 of preferred stock dividends
paid in cash, compared to net proceeds of $7,500,000 Siemens
Tranche A Loan received in 2001.

Working capital decreased $3,089,394 to a
negative $738,562 as of December 29, 2001 from $2,350,832 as of
December 29, 2000. The working capital of negative $738,562
includes approximately $1.5 million of dividends payable at
December 29, 2001, which at the option of the Company may
be paid in shares of the Companys common stock rather than
cash. This decrease is primarily the result of an increase in
current maturities of long-term debt of approximately
$2.3 million, representing the current portion of the
Siemens Tranche A Loan of $10,875,000, described above.

Net cash used by operating activities increased
from $798,375 in 2000, to $5,001,007 in 2001. The increase in
cash used by operating activities was primarily the result of
the increase of operating losses of approximately $5,313,000,
offset by the change in current assets including accounts and
notes receivable from net cash used of approximately $238,000 to
cash provided of $1.6 million due primarily to an
approximate $2.1 million decrease in net sales in the
fourth quarter of 2001 compared to 2000.

Net cash used by investing activities increased
from $1,610,009 in 2000, to $2,473,322 in 2001. In 2001,
proceeds from maturity of investment securities in excess of
purchases were approximately $843,000 versus net purchases of
approximately $93,000 in 2000. In addition, a $700,000 note

20



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receivable was issued to the Company by Helix in
November 2001 for the NECP acquisition and during 2001
approximately $977,000 of capitalized merger costs (related to
the Helix transaction) were incurred.


Net cash provided by financing activities
increased from $3,801,610 in 2000 to $8,785,524 in 2001. This
increase is primarily the result of the net proceeds of the
$10,875,000 Siemens Tranche A Loan offset by approximately
$2 million of cash paid to exchange and redeem the
Companys Series I Convertible Preferred Stock in
December 2001, compared to net proceeds of approximately
$4.5 million received from a preferred stock offering
during 2000.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB finalized FASB Statements
No. 141, Business Combinations(SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141
requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after
June 30, 2001. SFAS 141 also requires that the Company
recognize acquired intangible assets apart from goodwill if the
acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations
completed on or after July 1, 2001. It also requires, upon
adoption of SFAS 142, that the Company reclassify the
carrying amounts of intangible assets and goodwill based on the
criteria in SFAS 141.

SFAS 142 requires, among other things, that
companies no longer amortize goodwill, but instead test goodwill
for impairment at least annually. In addition, SFAS 142
requires that the Company identify reporting units for the
purpose of assessing potential future impairments of goodwill,
reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangibles assets
with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is
required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible
assets recognized at that date, regardless of when those assets
were initially recognized. SFAS 142 requires the Company to
complete transitional goodwill impairment test six months from
the date of adoption. The Company is also required to reassess
the useful lives of other intangible assets within the first
interim quarter after adoption of SFAS 142. The
Companys previous business combinations were accounted for
using the purchase method. The impact of the adoption of
SFAS 141 and SFAS 142 on the Companys financial
position and results of operations was not material.

In October 2001, the FASB issued
SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assetswhich resolves
significant implementation issues related to FASB Statement
No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
Of,and supersedes the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results
of Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions,for the
disposal of a business segment. SFAS 144 is effective for
fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early application
encouraged. The impact of adoption of SFAS 144 on the
Companys financial position and results of operations was
not material.

In April 2002, the FASB issued
SFAS No. 145 (SFAS 145), Rescission of SFAS
No.s 4, 44, and 64, Amendment of
SFAS No. 13, and Technical Corrections. In addition to
rescinding the aforementioned statements, SFAS 145 also
amends SFAS 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. SFAS 145 is generally effective
for fiscal years beginning after May 15, 2002. The impact

21



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of adoption of SFAS 145 on the
Companys financial position and results of operations was
not material.


In July 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. The standard requires
companies to recognize costs associated with exit (including
restructuring) or disposal activities at fair value when the
related liability is incurred rather than at the date of a
commitment to an exit or disposal plan under current practice.
Costs covered by the standard include certain contract
termination costs, certain employee termination benefits and
other costs to consolidate or close facilities and relocate
employees that are associated with an exit activity or disposal
of long-lived assets. The new requirements are effective
prospectively for exit or disposal activities initiated after
December 31, 2002 and will be adopted by the Company
effective January 1, 2003. The adoption of
SFAS No. 146 is expected to impact the timing of
recognition of costs associated with future exit and disposal
activities.

In December 2002, the FASB issued SFAS,
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. This
statement amends SFAS 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition,
this statement amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting
for stock-based accounting for employee compensation and the
effect of the method used on reported results. SFAS 148 is
generally effective for financial statements for fiscal years
ending after December 15, 2002. The adoption of
SFAS 148 on the Companys financial position and
results of operations was not material as the Company continues
to use the intrinsic value method.

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Others (FIN 45).
FIN 45 elaborates on the disclosures that a guarantor
should make in its interim and annual financial statements
regarding its obligations relating to the issuance of certain
guarantees. It also requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The impact of adopting
FIN 45 on the Companys financial position and results
of operations is not expected to be material.

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities, which
clarifies the application of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is applicable immediately for
variable interest entities created after January 31, 2003.
For variable interest entities created prior to January 31,
2003, the provisions of FIN 46 are applicable no later than
July 1, 2003. The Company does not expect this
Interpretation to have an effect on the consolidated financial
statements.

Forward Looking Statements

Except for historical information provided in
this discussion and analysis, the discussion includes forward
looking statements, including statements regarding the
Companys goal of establishing a nationwide network; the
Companys expectation concerning the effect of cost control
measures; funds available under credit facility, current cash,
investment securities and revenues from operations being
sufficient to support the Companys operational needs; the
impact of recent accounting pronouncements; and the
Companys belief concerning the effect on its financial
condition or operations of changes in benefits announced by some
insurance companies and the loss of any single contract. Such
statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the
forward-looking statements. Potential risks and uncertainties
include

22



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industry and market conditions, especially
those affecting managed health care; unforeseen capital
requirements; trends in market sales; and the success of the
HEARx West joint venture with The Permanente
Federation.




|         |                                                              
|-------- | -------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure
    About Market Risk

The Company does not engage in derivative
transactions or issue variable rate debt. The Company does
become exposed to foreign currencies risk as a result of its
acquisition of Helix, and the Company is not hedging such
exposure. Differences in the fair value of investment securities
are not material, therefore the related market risk is not
significant. The Companys exposure to market risk for
changes in interest rates relates primarily to the
Companys long-term debt. The following table presents the
Companys financial instruments for which fair value and
cash flows are subject to changing market interest rates:

Long-Term Debt

|                        |                                                                          |              |             |            |             |             |            |             |          |   |            |   |            |   |            |   |            |  
|----------------------- | ------------------------------------------------------------------------ | ------------ | ----------- | ---------- | ----------- | ----------- | ---------- | ----------- | -------- | - | ---------- | - | ---------- | - | ---------- | - | ---------- | -
|                        |                                                                          |              |             |           
|                        |                                                                          | Variable     |             | Fixed Rate
|                        |                                                                          | Rate         |             |           
|                        |                                                                          | Prime rate   |             |            |             | 10% note    |            |            
|                        |                                                                          | +1% note due |             | 10% notes  |             | due         |            |            
|                        |                                                                          | April 2007   |             | due 2007   |             | Dec 1, 2006 |            | Other notes
|                        |                                                                          |              |             |            |             |             |            |            
|As of December 28, 2002 |                                                                          |              |             |            |             |             |            |             |          |   |            |   |            |   |            |  
|                        | Estimated cash inflow (outflow) by fiscal
    year of principal maturity |              |             |            |             |             |            |             |          |   |            |   |            |   |            |   |           
|                        |                                                                          | 2003         |             |            |            |             |            |             | (619,000 | ) |            |   | (2,300,000 | ) |            |   | (1,154,000 | )
|                        |                                                                          | 2004         |             |            |            |             |            |             | (616,000 | ) |            |   | (2,300,000 | ) |            |   | (620,000   | )
|                        |                                                                          | 2005         |             |            |            |             |            |             | (613,000 | ) |            |   | (2,300,000 | ) |            |   | (300,000   | )
|                        |                                                                          | 2006         |             |            |            |             |            |             | (610,000 | ) |            |   | (1,300,000 | ) |            |   | (38,000    | )
|                        |                                                                          | 2007         |             |            | (13,000,000 | )           |            |             | (346,000 | ) |            |   |           |   |            |   | (40,000    | )
|                        |                                                                          |              |             |            |             |             |            |             |          |   |            |   |            |   |            |  
|Total                   |                                                                          |              | (13,000,000 | )          |             |             | (2,804,000 | )           |          |   | (8,200,000 | ) |            |   | (2,152,000 | )
|                        |                                                                          |              |             |            |             |             |            |             |          |   |            |   |            |   |            |  
|Estimated fair value    |                                                                          |              | (13,000,000 | )          |             |             | (2,804,000 | )           |          |   | (8,200,000 | ) |            |   | (2,152,000 | )
|                        |                                                                          |              |             |            |             |             |            |             |          |   |            |   |            |   |            |  
|Carrying value          |                                                                          |              | (13,000,000 | )          |             |             | (2,804,000 | )           |          |   | (8,200,000 | ) |            |   | (2,152,000 | )
|                        |                                                                          |              |             |            |             |             |            |             |          |   |            |   |            |   |            |  

23



---



##### 





|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

|                                                                                                                            |                                                                                                                                                   |      |    |       | 
|--------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | -- | ----- | 
|                                                                                                                            |                                                                                                                                                   | Page
|                                                                                                                            |                                                                                                                                                   |     
|Index to Financial Statements                                                                                               |                                                                                                                                                   |      |    |      
|Financial Statements:                                                                                                       |                                                                                                                                                   |      |    |      
|                                                                                                                            | Report of Independent Certified Public Accountants                                                                                                |      |    | 25    | 
|                                                                                                                            | Consolidated Balance Sheets at December 28,
    2002 and December 29, 2001                                                                        |      |    | 26    | 
|                                                                                                                            | Consolidated Statements of Operations for the
    years ended December 28, 2002, December 29, 2001, and
    December 29, 2000                     |      |    | 27    | 
|                                                                                                                            | Consolidated Statements of Changes in
    Stockholders Equity for the years ended December 28,
    2002, December 29, 2001 and December 29, 2000 |      |    | 28-29 | 
|                                                                                                                            | Consolidated Statements of Cash Flows for the
    years ended December 28, 2002, December 29, 2001, and
    December 29, 2000                     |      |    | 30-31 | 
|                                                                                                                            | Notes to Consolidated Financial Statements                                                                                                        |      |    | 32-56 | 
|Financial Statement Schedule:                                                                                               |                                                                                                                                                   |      |    |      
|II Valuation and Qualifying Accounts for the
    years ended December 28, 2002, December 29, 2001 and
    December 29, 2000 |                                                                                                                                                   |      | 57 |      

24



---



##### 



Report of Independent Certified Public
Accountants

Board of Directors 
 HearUSA, Inc. 
 West Palm Beach, Florida

We have audited the accompanying consolidated
balance sheets of HearUSA, Inc. as of December 28, 2002 and
December 29, 2001, and the related consolidated statements
of operations, changes in stockholders equity and cash
flows for each of the three years in the period ended
December 28, 2002. We have also audited the schedule listed
in the accompanying index. These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements and schedule. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of HearUSA, Inc. at
December 28, 2002 and December 29, 2001, and the
results of its operations and its cash flows for each of the
three years in the period ended December 28, 2002 in
conformity with accounting principles generally accepted in the
United States of America.

Also in our opinion, the schedule presents
fairly, in all material respects, the information set forth
therein.

BDO Seidman, LLP

West Palm Beach, Florida 
 March 14, 2003

25



---



##### 



HearUSA, Inc.

Consolidated Balance Sheets


|                                                                                                                                      |                                                                                                                        |                                                          |                            |              |       |            |            |             |       |            | 
|------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | -------------------------- | ------------ | ----- | ---------- | ---------- | ----------- | ----- | ---------- | 
|                                                                                                                                      |                                                                                                                        | December 28,                                             |                            | December 29,
|                                                                                                                                      |                                                                                                                        | 2002                                                     |                            | 2001        
|                                                                                                                                      |                                                                                                                        |                                                          |                            |             
|ASSETS                                                                                                                               
|Current assets:                                                                                                                       |                                                                                                                        |                                                          |                            |              |       |            |            |            
|Cash and cash equivalents                                                                                                             |                                                                                                                        | $                                                        | 2,642,717                  |              |       | $          | 5,561,608  |            
|Investment securities (Note 2)                                                                                                        |                                                                                                                        |                                                          | 435,000                    |              |       |            | 150,000    |            
|Accounts and notes receivable, less allowance for
    doubtful accounts of $1,342,897 and $185,814                                    |                                                                                                                        |                                                          | 7,145,692                  |              |       |            | 3,965,491  |            
|Inventories                                                                                                                           |                                                                                                                        |                                                          | 980,120                    |              |       |            | 504,762    |            
|Prepaid expenses and other                                                                                                            |                                                                                                                        |                                                          | 912,959                    |              |       |            | 855,052    |            
|                                                                                                                                      |                                                                                                                        |                                                          |                            |              |       |            |            |            
|                                                                                                                                      |                                                                                                                        |                                                          | Total current assets       |              |       | 12,116,488 |            |             |       | 11,036,913 | 
|Property and equipment  net(Notes 3 & 4)                                                                                             |                                                                                                                        |                                                          | 7,240,249                  |              |       |            | 6,835,643  |            
|Note receivable(Note 5)                                                                                                               |                                                                                                                        |                                                          |                           |              |       |            | 700,000    |            
|Intangibles, net(Notes 1, 3 and 6)                                                                                                    |                                                                                                                        |                                                          | 45,026,088                 |              |       |            | 992,663    |            
|Deposits and other                                                                                                                    |                                                                                                                        |                                                          | 482,982                    |              |       |            | 1,776,303  |            
|                                                                                                                                      |                                                                                                                        |                                                          |                            |              |       |            |            |            
|                                                                                                                                      |                                                                                                                        | $                                                        | 64,865,807                 |              |       | $          | 21,341,522 |            
|                                                                                                                                      |                                                                                                                        |                                                          |                            |              |       |            |            |            
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                             
|Current liabilities:                                                                                                                  |                                                                                                                        |                                                          |                            |              |       |            |            |            
|                                                                                                                                      | Accounts payable                                                                                                       |                                                          | $                          | 10,938,056   |       |            | $          | 4,196,294   |      
|                                                                                                                                      | Accrued expenses                                                                                                       |                                                          |                            | 3,738,857    |       |            |            | 2,674,830   |      
|                                                                                                                                      | Accrued salaries and other compensation                                                                                |                                                          |                            | 2,382,495    |       |            |            | 890,985     |      
|                                                                                                                                      | Current maturities of long term debt (Note 3)                                                                          |                                                          |                            | 4,073,285    |       |            |            | 2,492,313   |      
|                                                                                                                                      | Dividends payable (Notes 7C and 7F)                                                                                    |                                                          |                            | 1,215,167    |       |            |            | 1,521,053   |      
|                                                                                                                                      |                                                                                                                        |                                                          |                            |              |       |            |            |            
|                                                                                                                                      |                                                                                                                        |                                                          | Total current liabilities  |              |       | 22,347,860 |            |             |       | 11,775,475 | 
|                                                                                                                                      |                                                                                                                        |                                                          |                            |              |       |            |            |            
|Long term debt, less current maturities(Note 3)                                                                                       |                                                                                                                        |                                                          | 22,082,389                 |              |       |            | 8,750,999  |            
|                                                                                                                                      |                                                                                                                        |                                                          |                            |              |       |            |            |            
|Commitments and contingencies(Notes 3, 4, 6, 8, 12
    & 16)                                                                          |                                                                                                                        |                                                          |                           |              |       |            |           |            
|Stockholders equity:                                                                                                                 |                                                                                                                        |                                                          |                            |              |       |            |            |            
|Preferred stock: (Note 7)                                                                                                             |                                                                                                                        |                                                          |                            |              |       |            |            |            
|                                                                                                                                      | (Aggregate liquidation preference $8,108,167 and
    $8,628,053) $1 par, 5,000,000 and 2,000,000 shares
    authorized |                                                          |                            |              |       |            |            |             |      
|                                                                                                                                      |                                                                                                                        | Series J (233 & 233 shares
    outstanding)              |                            |              | 233   |            |            |             | 233   |           
|                                                                                                                                      |                                                                                                                        | Series H Junior Participating (0 shares
    outstanding) |                            |              |      |            |            |             |      |           
|                                                                                                                                      |                                                                                                                        | 1998 Convertible (4,563 & 4,777 shares
    outstanding)  |                            |              | 4,563 |            |            |             | 4,777 |           
|                                                                                                                                      |                                                                                                                        |                                                          |                            |              |       |            |            |            
|                                                                                                                                      |                                                                                                                        |                                                          | Total preferred stock      |              |       | 4,796      |            |             |       | 5,010      | 
|Common stock: $.10 par; 50,000,000 and
    20,000,000 shares authorized; 24,457,055 and 14,559,403 shares
    issued (Notes 6, 7 & 8) |                                                                                                                        |                                                          | 2,445,705                  |              |       |            | 1,455,940  |            
|                                                                                                                                      | Stock subscription (Note 7B)                                                                                           |                                                          |                            | (412,500     | )     |            |            | (412,500    | )    
|                                                                                                                                      | Additional paid-in capital                                                                                             |                                                          |                            | 117,314,681  |       |            |            | 91,438,475  |      
|                                                                                                                                      | Accumulated deficit                                                                                                    |                                                          |                            | (96,765,446  | )     |            |            | (89,188,436 | )    
|                                                                                                                                      | Accumulated other comprehensive
    income  currency translation adjustment                                           |                                                          |                            | 331,763      |       |            |            |            |      
|                                                                                                                                      | Treasury stock, at cost: 518,660 & 518,660
    common shares                                                           |                                                          |                            | (2,483,441   | )     |            |            | (2,483,441  | )    
|                                                                                                                                      |                                                                                                                        |                                                          |                            |              |       |            |            |            
|                                                                                                                                      |                                                                                                                        |                                                          | Total stockholders equity |              |       | 20,435,558 |            |             |       | 815,048    | 
|                                                                                                                                      |                                                                                                                        |                                                          |                            |              |       |            |            |            
|                                                                                                                                      |                                                                                                                        | $                                                        | 64,865,807                 |              |       | $          | 21,341,522 |            
|                                                                                                                                      |                                                                                                                        |                                                          |                            |              |       |            |            |            

See accompanying notes to consolidated
financial statements

26



---



##### 



HearUSA, Inc.

Consolidated Statements of Operations


|                                                                           |                                     |                                    |            |              |            |              |            |            |            |   |            |            |            |  
|-------------------------------------------------------------------------- | ----------------------------------- | ---------------------------------- | ---------- | ------------ | ---------- | ------------ | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | -
|                                                                           |                                     |                                   
|                                                                           |                                     | Year Ended                        
|                                                                           |                                     |                                   
|                                                                           |                                     | December 28,                       |            | December 29, |            | December 29,
|                                                                           |                                     | 2002                               |            | 2001         |            | 2000        
|                                                                           |                                     |                                    |            |              |            |             
|Net revenues                                                               |                                     | $                                  | 59,591,774 |              |            | $            | 48,796,110 |            |            | $ | 56,114,832 |           
|                                                                           |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Operating costs and expenses:                                              |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|                                                                           | Cost of products sold               |                                    |            | 17,945,371   |            |              |            | 15,421,587 |            |   |            | 18,966,110 |           
|                                                                           | Center operating expenses           |                                    |            | 32,080,126   |            |              |            | 28,722,667 |            |   |            | 29,328,114 |           
|                                                                           | General and administrative expenses |                                    |            | 11,572,018   |            |              |            | 10,441,046 |            |   |            | 8,830,546  |           
|                                                                           | Depreciation and amortization       |                                    |            | 2,628,157    |            |              |            | 2,410,160  |            |   |            | 2,572,048  |           
|                                                                           |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|                                                                           |                                     | Total operating costs and expenses |            |              | 64,225,672 |              |            |            | 56,995,460 |   |            |            | 59,696,818 |  
|                                                                           |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Loss from operations                                                       |                                     |                                    | (4,633,898 | )            |            |              | (8,199,350 | )          |            |   | (3,581,986 | )         
|Non-operating income (expense):                                            |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Interest income                                                            |                                     |                                    | 114,152    |              |            |              | 222,349    |            |            |   | 294,132    |           
|Interest expense                                                           |                                     |                                    | (1,729,399 | )            |            |              | (652,530   | )          |            |   | (28,723    | )         
|Other expense                                                              |                                     |                                    | (523       | )            |            |              |           |            |            |   |           |           
|                                                                           |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Loss before equity in loss of affiliated
    company                       |                                     |                                    | (6,249,668 | )            |            |              | (8,629,531 | )          |            |   | (3,316,577 | )         
|Equity in loss of affiliated company                                       |                                     |                                    | (630,801   | )            |            |              |           |            |            |   |           |           
|                                                                           |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Net loss                                                                   |                                     |                                    | (6,880,469 | )            |            |              | (8,629,531 | )          |            |   | (3,316,577 | )         
|Dividends on preferred stock:                                              |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|                                                                           | Deemed dividends (Note 7G)          |                                    |            |             |            |              |            |           |            |   |            | (571,241   | )         
|                                                                           | Dividends                           |                                    |            | (696,541     | )          |              |            | (812,205   | )          |   |            | (775,631   | )         
|                                                                           |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|                                                                           |                                     | Total dividends on preferred stock |            |              | (696,541   | )            |            |            | (812,205   | ) |            |            | (1,346,872 | )
|                                                                           |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Net loss applicable to common
    stockholders                             |                                     | $                                  | (7,577,010 | )            |            | $            | (9,441,736 | )          |            | $ | (4,663,449 | )         
|                                                                           |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Net loss per common share  basic
    and diluted (Note 1)                 |                                     | $                                  | (.34       | )            |            | $            | (.72       | )          |            | $ | (.39       | )         
|                                                                           |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Weighted average number of shares of common
    stock outstanding (Note 1) |                                     |                                    | 22,524,393 |              |            |              | 13,120,137 |            |            |   | 11,834,388 |           
|                                                                           |                                     |                                    |            |              |            |              |            |            |            |   |            |           

See accompanying notes to consolidated
financial statements

27



---



##### 



HearUSA, Inc.

Consolidated Statements of Changes in Stockholders
Equity


|                            |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |            |           |  
|--------------------------- | -------------------------- | ----------------------------------------------------------- |  | ----------------- | --------- | ----------------- | - | ----------- | ---------- | ------ |  | ---------- | --------- | - | - | ---------- | ---------- | - |  | ---------- | -------- | - | - | ---------- | --------- | -
|                            |                            |                                                             |  |                   |           |                  
|                            |                            | Year Ended                                                  |  | Year Ended        |           | Year Ended       
|                            |                            | December 28, 2002                                           |  | December 29, 2001 |           | December 29, 2000
|                            |                            |                                                             |  |                   |           |                  
|                            |                            | Shares                                                      |  | Amount            |           | Shares            |   | Amount      |            | Shares |  | Amount    
|                            |                            |                                                             |  |                   |           |                   |   |             |            |        |  |           
|Preferred Stock:            |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |           
|                            | Balance, beginning of year |                                                             |  | 5,010             |           |                   | $ | 5,010       |            |        |  | 6,015      |           |   | $ | 6,015      |            |   |  | 8,315      |          |   | $ | 8,315      |          
|                            |                            | Exchange/redemption of preferred stock                      |  |                   | (214      | )                 |   |             | (214       | )      |  |            | (285      | ) |   |            | (285       | ) |  |            |         |   |   |            |          |  
|                            |                            | Issuance of preferred stock                                 |  |                   |          |                   |   |             |           |        |  |            |          |   |   |            |           |   |  |            | 500      |   |   |            | 500       |  
|                            |                            | Conversion of preferred stock                               |  |                   |          |                   |   |             |           |        |  |            | (720      | ) |   |            | (720       | ) |  |            | (2,800   | ) |   |            | (2,800    | )
|                            |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |           
|                            | Balance, end of year       |                                                             |  | 4,796             |           |                   | $ | 4,796       |            |        |  | 5,010      |           |   | $ | 5,010      |            |   |  | 6,015      |          |   | $ | 6,015      |          
|                            |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |           
|Common Stock:               |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |           
|                            | Balance, beginning of year |                                                             |  | 14,559,403        |           |                   | $ | 1,455,940   |            |        |  | 12,364,139 |           |   | $ | 1,236,414  |            |   |  | 11,547,337 |          |   | $ | 1,154,734  |          
|                            |                            | Exchange/redemption of preferred stock                      |  |                   | 136,018   |                   |   |             | 13,602     |        |  |            | 606,710   |   |   |            | 60,671     |   |  |            |         |   |   |            |          |  
|                            |                            | Conversion of preferred stock                               |  |                   |          |                   |   |             |           |        |  |            | 1,388,519 |   |   |            | 138,852    |   |  |            | 817,202  |   |   |            | 81,720    |  
|                            |                            | Exercise of employee stock options                          |  |                   |          |                   |   |             |           |        |  |            | 35        |   |   |            | 3          |   |  |            | 1,600    |   |   |            | 160       |  
|                            |                            | Exercise of stock options by consultants                    |  |                   |          |                   |   |             |           |        |  |            |          |   |   |            |           |   |  |            | (2,000   | ) |   |            | (200      | )
|                            |                            | Stock subscription                                          |  |                   |          |                   |   |             |           |        |  |            | 200,000   |   |   |            | 20,000     |   |  |            |         |   |   |            |          |  
|                            |                            | Settlement of liability with common stock                   |  |                   | 141,480   |                   |   |             | 14,148     |        |  |            |          |   |   |            |           |   |  |            |         |   |   |            |          |  
|                            |                            | Issuance of common stock                                    |  |                   | 1,500,000 |                   |   |             | 150,000    |        |  |            |          |   |   |            |           |   |  |            |         |   |   |            |          |  
|                            |                            | Issuance common stock  Helix
    combination               |  |                   | 8,120,154 |                   |   |             | 812,015    |        |  |            |          |   |   |            |           |   |  |            |         |   |   |            |          |  
|                            |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |           
|                            | Balance, end of year       |                                                             |  | 24,457,055        |           |                   | $ | 2,445,705   |            |        |  | 14,559,403 |           |   | $ | 1,455,940  |            |   |  | 12,364,139 |          |   | $ | 1,236,414  |          
|                            |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |           
|Treasury Stock:             |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |           
|                            | Balance, beginning of year |                                                             |  | (518,660          | )         |                   | $ | (2,483,441  | )          |        |  | (518,660   | )         |   | $ | (2,483,441 | )          |   |  | (388,760   | )        |   | $ | (2,070,380 | )        
|                            |                            | Purchase of treasury stock                                  |  |                   |          |                   |   |             |           |        |  |            |          |   |   |            |           |   |  |            | (129,900 | ) |   |            | (413,061  | )
|                            |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |           
|                            | Balance, end of year       |                                                             |  | (518,660          | )         |                   | $ | (2,483,441  | )          |        |  | (518,660   | )         |   | $ | (2,483,441 | )          |   |  | (518,660   | )        |   | $ | (2,483,441 | )        
|                            |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |           
|Stock Subscription:         |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |           
|                            | Balance, beginning of year |                                                             |  |                   |           |                   | $ | (412,500    | )          |        |  |            |           |   | $ |           |            |   |  |            |          |   | $ |           |          
|                            |                            | Stock Subscription                                          |  |                   |           |                   |   |             |           |        |  |            |           |   |   |            | (412,500   | ) |  |            |          |   |   |            |          |  
|                            |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |           
|                            | Balance, end of year       |                                                             |  |                   |           |                   | $ | (412,500    | )          |        |  |            |           |   | $ | (412,500   | )          |   |  |            |          |   |   |           |          
|                            |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |           
|Additional Paid-in Capital: |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |           
|                            | Balance, beginning of year |                                                             |  |                   |           |                   | $ | 91,438,475  |            |        |  |            |           |   | $ | 92,695,792 |            |   |  |            |          |   | $ | 87,307,886 |          
|                            |                            | Exchange/redemption of preferred stock                      |  |                   |           |                   |   |             | (277,388   | )      |  |            |           |   |   |            | (1,707,930 | ) |  |            |          |   |   |            |          |  
|                            |                            | Issuance of preferred stock                                 |  |                   |           |                   |   |             |           |        |  |            |           |   |   |            |           |   |  |            |          |   |   |            | 4,999,500 |  
|                            |                            | Cost of issuing preferred stock                             |  |                   |           |                   |   |             |           |        |  |            |           |   |   |            |           |   |  |            |          |   |   |            | (479,617  | )
|                            |                            | Conversion of preferred stock                               |  |                   |           |                   |   |             |           |        |  |            |           |   |   |            | 58,046     |   |  |            |          |   |   |            | 313,402   |  
|                            |                            | Stock subscription                                          |  |                   |           |                   |   |             |           |        |  |            |           |   |   |            | 392,500    |   |  |            |          |   |   |            |          |  
|                            |                            | Exercise of employee stock options                          |  |                   |           |                   |   |             |           |        |  |            |           |   |   |            | 67         |   |  |            |          |   |   |            | 3,180     |  
|                            |                            | Exercise of stock options by consultants                    |  |                   |           |                   |   |             |           |        |  |            |           |   |   |            |           |   |  |            |          |   |   |            | (19,800   | )
|                            |                            | Deemed dividend                                             |  |                   |           |                   |   |             |           |        |  |            |           |   |   |            |           |   |  |            |          |   |   |            | 571,241   |  
|                            |                            | Settlement of liability with common stock                   |  |                   |           |                   |   |             | 65,081     |        |  |            |           |   |   |            |           |   |  |            |          |   |   |            |          |  
|                            |                            | Issuance common stock  Helix
    combination               |  |                   |           |                   |   |             | 24,317,835 |        |  |            |           |   |   |            |           |   |  |            |          |   |   |            |          |  
|                            |                            | Fair values of options and warrants 
    Helix combination |  |                   |           |                   |   |             | 380,428    |        |  |            |           |   |   |            |           |   |  |            |          |   |   |            |          |  
|                            |                            | Compensation expense                                        |  |                   |           |                   |   |             | 40,250     |        |  |            |           |   |   |            |           |   |  |            |          |   |   |            |          |  
|                            |                            | Issuance of common stock                                    |  |                   |           |                   |   |             | 1,350,000  |        |  |            |           |   |   |            |           |   |  |            |          |   |   |            |          |  
|                            |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |           
|                            | Balance, end of year       |                                                             |  |                   |           |                   | $ | 117,314,681 |            |        |  |            |           |   | $ | 91,438,475 |            |   |  |            |          |   | $ | 92,695,792 |          
|                            |                            |                                                             |  |                   |           |                   |   |             |            |        |  |            |           |   |   |            |            |   |  |            |          |   |   |           

See accompanying notes to consolidated
financial statements

28



---



##### 



HearUSA, Inc.

Consolidated Statements of Changes in Stockholders
Equity


|                                            |                                         |                                     |            |                   |            |                   |            |             |            |   |            |             |            |  
|------------------------------------------- | --------------------------------------- | ----------------------------------- | ---------- | ----------------- | ---------- | ----------------- | ---------- | ----------- | ---------- | - | ---------- | ----------- | ---------- | -
|                                            |                                         |                                    
|                                            |                                         | Year Ended                         
|                                            |                                         |                                    
|                                            |                                         | December 28, 2002                   |            | December 29, 2001 |            | December 29, 2000
|                                            |                                         |                                     |            |                   |            |                  
|                                            |                                         | Amount                              |            | Amount            |            | Amount           
|                                            |                                         |                                     |            |                   |            |                  
|Accumulated Deficit:                        |                                         |                                     |            |                   |            |                   |            |             |            |   |            |            
|                                            | Balance, beginning of year              |                                     | $          | (89,188,436       | )          |                   | $          | (79,746,700 | )          |   | $          | (75,083,251 | )         
|                                            |                                         | Net loss for the year               |            |                   | (6,880,469 | )                 |            |             | (8,629,531 | ) |            |             | (3,316,577 | )
|                                            |                                         | Deemed dividends on preferred stock |            |                   |           |                   |            |             |           |   |            |             | (571,241   | )
|                                            |                                         | Preferred stock dividends           |            |                   | (696,541   | )                 |            |             | (812,205   | ) |            |             | (775,631   | )
|                                            |                                         |                                     |            |                   |            |                   |            |             |            |   |            |            
|                                            | Balance, end of year                    |                                     | $          | (96,765,446       | )          |                   | $          | (89,188,436 | )          |   | $          | (79,746,700 | )         
|                                            |                                         |                                     |            |                   |            |                   |            |             |            |   |            |            
|Unamortized Deferred Compensation:          |                                         |                                     |            |                   |            |                   |            |             |            |   |            |            
|                                            | Balance, beginning of year              |                                     | $          |                  |            |                   | $          |            |            |   | $          | (37,813     | )         
|                                            |                                         | Amortization                        |            |                   |           |                   |            |             |           |   |            |             | 37,813     |  
|                                            |                                         |                                     |            |                   |            |                   |            |             |            |   |            |            
|                                            | Balance, end of year                    |                                     | $          |                  |            |                   | $          |            |            |   | $          |            |           
|                                            |                                         |                                     |            |                   |            |                   |            |             |            |   |            |            
|Accumulated Other Comprehensive
    Income: |                                         |                                     |            |                   |            |                   |            |             |            |   |            |            
|                                            | Balance, beginning of year              |                                     | $          |                  |            |                   | $          |            |            |   | $          |            |           
|                                            | Foreign currency translation adjustment |                                     |            | 331,763           |            |                   |            |            |            |   |            |            |           
|                                            |                                         |                                     |            |                   |            |                   |            |             |            |   |            |            
|                                            | Balance, end of year                    |                                     | $          | 331,763           |            |                   | $          |            |            |   | $          |            |           
|                                            |                                         |                                     |            |                   |            |                   |            |             |            |   |            |            
|Comprehensive Income (Loss):                |                                         |                                     |            |                   |            |                   |            |             |            |   |            |            
|Net loss for the year                       |                                         | $                                   | (6,880,469 | )                 |            | $                 | (8,629,531 | )           |            | $ | (3,316,577 | )          
|Other comprehensive income (loss)           |                                         |                                     | 331,763    |                   |            |                   |           |             |            |   |           |            
|                                            |                                         |                                     |            |                   |            |                   |            |             |            |   |            |            
|Comprehensive income(loss)                  |                                         | $                                   | (6,548,706 | )                 |            | $                 | (8,629,531 | )           |            | $ | (3,316,577 | )          
|                                            |                                         |                                     |            |                   |            |                   |            |             |            |   |            |            

See accompanying notes to consolidated
financial statements

29



---



##### 



HearUSA, Inc.

Consolidated Statements of Cash Flows


|                                                                                              |                         |                                                                                                         |             |              |            |              |            |   |             |   |            |   |             |  
|--------------------------------------------------------------------------------------------- | ----------------------- | ------------------------------------------------------------------------------------------------------- | ----------- | ------------ | ---------- | ------------ | ---------- | - | ----------- | - | ---------- | - | ----------- | -
|                                                                                              |                         |                                                                                                        
|                                                                                              |                         | Year Ended                                                                                             
|                                                                                              |                         |                                                                                                        
|                                                                                              |                         | December 28,                                                                                            |             | December 29, |            | December 29,
|                                                                                              |                         | 2002                                                                                                    |             | 2001         |            | 2000        
|                                                                                              |                         |                                                                                                         |             |              |            |             
|Cash flows from operating activities:                                                         |                         |                                                                                                         |             |              |            |              |            |   |             |   |            |  
|Net loss                                                                                      |                         | $                                                                                                       | (6,880,469  | )            |            | $            | (8,629,531 | ) |             | $ | (3,316,577 | )
|Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                         |                                                                                                         |             |              |            |              |            |   |             |   |            |  
|                                                                                              |                         | Depreciation and amortization                                                                           |             |              | 2,628,157  |              |            |   | 2,410,160   |   |            |   | 2,572,048   |  
|                                                                                              |                         | Provision for doubtful accounts                                                                         |             |              | 796,523    |              |            |   | 125,206     |   |            |   | 377,500     |  
|                                                                                              |                         | Loss on disposition of equipment                                                                        |             |              | 178,369    |              |            |   | 105,127     |   |            |   | 72,005      |  
|                                                                                              |                         | Equity loss in affiliated company                                                                       |             |              | 630,801    |              |            |   |            |   |            |   |            |  
|                                                                                              |                         | Compensation expense from the issuance of capital
    stock                                             |             |              | 40,250     |              |            |   |            |   |            |   |            |  
|Changes in assets and liabilities net of effects
    from purchase of Helix:                  |                         |                                                                                                         |             |              |            |              |            |   |             |   |            |  
|                                                                                              | (Increase) decrease in: |                                                                                                         |             |              |            |              |            |   |             |   |            |   |            
|                                                                                              |                         | Accounts and notes receivable                                                                           |             |              | 325,205    |              |            |   | 1,643,800   |   |            |   | (237,711    | )
|                                                                                              |                         | Inventories                                                                                             |             |              | 301,244    |              |            |   | (4,180      | ) |            |   | 50,878      |  
|                                                                                              |                         | Prepaid expenses and other                                                                              |             |              | (77,922    | )            |            |   | 35,005      |   |            |   | (326,485    | )
|                                                                                              | Increase (decrease) in: |                                                                                                         |             |              |            |              |            |   |             |   |            |   |            
|                                                                                              |                         | Accounts payable and accrued expenses                                                                   |             |              | 1,502,206  |              |            |   | (506,371    | ) |            |   | 463,470     |  
|                                                                                              |                         | Accrued salaries and other                                                                              |             |              | 1,234,601  |              |            |   | (180,223    | ) |            |   | (453,503    | )
|                                                                                              |                         |                                                                                                         |             |              |            |              |            |   |             |   |            |  
|Net cash provided by/(used in) operating
    activities                                       |                         |                                                                                                         | 678,963     |              |            |              | (5,001,007 | ) |             |   | (798,375   | )
|                                                                                              |                         |                                                                                                         |             |              |            |              |            |   |             |   |            |  
|Cash flows from investing activities:                                                         |                         |                                                                                                         |             |              |            |              |            |   |             |   |            |  
|                                                                                              |                         | Purchase of property and equipment                                                                      |             |              | (522,800   | )            |            |   | (1,640,464  | ) |            |   | (1,519,764  | )
|                                                                                              |                         | Proceeds from sale of equipment                                                                         |             |              |           |              |            |   | 600         |   |            |   | 2,979       |  
|                                                                                              |                         | Purchase of investments                                                                                 |             |              | (5,542,524 | )            |            |   | (10,129,206 | ) |            |   | (10,375,928 | )
|                                                                                              |                         | Proceeds from maturities of investments                                                                 |             |              | 5,257,524  |              |            |   | 10,972,430  |   |            |   | 10,282,704  |  
|                                                                                              |                         | Issuance of note receivable and advance to Helix
    pre-combination net of cash acquired of $1,162,803 |             |              | (8,384,122 | )            |            |   | (700,000    | ) |            |   |            |  
|                                                                                              |                         | Purchase of pre-combination investment in Helix                                                         |             |              | (2,000,000 | )            |            |   |            |   |            |   |            |  
|                                                                                              |                         | Cost of business combination                                                                            |             |              | (1,570,683 | )            |            |   | (976,682    | ) |            |   |            |  
|                                                                                              |                         |                                                                                                         |             |              |            |              |            |   |             |   |            |  
|Net cash used by investing activities                                                         |                         |                                                                                                         | (12,762,605 | )            |            |              | (2,473,322 | ) |             |   | (1,610,009 | )
|                                                                                              |                         |                                                                                                         |             |              |            |              |            |   |             |   |            |  
|Cash flows from financing activities:                                                         |                         |                                                                                                         |             |              |            |              |            |   |             |   |            |  
|                                                                                              |                         | Proceeds from issuance of:                                                                              |             |              |            |              |            |   |             |   |            |   |             |  
|                                                                                              |                         | Long-term debt                                                                                          |             |              | 13,452,095 |              |            |   | 11,790,434  |   |            |   |            |  
|                                                                                              |                         | Principal payments: Long-term debt                                                                      |             |              | (4,397,066 | )            |            |   | (875,396    | ) |            |   | (289,051    | )
|                                                                                              |                         | Acquisition of treasury stock                                                                           |             |              |           |              |            |   |            |   |            |   | (413,061    | )
|                                                                                              |                         | Exchange & redemption of capital stock                                                                  |             |              | (264,000   | )            |            |   | (2,129,584  | ) |            |   |            |  
|                                                                                              |                         | Proceeds from exercise of employee stock options                                                        |             |              |           |              |            |   | 70          |   |            |   |            |  
|                                                                                              |                         | Proceeds from issuance of capital stock, net of
    offering costs                                      |             |              | 1,500,000  |              |            |   |            |   |            |   | 4,503,722   |  
|                                                                                              |                         | Dividends on preferred stock                                                                            |             |              | (1,002,427 | )            |            |   |            |   |            |   |            |  
|                                                                                              |                         |                                                                                                         |             |              |            |              |            |   |             |   |            |  
|Net cash provided by financing activities                                                     |                         |                                                                                                         | 9,288,602   |              |            |              | 8,785,524  |   |             |   | 3,801,610  |  

See accompanying notes to consolidated
financial statements

30



---



##### 



HearUSA, Inc.

Consolidated Statements of Cash Flows


|                                                                                                             |  |              |            |              |  |              |           |  |  |   |           | 
|------------------------------------------------------------------------------------------------------------ |  | ------------ | ---------- | ------------ |  | ------------ | --------- |  |  | - | --------- | 
|                                                                                                             |  |             
|                                                                                                             |  | Year Ended  
|                                                                                                             |  |             
|                                                                                                             |  | December 28, |            | December 29, |  | December 29,
|                                                                                                             |  | 2002         |            | 2001         |  | 2000        
|                                                                                                             |  |              |            |              |  |             
|Effects of exchange rate changes on cash                                                                     |  | $            | (123,851   | )            |  | $            |          |  |  | $ |          | 
|                                                                                                             |  |              |            |              |  |              |           |  |  |   |           | 
|Net (decrease) increase in cash and cash
    equivalents                                                     |  |              | (2,918,891 | )            |  |              | 1,311,195 |  |  |   | 1,393,226 | 
|Cash and cash equivalents at beginning of year                                                               |  |              | 5,561,608  |              |  |              | 4,250,413 |  |  |   | 2,857,187 | 
|                                                                                                             |  |              |            |              |  |              |           |  |  |   |           | 
|Cash and cash equivalents at end of year                                                                     |  | $            | 2,642,717  |              |  | $            | 5,561,608 |  |  | $ | 4,250,413 | 
|                                                                                                             |  |              |            |              |  |              |           |  |  |   |           | 
|Supplemental disclosure of cash flow information:                                                            |  |              |            |              |  |              |           |  |  |   |           | 
|Cash paid for interest                                                                                       |  | $            | 81,252     |              |  | $            | 414,516   |  |  | $ | 32,251    | 
|                                                                                                             |  |              |            |              |  |              |           |  |  |   |           | 
|Supplemental schedule of non-cash investing and
    financing activities                                     |  |              |            |              |  |              |           |  |  |   |           | 
|Preferred stock dividend paid upon conversion in
    kind by issuance of additional common stock             |  | $            | 69,973     |              |  | $            | 196,178   |  |  | $ | 392,323   | 
|Preferred stock dividend paid through exchange/
    redemption by issuance of new preferred and common stock |  |              |           |              |  |              | 451,093   |  |  |   |          | 
|Deemed dividends                                                                                             |  |              |           |              |  |              |          |  |  |   | 571,241   | 
|Issuance of note payable and assumption of
    accounts payable in exchange for customer list and equipment  |  |              | 225,000    |              |  |              |          |  |  |   |          | 
|Issuance of common stock to employees                                                                        |  |              |           |              |  |              |          |  |  |   | 3,340     | 
|See Note 6 for impact of Helix combination                                                                   |  |              |            |              |  |              |           |  |  |   |           | 

See accompanying notes to consolidated
financial statements

31



---



##### 



HearUSA, Inc.

Notes to Consolidated Financial Statements


1.     Summary of
Significant Accounting Policies

The Company

HearUSA Inc. (HearUSA or the
Company), a Delaware corporation, was organized for the
purpose of creating a nationwide chain of retail centers to
serve the needs of the hearing impaired. As of December 28,
2002, the Company operated 31 centers in Florida, 15 in New
Jersey, 15 in New York, 10 in Massachusetts, 10 in Ohio, 9 in
Michigan, 3 in Wisconsin, 6 in Minnesota, 8 in Missouri, 14 in
Washington and 22 HEARx West centers in California. HearUSA also
owns 14 centers in the Province of Ontario, Canada and manages
16 centers in the Province of Quebec, Canada.

Helix Transaction

On July 27, 2001, the Company and Helix
Hearing Care of America Corp. (Helix) signed a
definitive merger agreement, which was subsequently amended and
restated as of November 6, 2001. Helix owned or managed,
prior to the combination, 126 hearing healthcare clinics located
in Massachusetts, New York, Ohio, Michigan, Wisconsin,
Minnesota, Washington and Missouri as well as in the Provinces
of Ontario and Quebec. The transaction was approved by the
stockholders of both the Company and Helix on June 26, 2002
and by the Canadian courts on June 28, 2002. The
transaction closed on July 11, 2002, and is effective
June 30, 2002, the first day of the Companys third
quarter of 2002, for financial reporting purposes. In connection
with the completion of the business combination, on July 8,
2002 the Company changed its name from HEARx Ltd. to HearUSA,
Inc. and increased its authorized capital. The Companys
common stock continues to trade on the American Stock Exchange
under the symbol EAR. See Notes 5 and 6, which
describe certain significant transactions between the Company
and Helix.

As of December 28, 2002, 6,490,223
exchangeable shares of HEARx Canada, Inc., an indirect
subsidiary of the Company, were issued or will be issued to
certain former common shareholders of Helix in connection with
the combination. Each exchangeable share of HEARx Canada, Inc.
is exchangeable for one share of the Companys common
stock. The exchangeable shares are traded on the Toronto Stock
Exchange under the symbol HUX.

Basis of Consolidation

The consolidated financial statements include the
accounts of the Company and its wholly-owned and majority
controlled subsidiaries. Intercompany accounts and transactions
have been eliminated in consolidation.

Investment in Affiliated Company

Prior to the closing of the combination with
Helix, the Company owned approximately 10.5 percent of the
common stock of Helix. The Company accounted for this investment
using the equity method because the Company had the ability to
exercise significant influence over the operational and
financial policies of Helix as a result of the terms of the
merger agreement with Helix and the use of certain proceeds of
the Companys credit facility with Siemens Hearing
Instruments, Inc. (Siemens) to repay certain debts
of Helix. Under the equity method, the Company recorded its
proportionate share of profits and losses of the affiliated
company based on its percentage interest in the affiliated
company.

32



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


Comprehensive Income (Loss)

Comprehensive income is defined to include all
changes in equity except those resulting from investments by
owners and distributions to owners. The Companys other
comprehensive income represents a foreign currency translation
adjustment.

Segments

Since the closing of the Helix transaction, the
Company operates in three business segments, which include the
operation and management of centers, the establishment,
maintenance and support of an affiliated network and the
operation of an e-commerce business. The Companys business
units are located in the United States and Canada.

|                              |                               |         |            |            |  |         |         |           |  |       |         |           |  |   |             |            |  |   |            |            | 
|----------------------------- | ----------------------------- | ------- | ---------- | ---------- |  | ------- | ------- | --------- |  | ----- | ------- | --------- |  | - | ----------- | ---------- |  | - | ---------- | ---------- | 
|                              |                               | Centers |            | E-commerce |  | Network |         | Corporate |  | Total
|                              |                               |         |            |            |  |         |         |           |  |      
|Net Revenues                  |                               |         |            |            |  |         |         |           |  |       |         |           |  |   |             |            |  |   |            |           
|Year 2002                     |                               | $       | 58,934,000 |            |  | $       | 27,000  |           |  | $     | 631,000 |           |  | $ |            |            |  | $ | 59,592,000 |           
|Year 2001                     |                               |         | 48,796,000 |            |  |         |        |           |  |       |        |           |  |   |            |            |  |   | 48,796,000 |           
|Year 2000                     |                               |         | 56,115,000 |            |  |         |         |           |  |       |         |           |  |   |            |            |  |   | 56,115,000 |           
|Income (Loss) from Operations |                               |         |            |            |  |         |         |           |  |       |         |           |  |   |             |            |  |   |            |           
|Year 2002                     |                               |         | 7,738,000  |            |  |         | (27,000 | )         |  |       | 223,000 |           |  |   | (12,568,000 | )          |  |   | (4,634,000 | )         
|Year 2001                     |                               |         | 1,320,000  |            |  |         |        |           |  |       |        |           |  |   | (9,519,000  | )          |  |   | (8,199,000 | )         
|Year 2000                     |                               |         | 4,095,000  |            |  |         |        |           |  |       |        |           |  |   | (7,677,000  | )          |  |   | (3,582,000 | )         
|Year 2002                     |                               |         |            |            |  |         |         |           |  |       |         |           |  |   |             |            |  |   |            |           
|                              | Depreciation and amortization |         |            | 1,632,000  |  |         |         |          |  |       |         | 1,000     |  |   |             | 995,000    |  |   |            | 2,628,000  | 
|                              | Identifiable assets           |         |            | 45,173,000 |  |         |         |          |  |       |         | 2,308,000 |  |   |             | 17,385,000 |  |   |            | 64,866,000 | 
|                              | Capital Expenditures          |         |            | 229,000    |  |         |         |          |  |       |         | 1,000     |  |   |             | 293,000    |  |   |            | 523,000    | 
|Year 2001                     |                               |         |            |            |  |         |         |           |  |       |         |           |  |   |             |            |  |   |            |           
|                              | Depreciation and amortization |         |            | 1,666,000  |  |         |         |          |  |       |         |          |  |   |             | 744,000    |  |   |            | 2,410,000  | 
|                              | Identifiable assets           |         |            | 6,172,000  |  |         |         |          |  |       |         |          |  |   |             | 15,170,000 |  |   |            | 21,342,000 | 
|                              | Capital Expenditures          |         |            | 870,000    |  |         |         |          |  |       |         |          |  |   |             | 770,000    |  |   |            | 1,640,000  | 
|Year 2000                     |                               |         |            |            |  |         |         |           |  |       |         |           |  |   |             |            |  |   |            |           
|                              | Depreciation and amortization |         |            | 1,863,000  |  |         |         |          |  |       |         |          |  |   |             | 709,000    |  |   |            | 2,572,000  | 
|                              | Identifiable assets           |         |            | 7,159,000  |  |         |         |          |  |       |         |          |  |   |             | 14,713,000 |  |   |            | 21,872,000 | 
|                              | Capital Expenditures          |         |            | 952,000    |  |         |         |          |  |       |         |          |  |   |             | 568,000    |  |   |            | 1,520,000  | 

Income (loss) from Operations at the segment
level are computed before general and administrative expenses.

Fiscal year

The Companys fiscal year ends on the last
Saturday in December and customarily consists of four 13-week
quarters for a total of 52 weeks. Every sixth year includes
53 weeks.

Investment securities

Marketable securities are classified available
for sale and are carried at estimated market value. Unrealized
holding gains and losses are reported as a net amount in a
separate component of stockholders equity until realized.
Gains and losses realized from the sales are computed by the
specific identification method.

33



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


Allowance for doubtful accounts

The Company provides an allowance for doubtful
accounts equal to the estimated uncollectible amounts. That
estimate is based on historical collection experience, current
economic and market conditions, and a review of the current
status of each customers trade accounts receivable.

Inventories

Inventories, which consist of hearing aids,
batteries, special hearing devices and related items, are priced
at the lower of cost (first-in, first-out) or market.

Property and equipment

Property and equipment is stated at cost.
Depreciation is provided on the straight-line method over the
estimated useful lives of the depreciable assets. Leasehold
improvements are amortized over the shorter of the term of the
lease or the useful life of the asset.

Goodwill and other intangible assets

Under Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets, goodwill amortization ceased effective
at the beginning of 2002. Goodwill amortization for the year
ended December 29, 2001 was not significant. Goodwill is
now subject to impairment assessments. A fair-value-based test
is applied at the reporting unit level, which is generally one
level below the segment level. This test requires various
judgments and estimates. A goodwill impairment loss would be
recorded for any goodwill that is determined to be impaired.
Goodwill is tested for impairment at least annually on the first
day of the Companys fourth quarter. See Note 15 
Recent Accounting Pronouncements for further details.

At December 29, 2001, the Company had
goodwill of approximately $59,000. During the year ended
December 28, 2002, the Company acquired goodwill of
approximately $2,485,000 resulting from its purchase of 10.5% of
Helix in January 2002, and approximately $29,915,000 resulting
from the Helix combination effective June 30, 2002, for
total goodwill at December 28, 2002 of approximately
$32,459,000. In addition, approximately $7,200,000 of trademarks
and tradenames, not subject to amortization, were acquired in
the Helix combination.

As of December 28, 2002 and
December 29, 2001, the gross carrying amount of the
Companys intangible assets subject to amortization, which
consist of patient files, was $6,115,000 and $1,442,000,
respectively, and the accumulated amortization was approximately
$748,000 and $508,000, respectively. For each year ended
December 28, 2002 and December 29, 2001, the aggregate
amortization expense for these assets was approximately $240,000
and $115,000, respectively. At December 28, 2002, the
estimated amortization expense for the next five fiscal years is
approximately: 2003  $978,000, 2004 
$832,000, 2005  $706,000, 2006  $598,000,
2007  $504,000, and thereafter  $1,749,000.

See Notes 5 and 6 for goodwill and other
intangible assets not subject to amortization, recorded as of
December 28, 2002 as a result of the combination with Helix.

34



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


Pre-opening costs

The costs associated with the opening of new
centers are expensed as incurred.

Long-lived assets  impairments and
disposals

The Company reviews the carrying values of its
long-lived and identifiable intangible assets for possible
impairment whenever events or changes in circumstances indicate
that the carrying amounts of the assets may not be recoverable
through the estimated undiscounted future cash flows resulting
from the use of these assets. At December 28, 2002, no
long-lived assets were held for disposal.

Advertising Costs

Costs for newspaper, television, and other media
advertising are expensed as incurred and were $5,596,000,
$6,781,000 and $7,757,000 in 2002, 2001, and 2000, respectively.

Sales return policy

The Company provides to all patients purchasing
hearing aids a specific return period, a minimum of
30 days, if the patient is dissatisfied with the product.
The Company provides an allowance in accrued expenses for
returns. The return period can be extended to 60 days if
the patient attends the Companys H.E.L.P. program.

Warranties

Hearing aids sold by the Company are covered by
manufacturers warranties.

Foreign Currency Translation

The consolidated financial statements for the
Companys Canadian subsidiaries are translated into U.S.
dollars at current exchange rates. For assets and liabilities
the year-end rate is used. For revenues, expenses, gains and
losses the average rate for the period is used. Unrealized
currency adjustments in the Consolidated Balance Sheet are
accumulated in stockholders equity as a component of
accumulated other comprehensive income.

Revenue Recognition

Revenues from the sale of audiological products
are recognized at the time of delivery. Revenues from hearing
care services are recognized at the time those services are
performed.

The Company has capitation contracts with certain
health care organizations under which the Company is paid an
amount for each enrollee of the health maintenance organization
to provide to the enrollee a once every three years discount on
certain hearing products and services. The amount paid to the
Company by the healthcare organization is calculated on a
per-capita basis and is referred to as capitation revenue.
Capitation revenue is deferred until the earlier of the actual
utilization by the member populations or the end of the contract
term.

Income taxes

Deferred taxes are provided for temporary
differences arising from the differences between financial
statement and income tax bases of assets and liabilities. A
valuation allowance is provided for the amount of deferred tax
assets which are not considered more likely than not to be
realized.

35



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


Net loss per common share

Net loss per common share is calculated in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 128 Earnings Per Share
which requires companies to present basic and diluted earnings
per share. Net loss per share  Basic is based on the
weighted average number of common shares outstanding during the
year. Net loss per common share  Diluted is based on the
weighted average number of common shares and dilutive potential
common shares outstanding during the year. Convertible preferred
stock, stock options and stock warrants are excluded from the
computations of net loss per share because the effect of their
inclusion would be anti-dilutive.

Due to the Companys net losses the
following convertible preferred stock, outstanding options and
warrants to purchase common stock, of 12,965,555, 8,228,413 and
5,026,486, respectively were excluded from the computation of
net loss per common share  diluted at December 28,
2002, December 29, 2001 and December 29, 2000 because
they were anti-dilutive. For purposes of computing net loss per
common share  basic and diluted, for the year ended
December 28, 2002, the weighted average number of shares of
common stock outstanding includes the effect of the 6,490,223
exchangeable shares of HEARx Canada, Inc. described above, as if
they were outstanding common stock of the Company on
June 30, 2002, the effective date of the combination for
financial reporting purposes.

Statements of Cash Flows

For the purposes of the Statements of Cash Flows,
temporary cash investments which have an original maturity of
ninety days or less are considered cash equivalents.

Reclassifications

Certain amounts in the 2001 and 2000 financial
statements have been reclassified in order to conform to the
2002 presentation.

Estimates

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

Stock-based compensation

The Company has granted stock options to
employees and directors under stock option plans that are more
fully described in Note 8. The Company accounts for those plans
using the intrinsic value method under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees. Stock-based employee compensation cost
reflected in net loss is not significant, as all options granted
under those plans had an exercise price greater than or equal to
the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net loss
and loss per share if the Company had applied the fair value
recognition provisions of SFAS

36



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


No. 123, (SFAS 123)
Accounting for Stock-Based Compensation, to
stock-based employee compensation:

|                                           |                                                                                                                     |      |   |            |   |      |   |             |   |  |   |            |  
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------- | ---- | - | ---------- | - | ---- | - | ----------- | - |  | - | ---------- | -
|                                           |                                                                                                                     | 2002 |   | 2001       |   | 2000
|                                           |                                                                                                                     |      |   |            |   |     
|Net Loss applicable to Common Stockholders |                                                                                                                     |      |   |            |   |      |   |             |   |  |   |           
|                                           | As reported                                                                                                         |      | $ | (7,577,010 | ) |      | $ | (9,441,736  | ) |  | $ | (4,663,449 | )
|                                           | Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards |      |   | (394,990   | ) |      |   | (758,264    | ) |  |   | (927,551   | )
|                                           | Pro forma                                                                                                           |      |   | (7,972,000 | ) |      |   | (10,200,000 | ) |  |   | (5,591,000 | )
|Loss per share  basic and diluted         |                                                                                                                     |      |   |            |   |      |   |             |   |  |   |           
|                                           | As reported                                                                                                         |      | $ | (0.34      | ) |      | $ | (0.72       | ) |  | $ | (0.39      | )
|                                           | Pro forma                                                                                                           |      | $ | (0.35      | ) |      | $ | (0.78       | ) |  | $ | (0.47      | )

For purposes of the above disclosure, the
determination of the fair value of stock options granted in
2002, 2001 and 2000 was based on the following: (i) a risk
free interest rate of 3.29%, 4.66% and 5.12% respectively;
(ii) expected option lives ranging from 5 to 9 years;
(iii) expected volatility in the market price of the
Companys common stock of 95%, 93% and 89% respectively;
and (iv) no dividends on the underlying common stock.

2.     Investment
Securities

Investment securities available for sale consist
of the following:

|                        |  |           |         |                |  |           |   |  |  |   |         | 
|----------------------- |  | --------- | ------- | -------------- |  | --------- | - |  |  | - | ------- | 
|                        |  |           |         | Gross          |  | Estimated
|                        |  | Amortized |         | Unrealized     |  | Market   
|                        |  | Cost      |         | Gains/(Losses) |  | Value    
|                        |  |           |         |                |  |          
|December 28, 2002       |  |           |         |                |  |           |   |  |  |   |         | 
|Certificates of Deposit |  | $         | 435,000 |                |  | $         |  |  |  | $ | 435,000 | 
|                        |  |           |         |                |  |           |   |  |  |   |         | 
|                       
|December 29, 2001       |  |           |         |                |  |           |   |  |  |   |         | 
|Certificate of Deposit  |  | $         | 150,000 |                |  | $         |  |  |  | $ | 150,000 | 
|                        |  |           |         |                |  |           |   |  |  |   |         | 

At December 28, 2002, the $435,000
certificates of deposit had a contractual maturity of one year,
and were pledged as collateral to a financial institution for
automated clearing house exposure.

37



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


3.     Debt

Long term debt consists of the following:

|                                                                       |           |             |            |             |  |   |            |            | 
|---------------------------------------------------------------------- | --------- | ----------- | ---------- | ----------- |  | - | ---------- | ---------- | 
|                                                                       |           | December 28 |            | December 29
|                                                                       |           | 2002        |            | 2001       
|                                                                       |           |             |            |            
|Note payable to supplier  see
    (a) below:                          |           |             |            |             |  |   |            |           
|                                                                       | Tranche A |             | $          | 8,200,000   |  |   | $          | 10,875,000 | 
|                                                                       | Tranche B |             |            | 104,000     |  |   |            |           | 
|                                                                       | Tranche C |             |            | 2,700,000   |  |   |            |           | 
|                                                                       | Tranche D |             |            | 13,000,000  |  |   |            |           | 
|Notes payable collateralized by customer list,
    see (b) & (c) below |           |             | 306,250    |             |  |   | 162,500    |           
|Notes payable to supplier  see
    (e) below                          |           |             | 387,345    |             |  |   |           |           
|Note payable  see (f) below                                           |           |             | 1,000,006  |             |  |   |           |           
|Other                                                                  |           |             | 458,073    |             |  |   | 205,812    |           
|                                                                       |           |             |            |             |  |   |            |           
|                                                                       |           |             | 26,155,674 |             |  |   | 11,243,312 |           
|Less current maturities                                                |           |             | (4,073,285 | )           |  |   | (2,492,313 | )         
|                                                                       |           |             |            |             |  |   |            |           
|                                                                       |           | $           | 22,082,389 |             |  | $ | 8,750,999  |           
|                                                                       |           |             |            |             |  |   |            |           

The approximate aggregate maturities on long term
debt obligations in years subsequent to 2002 are as follows:
2003  $4,073,000; 2004  $3,536,000;
2005  $3,213,000; 2006  $1,948,000 and
2007  $13,386,000.



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | On April 23, 2001, the Company and Siemens
    Hearing Instruments, Inc. (Siemens) signed a letter
    of intent pursuant to which the parties intended to form a
    marketing and promotional alliance in the United States. As part
    of this letter of intent, Siemens agreed to provide HearUSA with
    a five-year $7.5 million line of credit with interest at
    12%, payable quarterly. These terms of the letter of intent
    relating to $7.5 million line of credit became binding on
    April 27, 2001, when HearUSA first drew on the line of credit.
    Under the letter of intent, HearUSA agreed to purchase from
    Siemens a certain percentage of HearUSAs total hearing aid
    requirements over the next five years. The letter of intent
    provided that as HearUSA purchased products from Siemens,
    Siemens would pay to HearUSA certain rebates that would then be
    used to pay the quarterly installments of principal and interest
    under the five-year line of credit. On December 7, 2001,
    HearUSA and Siemens entered into the credit agreement and supply
    agreement described below, which superseded the letter of intent.
|
| |    | On December 7, 2001, HearUSA entered into a
    credit agreement with Siemens pursuant to which Siemens agreed
    to provide a $51,875,000 secured credit facility. The credit
    facility is comprised of (a) a $10,875,000 secured
    five-year term loan credit facility (the Tranche A Loan);
    (b) a $25,000,000 secured five-year revolving loan credit
    facility (the Tranche B Loan); (c) a $3,000,000 secured
    five-year term loan facility (the Tranche C Loan); and
    (d) a $13,000,000 secured five-year term loan credit
    facility (the Tranche D Loan).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |    | The Tranche A Loan proceeds were used as follows:
    (i) the repayment of $6,875,000 owed at December 7,
    2001 to Siemens by the Company under the April 23, 2001
    agreement (which included a $7.5 million line of credit);
    (ii) a $2,000,000 loan from the Company to Helix to fund
    the NECP acquisition (Note 5) and (iii) $2,000,000 for the
    exchange and redemption of all of the outstanding HearUSAs
    Series I Convertible                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

38



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)




| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Preferred Stock. The Tranche B Loan may be used
    only for future acquisitions by the Company subject to
    guidelines by credit agreement or as otherwise agreed to by the
    Company and Siemens. The Tranche B Loan proceeds of $104,000
    were used for the December 2002 asset acquisition of three
    centers of Hear America, Inc described in Note 3(b) below. The
    Tranche C Loan proceeds have been used for to repay a term loan
    payable by Helix to Siemens. The Tranche D Loan proceeds were
    used to repay all of Helixs existing convertible debt and
    portions of its non-convertible debt. The Siemens credit
    facility imposes certain financial and other covenants on the
    Company, which are customary for loans of this size and nature.
    If the Company cannot maintain compliance with these covenants,
    Siemens may terminate future funding under the credit facility
    and declare all then outstanding amounts under the facility
    immediately due and payable. See Note 16 regarding compliance
    with covenants and a new Tranche E Loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |    | The Tranche A and C Loans are payable in equal
    quarterly amounts over five years, through their maturity dates
    of December 2006 and June 2007, respectively. The
    Tranche B Loan is payable quarterly and payments are calculated
    as 5% of the aggregate outstanding balance. Any remaining
    Tranche B Loan principal and interest is due and payable on the
    final maturity date of December 2007. Interest of 10% is
    due and payable each quarter for the Tranche A, B and C loans.
    Principal and interest, at prime rate (4.25% at
    December 28, 2002) plus 1%, on the Tranche D Loan is
    payable on the final maturity date of April 2007. Quarterly
    principal and interest payments on the Tranche A, B and C Loans
    may be paid through preferred pricing reductions received from
    Siemens by HearUSA as long as the Company purchases certain
    minimum percentages of its requirements of hearing aids from
    Siemens pursuant to the supply agreement discussed below.
    HearUSA records a preferred pricing receivable and reduces cost
    of goods sold for the preferred pricing earned as it meets
    minimum purchase percentages from Siemens. During 2002 and 2001,
    approximately $3,795,000 and $1,665,000, of earned preferred
    pricing reductions, respectively, were recorded as a reduction
    of cost of goods sold, and $1,315,000 and $390,000 of interest,
    respectively, and $3,130,000 and $625,000 of principal,
    respectively, has been repaid through such preferred pricing
    reductions. The loans may be prepaid in whole or in part at any
    time without penalty. The credit facility is secured by a first
    priority security interest in substantially all of the assets of
    HearUSA.
|
| |    | In connection with the credit facility, HearUSA
    and Siemens entered into a supply agreement dated as of
    December 7, 2001, pursuant to which HearUSA agreed to
    purchase from Siemens certain minimum percentages of
    HearUSAs hearing aid purchases for a period of ten years
    (an initial five year term and a five year renewal term) at
    specified prices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |    | Pursuant to the agreements with Siemens, in the
    event of a change of control of the Company (as defined), and
    the surviving entity of such change of control does not assume
    the Companys obligations under the agreements, the entire
    outstanding amount under the credit facility will be immediately
    due and payable and the supply arrangements may be terminated
    upon payment to Siemens of a $50 million breakup fee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | b) | In December 2002, the Company acquired the
    customer list and selected assets of Hear America, Inc. in
    Missouri for approximately $114,000 in cash, and a three year
    note in                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

39



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)




| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | the amount of $225,000 plus interest at 7%
    payable in three annual installments of $75,000 plus interest
    beginning December 9, 2003.                                                                                                                                                                                                                                                                                                                       
|
| | c) | During July 1999, the Company issued a $325,000
    promissory note payable bearing 8.75% interest to an individual
    in connection with a purchase of an audiological practice in
    California, (See Note 8). The note is payable in four annual
    installments of $81,250 plus accrued interest, beginning
    July 1, 2000 and is collateralized by the equipment and
    customer list purchased.                                                        
|
| | d) | In January 1996, the Company acquired the
    customer list and selected assets of Suffolk County Hearing Aid
    Center, Inc. in New York for $150,000 in cash, 150,000 shares of
    Common Stock, and a five year note in the amount of $250,000
    including interest. The note payable included interest at 5.5%
    was payable in five annual installments of $50,000 including
    interest beginning January 22, 1997 and was repaid in
    January 2001.
|
| | e) | Notes payable to Siemens and affiliates bearing
    interest at rates ranging from 4% to 8%, payable in monthly
    payments ranging from approximately $3,000 to $8,300, maturing
    between 2003 through 2005, collateralized by various inventory,
    accounts receivable and equipment.                                                                                                                                                                      



| |    |                                                                                                                                                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | f) | Notes payable issued by Helix before the
    combination in connection with prior business acquisitions,
    bearing interest at rates ranging from 4% to 8%, payable in
    monthly payments ranging from approximately $800 to $14,200,
    maturing between 2003 and 2007, collateralized by various
    equipment.

4.     Property and
Equipment and Leases

Property and equipment consists of the following:

|                                               |  |              |            |              |  |              |            |  |  |   |            | 
|---------------------------------------------- |  | ------------ | ---------- | ------------ |  | ------------ | ---------- |  |  | - | ---------- | 
|                                               |  | Range of     |            | December 28, |  | December 29,
|                                               |  | Useful Lives |            | 2002         |  | 2001        
|                                               |  |              |            |              |  |             
|Equipment, furniture and fixtures              |  |              | 5-10 years |              |  | $            | 11,535,324 |  |  | $ | 8,567,807  | 
|Leasehold Improvements                         |  |              | 5-10 years |              |  |              | 7,300,954  |  |  |   | 6,892,273  | 
|Computer systems                               |  |              | 3 years    |              |  |              | 5,214,611  |  |  |   | 3,720,120  | 
|Leasehold improvements in progress             |  |              | N/A        |              |  |              | 214,171    |  |  |   | 223,855    | 
|                                               |  |              |            |              |  |              | 24,265,060 |  |  |   | 19,404,055 | 
|Less accumulated depreciation and amortization |  |              |            |              |  |              | 17,024,811 |  |  |   | 12,568,412 | 
|                                               |  |              |            |              |  | $            | 7,240,249  |  |  | $ | 6,835,643  | 

Approximate future minimum rental commitments
under operating leases are as follows: $5,887,000 in 2003;
$4,665,000 in 2004; $3,680,000 in 2005; $1,639,000 in 2006;
$703,000 in 2007 and $664,000 thereafter. These leases are
primarily for hearing centers and are located in retail shopping
areas.

Equipment and building rent expense for the years
ended December 28, 2002, December 29, 2001 and
December 29, 2000 was $5,351,000, $3,759,000 and
$3,181,000, respectively.

5.     Investment in
and Advances to Affiliated Company

On November 16, 2001, the Company loaned
$700,000 to Helix for use by Helix as part of the
$3.5 million acquisition of substantially all of the
capital stock of Auxiliary Benefits Corporation, a Colorado
corporation doing business as National Ear Care Plan
(NECP). The note was secured by substantially all of
the assets of NECP, bore interest at a rate of prime plus 1% per
annum and

40



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


originally matured on November 16, 2002. On
January 10, 2002, the Company loaned to Helix an additional
$2 million to complete the NECP transaction. On
January 14, 2002, the Company and Helix entered into a
subscription agreement pursuant to which the Company purchased
4,853,932 common shares of Helix for an aggregate purchase price
of $2.7 million. The purchase price was paid using the
$2.7 million in loans to Helix. Upon consummation of the
purchase of the 4,853,932 Helix common shares, the Company
became an approximate 10.5 percent owner of Helix common
shares. Prior to the closing of the combination with Helix, the
Company accounted for this investment using the equity method.
Approximately $631,000 was recorded as equity in loss of
affiliated company for the twelve months ended December 28,
2002, representing the Companys equity in the net loss of
Helix from the January 14, 2002 acquisition date to
June 30, 2002, the effective closing date of the
combination with Helix for financial reporting purposes. At
December 28, 2002, approximately $2,485,000 from this
transaction is included in goodwill. See Note 1.

At June 30, 2002, a note of approximately
$9,400,000 and an advance of approximately $100,000 were
receivable by the Company from Helix.

6.     Helix
Transaction

On July 11, 2002, the Company completed its
business combination with Helix. As a result of the combination,
management believes combining the two entities will result in a
stronger and more competitive company capable of achieving
greater financial strength, better access to capital markets and
greater potential than either company would have on its own.

The Company had entered into a definitive
agreement with Helix on July 27, 2001(which was
subsequently amended and restated on November 6, 2001) to
acquire all of the issued and outstanding common shares of Helix
in exchange for approximately 14,610,000 shares of the
Companys common stock, at a price of $1.72, the market
price of the Companys common stock on the day preceding
the public announcement of the definitive agreement. As a result
of the closing, as of December 28, 2002, the Company has
issued 8,120,154 shares of the Companys common stock and
6,490,223 exchangeable shares of HEARx Canada, Inc. In addition,
the Company has issued options and warrants to purchase
approximately 1,730,000 shares of the Companys common
stock to holders of Helix options and warrants in exchange for
those options and warrants. The fair value of the Companys
options and warrants issued was approximately $380,000, using
fair value assumptions of: no dividends, expected volatility of
approximately 95%, risk-free interest rate of approximately 4%,
and expected lives ranging from 1 to 6 years. Total costs
incurred by the Company in connection with the acquisition were
approximately $2,547,000. This resulted in a total purchase
price of approximately $28,058,000.

The following table summarizes the fair values of
the Helixs assets acquired and the liabilities assumed as
of June 30, 2002, the first day of the Companys third
quarter, the effective date of the acquisition for financial
reporting purposes. These fair values are based on Helixs
balance sheet at

41



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


June 30, 2002 under US GAAP and translated
from Canadian dollars to US dollars at the rate of .6585.

|                       |                           |   |             |             |  
|---------------------- | ------------------------- | - | ----------- | ----------- | -
|Current assets         |                           | $ | 6,481,000   |            
|Property and equipment |                           |   | 2,446,000   |            
|Intangible assets      |                           |   | 11,810,000  |            
|Goodwill               |                           |   | 29,915,000  |            
|                       |                           |   |             |            
|                       | Total assets acquired     |   |             | 50,652,000  |  
|Current liabilities    |                           |   | (8,591,000  | )          
|Long-term debt         |                           |   | (14,003,000 | )          
|                       |                           |   |             |            
|                       | Total liabilities assumed |   |             | (22,594,000 | )
|                       |                           |   |             |            
|Net assets acquired    |                           | $ | 28,058,000  |            
|                       |                           |   |             |            

Of the $11,810,000 of estimated acquired
intangible assets, $7,200,000 was assigned to trademarks and
trade names that are not subject to amortization, and $4,610,000
was assigned to patient files, which have a weighted average
useful life of approximately 15 years.

In connection with the transaction, the Company
has allocated the goodwill to the following segments as of
December 28, 2002.

|         |  |         |            |         |  |       |           |  |  |   |            | 
|-------- |  | ------- | ---------- | ------- |  | ----- | --------- |  |  | - | ---------- | 
|         |  | Centers |            | Network |  | Total
|         |  |         |            |         |  |      
|Goodwill |  | $       | 28,410,000 |         |  | $     | 1,505,000 |  |  | $ | 29,915,000 | 

None of the $29,915,000 of goodwill is expected
to be deductible for tax purposes.

The pro forma condensed combined statements of
operations data gives effect to the combination as it occurred
at the beginning of the earliest period presented, combining the
results of HearUSA for the years ended December 28, 2002
and December 29, 2001 with those of Helix for the years
ended December 28, 2002 and November 30, 2001.

Summary Unaudited Pro Forma Condensed Combined
Statements of Operations Data:

|                                           |  |                   |             |                   |  |   |             |  
|------------------------------------------ |  | ----------------- | ----------- | ----------------- |  | - | ----------- | -
|                                           |  | Year Ended        |             | Year Ended       
|                                           |  | December 28, 2002 |             | December 29, 2001
|                                           |  |                   |             |                  
|Net revenue                                |  | $                 | 74,195,000  |                   |  | $ | 79,354,000  |  
|Net loss applicable to Common stockholders |  |                   | (12,694,000 | )                 |  |   | (16,844,000 | )
|Loss per common share:                     |  |                   |             |                   |  |   |             |  
|Basic and diluted                          |  | $                 | (0.43       | )                 |  | $ | (0.61       | )

7.     Stockholders
Equity

A. Private Placement

On March 29, 2002, the Company closed on a
private placement of 1.5 million shares of common stock and
1.5 million common stock purchase stock warrants for an
aggregate sales price of $1.5 million. The offers and sales
were made only to accredited investors as defined in
Rule 501(a) of Regulation D and the Company relied on
Regulation D and Section 4(2) of the Securities Act of
1933 to issue the securities without registration. The warrants
may be exercised at any time until March 29, 2005 to
purchase shares of common stock for an exercise price of $1.15
per share. The Company has undertaken to register the common
stock for resale.

42



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


All members of the board of directors of the
Company, as of March 29, 2002, participated in the private
placement, purchasing 805,000 of the 1,500,000 shares of common
stock. Because the shares were sold at a $0.05 per share
discount to the quoted market price of $1.05 per share,
additional compensation expense of approximately $40,000 was
incurred for the quarter ended March 30, 2002. The fair
value of the warrants was not significant.

B. Stock Subscription

On April 1, 2001, the Company sold 200,000
shares of the Companys common stock, par value $.10 per
share (Common Stock) to an investment banker, for
$2.0625 per share, and received a secured, nonrecourse
promissory note for the principal amount of $412,500. The
secured, nonrecourse promissory note is collateralized by the
Common Stock purchased which is held in escrow. The principal
amount of the note and accrued interest is payable on
April 1, 2006. The note bears interest at the prime rate
published by the Wall Street Journal adjusted annually. At
December 28, 2002, the interest rate of the note was 4.25%.
The $412,500 note has been recorded as Stock Subscription in
stockholders equity in the accompanying balance sheet.

Under the terms of a consulting agreement with
the investment banker, beginning December 1, 2000, the
Company paid the investment banker approximately $188,000 for
financial consulting services, which was recorded as consulting
expense of approximately $38,000 and $150,000 during 2000 and
2001, respectively. The agreement was terminated in August 2001.

C. Series J Preferred Stock

On December 13, 2001, the Company completed
an exchange and redemption of all of the 418 shares of
outstanding Series I Convertible Preferred Stock (see
Note 7D below) and 203,390 associated common stock purchase
warrants for $1,951,000 in cash, 233 shares of newly created
Series J Preferred Stock, and 470,530 shares of Common
Stock. The cost of the transaction included legal and broker
fees of approximately $47,500 in cash and 136,180 shares of
Common Stock issued to the broker. The fair value of the cash,
shares of Series J Preferred Stock, and Common Stock
transferred to the holders of the Series I Convertible
Preferred Stock approximated the carrying value of the
Series I Convertible Preferred Stock and the related
dividends payable of approximately $4.7 million.

The Series J Preferred Stock has a stated
value of $10,000 per share and is non-convertible and
non-voting. The holders of the Series J Preferred Stock are
entitled to receive cumulative dividends, in cash, at a rate of
6% per year. Dividends earned but not paid on the applicable
dividend payment date will bear interest at a rate of 18% per
year payable in cash unless the holders and the Company agree
that such amounts may be paid in shares of Common Stock.

At any time the Company has the right to redeem
all or a portion of the Series J Preferred Stock for a
redemption price equal to the stated value plus accrued and
unpaid dividends. If there is a change in control of the
Company, only upon or after the approval thereof by the
Companys Board of Directors, the holders of the
Series J Preferred Stock have the right to require the
Company to redeem the Series J Preferred Stock at a price
of 120% of the stated value plus any accrued and unpaid
dividends. The parties have agreed that the transaction with
Helix shall not be deemed to be a change in control
for this purpose.

In the event of liquidation, dissolution or
winding up of the Company prior to the redemption of the
Series J Preferred Stock, holders of the Series J
Preferred Stock will be entitled to receive the stated value per
share plus any accrued and unpaid dividends before any
distribution or payment is made to the holders of any junior
securities but after payment is made to the holders of the 1998

43



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


Convertible Preferred Stock, if any. In the event
that the assets of the Company are insufficient to pay the full
amount due the holders of the Series J Preferred Stock and
any holders of securities equal in ranking, such holders will be
entitled to share ratably in all assets available for
distribution.

In connection with this transaction, the Company
also entered into a Registration Rights Agreement with the
holder under which the Company is required to file a
registration statement on Form S-3 covering the resale of
the 470,530 shares of Common Stock issued in this transaction no
later than 180 days from December 13, 2001. The
470,530 shares of Common Stock issued in the transaction,
together with 129,470 shares of Common Stock currently held by
the same holder, have been placed in escrow and are subject to
resale restrictions based on the trading price of the common
stock and appropriate resale registration. During 2002 and 2001,
approximately $145,000 and $5,000 of the 6% dividend is included
in the caption Dividends under Dividends on Preferred Stock in
the accompanying consolidated statements of operations.

D. Series I Convertible Preferred
Stock

On May 9, 2000, the Company completed a
private placement of 500 shares of the Companys 7%
Series I Convertible Preferred Stock, par value $1.00 per
share (the Series I Preferred Stock) and
warrants to acquire 203,390 shares Common Stock, for an
aggregate purchase price of $5.0 million. The net proceeds
to the Company after payment of finders fees, placement fees,
legal and accounting expenses was approximately
$4.5 million. In connection with the placement of the
Series I Preferred Stock, the Company also issued finders
warrants to purchase an aggregate of 131,695 shares of Common
Stock at an exercise price equal to $4.46.

The Series I Preferred Stock was convertible
into Common Stock after August 6, 2000. Upon conversion,
holders were entitled to receive a number of shares of Common
Stock determined by dividing the sum of the stated value of the
Series I Preferred Stock ($10,000 per share), plus accrued
and unpaid dividends (unless the Company elected to pay
dividends in cash) by $4.46 (subject to adjustments upon
occurrence of certain dilutive events). The dividends payable
upon conversion were equal to 7% of the stated value of the
Series I Preferred Stock per annum in cash or by accretion
to the Stated Value, at the Companys discretion subject to
limited exceptions. The Series I Preferred Stock could not
be converted until after August 6, 2000 and then at the
fixed conversion price of $4.46 per share until January 2001.
From January 2001 until May 2001, the holders could request
redemption of the shares of preferred stock at 110% of the
stated value plus accrued dividends. If the Company elected not
to redeem the shares, the conversion price converted to the
lesser of $4.46 or the market price (defined as the average of
the 5 lowest closing prices for the 30 trading days preceding
the conversion date) at the time of conversion. The
Series I Preferred Stock could be converted by holders in
accordance with these terms any time prior to May 9, 2003,
and would automatically convert on such date. In the event of
liquidation, dissolution or winding up of the Company prior to
the conversion of the Series I Preferred Stock, holders of
the Series I Preferred Stock would be entitled to receive
an amount equal to the stated value per share before any
distribution could be made to the holders of any junior
securities but after any distribution was made to holders of
senior securities. During 2001, 82 shares of the Series I
Convertible Preferred Stock were converted into 689,106 shares
of Common Stock, prior to the exchange and redemption of the
remaining 418 shares in December 2001. During 2001 and 2000,
approximately $283,000 and $224,000, respectively, of the 7%
dividends payable upon conversion had been accreted and is
included in the caption Dividends under Dividends on Preferred
Stock in the accompanying consolidated statements of operations.

44



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


The related common stock purchase warrants issued
to the investor in connection with the Series I Preferred
Stock private placement, were exercisable for shares of Common
Stock for an exercise price of $4.46 per share. The warrants
would have expired on May 9, 2005.

During the year ended December 29, 2000, the
Company recorded a deemed dividend of approximately $571,000 for
the intrinsic value of the beneficial conversion option under
the terms of the Series I Preferred Stock. The deemed
dividend includes an allocation of the proceeds to the relative
fair value of the warrants of approximately $285,500, and the
intrinsic value of the beneficial conversion of approximately
$285,500.

All of the shares of the Series I
Convertible Preferred Stock and the related common stock
purchase warrants were redeemed and exchanged on
December 13, 2001 as described above, and no shares of the
series remain outstanding.

E. Reverse Stock Split

On June 30, 1999, the Company effectuated a
one for ten reverse split of its common stock. The reverse stock
split and a reduction in the authorized shares of common stock
to twenty million were approved at the June 7, 1999 Annual
Meeting of Stockholders. Each stockholder on June 30, 1999
was entitled to one share of common stock for each ten shares of
common stock held in connection with the reverse split. A cash
payment was paid in lieu of fractional shares.

F. 1998 Convertible Preferred
Stock

On August 27, 1998, the Company completed a
private placement of 7,500 units of $1 par, 1998 Convertible
Preferred Stock and related common stock purchase warrants. Net
proceeds to the Company after the payment of placement fees,
legal and accounting expenses was $6,975,000. The additional
capital was primarily raised to fund construction and start-up
costs of the HEARx West centers.

The 1998 Convertible Preferred Stock ranks prior
to all of the Companys Common Stock, prior to any class or
series of capital stock of the Company thereafter created
specifically ranking by its terms junior to 1998 Convertible
Preferred, junior to the Companys 1997 Convertible
Preferred Stock (none of which remains outstanding) and after
any class or series of capital stock of the Company thereafter
created and specifically ranking by its terms senior to the 1998
Convertible Preferred. Upon conversion the 1998 Convertible
Preferred, holders are entitled to receive a number of shares of
Common Stock determined by dividing the sum of the stated value
of the 1998 Convertible Preferred ($1,000 per share) so
converted plus a premium (unless the Company elects to pay that
premium in cash), by a conversion price equal to the lesser of
the average closing bid prices for the Common Stock five of
twenty days prior to conversion, and $18.00 (the closing bid
price at the date of issuance, subject to adjustment upon
occurrence of certain dilutive events including the reverse
split described above). The premium payable upon conversion is
equal to 8% of the stated value of 1998 Convertible Preferred
from the date of issuance until one year following such date,
and increased by 0.5% each year, commencing on the date which
was one year following the date of issuance. The 1998
Convertible Preferred may be converted by holders in accordance
with these terms at any time prior to August 27, 2003, and
automatically converts on such date. In the event of
liquidation, dissolution or winding up of the Company prior to
conversion of the 1998 Convertible Preferred, holders of 1998
Convertible Preferred will be entitled to share ratably in all
assets available for distribution prior to distributions to
holders of Common Stock. In addition, no distributions may be
made to holders of Common Stock until holders of 1998
Convertible Preferred shall have received a liquidation
preference equal to the sum of the stated value of the 1998
Preferred Stock ($1,000 per share) plus an amount equal to ten
percent (10%) per annum of such

45



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


stated value for the period from the date of
issuance until the date of final distribution. During 2002, no
shares of the 1998 Convertible Preferred Stock were converted.
During 2001 and 2000, 638 and 1,800 of the 1998 Convertible
Preferred, respectively, plus accrued dividends of $140,255 and
$216,926, respectively, were converted into 699,413 and 517,989
shares of the Companys Common Stock, respectively. In
addition, during 2002 and 2001, 214 and 100 shares,
respectively, of the 1998 Convertible Preferred plus accrued
dividends of $69,973 and $30,947, and an 8 percent premium
of $17,120 and $0 respectively, was redeemed for cash of
approximately $351,000 and $139,000 respectively. The 2002
redemption included costs of $50,000 in cash and 136,018 shares
of the Companys common stock. During 2002, 2001 and 2000
approximately $552,000, $524,000 and $543,000, respectively, of
the conversion premium has been accreted and is included in the
caption Dividends under Dividends on Preferred Stock in the
accompanying consolidated statements of operations.

For each unit of 1998 Convertible Preferred
purchased, each investor received warrants to acquire 7.5 shares
of Common Stock of the Company. Upon exercise, holders will be
entitled to receive shares of Common Stock for an exercise price
of $18.00 per share. The warrants will expire on August 27,
2003. In connection with this transaction, the Company issued an
additional 56,250 warrants with an exercise price of $18.00 to
certain individuals as finders fees for the placement of
the 1998 Convertible Preferred with investors. As of
December 28, 2002, no warrants were outstanding.

G. 1997 Convertible Preferred
Stock

The 1997 Convertible Preferred Stock ranked prior
to all of the Companys Common Stock, prior to any class or
series of capital stock of the Company thereafter created
specifically ranking by its terms junior to 1997 Convertible
Preferred, and after any class or series of capital stock of the
Company thereafter created and specifically ranking by its terms
senior to the 1997 Convertible Preferred. The 1997 Convertible
Preferred Stock bore a cumulative premium of 6%, payable in kind
or cash upon conversion at the option of the Company. Upon
conversion of the Preferred Stock, holders were entitled to
receive a number of shares of Common Stock determined by
dividing the stated value of the Preferred Stock ($1,000 per
share), plus a premium in the amount of 6% per annum of the
stated value from the date of issuance (unless the Company chose
to redeem the shares otherwise issuable in respect of that
premium) by a conversion price equal to the lesser of
(i) $50.00, or (ii) 85% of the average of the closing
bid prices for shares of Common Stock for the ten day trading
period immediately prior to conversion. The 1997 Convertible
Preferred Stock was convertible by holders beginning
August 15, 1997 and at any time prior to March 17,
2000 and must have been converted on that date. During 2000
1,000 shares of the 1997 Convertible Preferred Stock plus
accrued dividends of $175,397 were converted into 299,214 shares
of the Companys Common Stock. All shares of the 1997
Convertible Preferred Stock had been converted before
December 29, 2000. During 2000 approximately $9,000 of the
6% conversion premium had been accreted and is included in the
caption Dividends under Dividends on Preferred Stock in the
accompanying consolidated statement of operations.

H. Shareholder Rights Plan

On December 14, 1999, the Board of Directors
approved the adoption of a Shareholder Rights Plan, in which a
dividend of one preferred share purchase right ( a
Right) for each outstanding share of Common Stock
was declared, and payable to the stockholders of record on
December 31, 1999. The Shareholder Rights Plan was amended
and restated on July 11, 2002, in connection with the
combination with Helix, to among other things, give effect to
the issuance of the exchangeable shares as voting stock of the
Company, and to otherwise take into account the effects of the

46



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


combination. The Rights will be exercisable only
if a person or group acquires 15% or more of the Companys
Common Stock or announces a tender offer which would result in
ownership of 15% or more of the Common Stock. The Rights entitle
the holder to purchase one one-hundredth of a share of
Series H Junior Participating Preferred Stock at an
exercise price of $28.00 and will expire on December 31,
2009.

Following the acquisition of 15% or more of the
Companys Common Stock by a person or group without the
prior approval of the Board of Directors, the holders of the
Rights (other than the acquiring person) will be entitled to
purchase shares of Common Stock (or Common Stock equivalents) at
one-half the then current market price of the Common Stock, or
at the election of the Board of Directors, to exchange each
Right for one share of the Companys Common Stock (or
Common Stock equivalent). In the event of a merger or other
acquisition of the Company without the prior approval of the
Board of Directors, each Right will entitle the holder (other
than the acquiring person), to buy shares of common stock of the
acquiring entity at one-half of the market price of those
shares. The Company will be able to redeem the Rights at $0.01
per Right at any time until a person or group acquires 15% or
more of the Companys Common Stock. The Board of Directors
specifically exempted the Helix transaction from the operation
of the Plan.

The Series H Junior Participating Preferred
Stock is subject to the rights of the holders of any shares of
any series of preferred stock of the Company ranking prior and
superior to the Series H Junior participating Preferred
Stock with respect to dividends. The holders of shares of
Series H Junior Participating Preferred; in preference to
the holders of shares of Common Stock, and any other junior
stock, shall be entitled to receive dividends, when, as and if
declared by the Board of Directors out of funds legally
available therefore.

On July 11, 2002, in connection with the
combination with Helix, HEARx Canada, Inc., an indirect
subsidiary of the Company, adopted a Rights Agreement (the
Exchangeable Rights Plan) substantially equivalent
to the Companys Rights Plan. Under the Exchangeable Rights
Plan, each exchangeable share issued has an associated right (an
Exchangeable Share Right) entitling the holder of
such Exchangeable Share Right to acquire additional exchangeable
shares on terms and conditions substantially the same as the
terms and conditions upon which a holder of shares of common
stock is entitled to acquire either one one-hundredth of a share
of the Companys Series H Junior Participating
Preferred Stock or, in certain circumstances, shares of common
stock under the Companys Shareholder Rights Plan. The
definitions of beneficial ownership, the calculation of
percentage ownership and the number of shares outstanding and
related provisions of the Companys Shareholder Rights Plan
and the Exchangeable Rights Plan apply, as appropriate, to
shares of common stock and exchangeable shares as though they
were the same security. The Exchangeable Share Rights are
intended to have characteristics essentially equivalent in
economic effect to the Rights granted under the Companys
Shareholder Rights Plan.

I. Warrants

No warrants were exercised in 2002.

The aggregate number of common shares reserved
for issuance upon the exercise of warrants is 2,981,239 as of
December 28, 2002. The expiration date and exercise prices
of the outstanding warrants are as follows:

47



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


|            |           |            |  |          |      |  |  |  |       | 
|----------- | --------- | ---------- |  | -------- | ---- |  |  |  | ----- | 
|Outstanding |           | Expiration |  | Exercise
|Warrants    |           | Date       |  | Price   
|            |           |            |  |         
|            | 57,712    |            |  |          | 2003 |  |  |  | 12.50 | 
|            | 234,953   |            |  |          | 2003 |  |  |  | 2.88  | 
|            | 50,975    |            |  |          | 2003 |  |  |  | 20.00 | 
|            | 112,501   |            |  |          | 2003 |  |  |  | 18.00 | 
|            | 893,403   |            |  |          | 2003 |  |  |  | 3.16  | 
|            | 131,695   |            |  |          | 2005 |  |  |  | 2.46  | 
|            | 1,500,000 |            |  |          | 2005 |  |  |  | 1.15  | 
|            |           |            |  |          |      |  |  |  |       | 
|            | 2,981,239 |            |  |          |      |  |  |  |       | 
|            |           |            |  |          |      |  |  |  |       | 

J. Aggregate and Per Share Cumulative
Preferred Dividends

As of December 28, 2002 and
December 29, 2001, the aggregate and per share amount of
arrearages in cumulative preferred dividends/premiums were
$1,215,000 and $1,521,000 and $.05/share and $.11/share,
respectively.

8.     Stock
Plans

The Company has the following stock plans:

A. Employee Stock Option Plans

In 1987, the Company established the 1987 Stock
Option Plan. It is administered by the Companys Board of
Directors. A maximum of 250,000 shares of Common Stock were
authorized for issuance under this plan. All employees of the
Company, other than its then principal stockholder
(Dr. Paul A. Brown) were eligible to receive options under
this plan at the sole discretion of the Board of Directors. Both
incentive and non-incentive stock options could be granted. This
plan expired June 2, 1997 and no further option grants can
be made under this plan. The expiration of the plan did not
affect the outstanding options which shall remain in full force
as if the plan had not expired.

In 1995, the Company established the 1995
Flexible Stock Plan. It is also administered by the
Companys Board of Directors. An original maximum of
250,000 shares of the Companys Common Stock were
authorized for issuance under this plan. On June 6, 2000
the shareholders approved an increase of 500,000 shares of the
Companys stock available under this plan. The plan
authorizes an annual increase in authorized shares equal to 10%
of the number of shares authorized as of the prior year.
Currently an aggregate of 4,895 shares remain as authorized but
not yet subject to a plan grant under the plan. All employees of
the Company are eligible to receive incentive stock options,
non-qualified stock options, stock appreciation rights,
restricted shares, performance shares, and other stock-based
awards under this plan at the sole discretion of the Board of
Directors.

On October 24, 2001 the Board of Directors
approved the issuance of non-qualified stock options to purchase
300,000 shares of the Companys Common Stock for $.77 per
share, to an officer of the Company. These grants are
independent of the Companys 1987 and 1995 stock option
plans and are to be funded on exercise from shares of treasury
stock.

On June 26, 2002, the Board of Directors
adopted and the Companys shareholders approved, the 2002
Flexible Stock Plan. This plan is administered by the
Companys Board of Directors. A maximum of 3,000,000 shares
of the Companys Common Stock were authorized for issuance
under this plan. The plan authorizes an annual increase in
authorized shares equal to 10% of the

48



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


number of shares subject to the plan as of the
prior year beginning in fiscal year 2003 not to exceed 5,000,000
shares in the aggregate. All employees of the Company are
eligible to receive incentive stock options, non-qualified stock
options, stock appreciation rights, restricted shares,
performance shares, and other stock-based awards under this plan
at the sole discretion of the Board of Directors.

As of December 28, 2002, 340 employees of
the Company held options permitting them to purchase an
aggregate of 2,168,290 shares of Common Stock at prices ranging
from $.62 to $18.75 per share. Options are exercisable for
periods ranging from four to nine years commencing one year
following the date of grant and are generally exercisable in
cumulative annual installments of 25 percent per year.

The following table summarizes the transactions
of the Companys employee stock option plans:

|                                                               |  |                   |           |                   |  |                   |      |                |  |        |           |                |  |   |      |  |  |   |         |  |  |   |      | 
|-------------------------------------------------------------- |  | ----------------- | --------- | ----------------- |  | ----------------- | ---- | -------------- |  | ------ | --------- | -------------- |  | - | ---- |  |  | - | ------- |  |  | - | ---- | 
|                                                               |  |                  
|                                                               |  | Year Ended       
|                                                               |  |                  
|                                                               |  |                   |           |                   |  |                  
|                                                               |  | December 28, 2002 |           | December 29, 2001 |  | December 29, 2000
|                                                               |  |                   |           |                   |  |                  
|                                                               |  |                   |           | Weighted          |  |                   |      | Weighted       |  |        |           | Weighted      
|                                                               |  |                   |           | Average           |  |                   |      | Average        |  |        |           | Average       
|                                                               |  | Shares            |           | Exercise Price    |  | Shares            |      | Exercise Price |  | Shares |           | Exercise Price
|                                                               |  |                   |           |                   |  |                   |      |                |  |        |           |               
|Outstanding at beginning of year                               |  |                   | 1,574,222 |                   |  | $                 | 3.32 |                |  |        | 873,957   |                |  | $ | 5.42 |  |  |   | 764,194 |  |  | $ | 5.78 | 
|Granted                                                        |  |                   | 644,342   |                   |  | $                 | 2.50 |                |  |        | 758,830   |                |  | $ | 1.04 |  |  |   | 152,360 |  |  | $ | 4.12 | 
|Exercised                                                      |  |                   |          |                   |  |                   |     |                |  |        | 35        |                |  | $ | 2.00 |  |  |   | 1,600   |  |  | $ | 2.09 | 
|Forfeited and cancelled                                        |  |                   | 50,274    |                   |  | $                 | 4.85 |                |  |        | 58,530    |                |  | $ | 5.17 |  |  |   | 40,997  |  |  | $ | 7.42 | 
|                                                               |  |                   |           |                   |  |                   |      |                |  |        |           |                |  |   |      |  |  |   |         |  |  |   |      | 
|Outstanding at end of year                                     |  |                   | 2,168,290 |                   |  | $                 | 3.04 |                |  |        | 1,574,222 |                |  | $ | 3.32 |  |  |   | 873,957 |  |  | $ | 5.42 | 
|                                                               |  |                   |           |                   |  |                   |      |                |  |        |           |                |  |   |      |  |  |   |         |  |  |   |      | 
|                                                              
|Exercisable at end of year                                     |  |                   | 1,657,467 |                   |  |                   |      |                |  |        | 862,388   |                |  |   |      |  |  |   | 452,214 |  |  |   |      | 
|                                                               |  |                   |           |                   |  |                   |      |                |  |        |           |                |  |   |      |  |  |   |         |  |  |   |      | 
|                                                              
|Weighted average fair value of options granted
    during year |  | $                 | 0.52      |                   |  |                   |      |                |  | $      | 0.80      |                |  |   |      |  |  | $ | 3.43    |  |  |   |      | 
|                                                               |  |                   |           |                   |  |                   |      |                |  |        |           |                |  |   |      |  |  |   |         |  |  |   |      | 

The following table summarizes information about
fixed employee stock options outstanding at December 28,
2002:

|                        |  |             |           |                  |  |                |     |             |  |                |       |  |  |  |           |  |  |   |       | 
|----------------------- |  | ----------- | --------- | ---------------- |  | -------------- | --- | ----------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                        |  |             |           | Weighted         |  |                |     | Options     |  |               
|                        |  |             |           | Average          |  | Weighted       |     | Exercisable |  | Weighted      
|                        |  | Options     |           | Remaining        |  | Average        |     | At December |  | Average       
|Range of Exercise Price |  | Outstanding |           | Contractual Life |  | Exercise Price |     | 28, 2002    |  | Exercise Price
|                        |  |             |           |                  |  |                |     |             |  |               
|$ .62  $  .77          |  |             | 322,870   |                  |  |                | 4.2 |             |  | $              | 0.77  |  |  |  | 303,381   |  |  | $ | .77   | 
|$ .78  $ 2.00          |  |             | 506,250   |                  |  |                | 8.0 |             |  | $              | 1.28  |  |  |  | 153,986   |  |  | $ | 1.45  | 
|$2.01  $ 5.4           |  |             | 1,025,157 |                  |  |                | 4.5 |             |  | $              | 3.20  |  |  |  | 896,308   |  |  | $ | 3.10  | 
|$5.41  $ 8.75          |  |             | 298,893   |                  |  |                | 3.8 |             |  | $              | 7.28  |  |  |  | 288,672   |  |  | $ | 7.34  | 
|$8.76  $18.75          |  |             | 15,120    |                  |  |                | 4.2 |             |  | $              | 15.72 |  |  |  | 15,120    |  |  | $ | 15.72 | 
|                        |  |             |           |                  |  |                |     |             |  |                |       |  |  |  |           |  |  |   |       | 
|                        |  |             | 2,168,290 |                  |  |                |     |             |  |                |       |  |  |  | 1,657,467 |  |  |   |       | 
|                        |  |             |           |                  |  |                |     |             |  |                |       |  |  |  |           |  |  |   |       | 

49



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


The stock options are exercisable in the
following years:

|     |  |  |           | 
|---- |  |  | --------- | 
|2003 |  |  | 1,886,360 | 
|2004 |  |  | 151,622   | 
|2005 |  |  | 120,718   | 
|2006 |  |  | 9,590     | 
|     |  |  |           | 
|     |  |  | 2,168,290 | 
|     |  |  |           | 

B. Non-Employee Director Plan

In April 1993, the stockholders of the Company
approved the adoption of the HearUSA Inc. Non-qualified Stock
Option Plan for Non-Employee Directors (Directors
Plan). The purpose of the Directors Plan is to increase
the proprietary interest of non-employee directors and promote
long-term stockholder value by granting stock options to
non-employee directors. Grants cannot exceed 50,000 shares of
Common Stock in the aggregate and may be granted until the
Annual Meeting of Stockholders in 2003. Under the plan, each
non-employee director may be granted 1,500 options each year.
The option price is the fair market value of the Companys
shares at the date of grant.

As of December 28, 2002, three directors
hold options as follows: 3,000 shares at $3.40, 4,500 at $4.00,
4,500 shares at $5.00, 4,500 shares at $6.875, 16,500 at $7.50,
and 4,500 shares at prices ranging from $12.50 to $58.75 per
share.

C. Stock Bonus Plan

The Board of Directors adopted a Stock Bonus Plan
(Bonus Plan). The number of shares of Common Stock
which can be issued under the Bonus Plan cannot exceed 50,000.
It is administered by the Board of Directors. The purpose of the
Bonus Plan is to provide an incentive to senior management to
achieve the Companys strategic objectives. At present
there are nine senior management personnel eligible to
participate. No shares were issued in 2002, 2001, or 2000.

9.     Major
Customers and Suppliers

During 2002 and 2001, the Company did not have
sales totaling 10% or more of the total net sales to a single
customer. In 2000, the Company had sales totaling
$5.7 million or 10.2% of net sales to a single customer,
Kaiser Permanente Health Plan.

During 2002, 2001 and 2000, the Company purchased
approximately 90.9%, 94.9%, and 79.2% of all hearing aids sold
by the Company from Siemens. As described in Note 3, on
December 7, 2001, the Company entered into a supply
agreement with Siemens with an initial five year term, whereby,
the Company agreed to minimum purchase levels from Siemens.
Although there are a limited number of manufacturers of hearing
aids, management believes that other suppliers could provide
similar hearing aids on comparable terms. In the event of a
disruption of supply from Siemens, the Company could obtain
comparable products from other manufacturers. Few manufacturers
offer dramatic product differentiation. The Company has not
experienced any significant disruptions in supply in the past.

10.     Related Party
Transactions

On January 6, 1999, HEARx West entered into
a capitation contract with an affiliate (the Kaiser
Plan) of its minority owner, the Permanente Federation
LLC. Under the terms of the contract,

50



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


HEARx West is paid an amount per enrollee of the
Kaiser Plan, to provide a once every three years benefit on
certain hearing products and services. During 2002, 2001 and
2000 approximately $1,682,000, $1,943,000 and $5,722,000 of
capitation revenue from this contract is included in net revenue
in the accompanying consolidated statements of operations.

On July 31, 1999, the Company entered into
an asset purchase agreement with an individual who is employed
as the Companys California Division Manager. Under the
terms of this agreement, the Company purchased equipment for
consideration of approximately $100,000 and a customer list for
consideration of approximately $382,000. Consideration included
cash of $75,000, a $325,000 promissory note payable to the
individual, and assumed trade payables of approximately $82,000.

The Companys Quebec subsidiaries (the
Quebec subsidiaries) provide management services to
a single client, Forget & Sauvé, audioprothesistes,
s.e.n.c. operating under the name Le Groupe Forget
(Le Groupe Forget). Le Groupe Forget is
controlled by Steve Forget, a director and former president of
the Company. Le Groupe Forget operates a network of 16
hearing healthcare centers in the Province of Quebec. The
services provided to Le Groupe Forget by the Quebec
subsidiaries include inventory purchasing and management, office
service support, general administration and patient management
software and related training. The aforementioned services are
rendered to Le Groupe Forget by the Quebec subsidiaries
pursuant to management agreements entered into by each of the
subsidiaries and Le Groupe Forget. During the year ended
December 28, 2002 revenue of approximately $2,363,000 was
earned from services to Le Groupe Forget. At
December 28, 2002, approximately $1,029,000 has been
included in the accounts receivable resulting from these
transactions.

11.     Income
Taxes

The components of loss before equity in losses of
affiliated company are as follows:

|         |                                                              |      |            |            |   |      |            |            |   |   |            |            |  
|-------- | ------------------------------------------------------------ | ---- | ---------- | ---------- | - | ---- | ---------- | ---------- | - | - | ---------- | ---------- | -
|         |                                                              | 2002 |            | 2001       |   | 2000
|         |                                                              |      |            |            |   |     
|Domestic |                                                              | $    | (6,244,000 | )          |   | $    | (8,630,000 | )          |   | $ | (3,317,000 | )         
|Foreign  |                                                              |      | (6,000     | )          |   |      |           |            |   |   |           |           
|         |                                                              |      |            |            |   |      |            |            |   |   |            |           
|         | Total loss before equity in losses of affiliated
    company |      | $          | (6,250,000 | ) |      | $          | (8,630,000 | ) |   | $          | (3,317,000 | )
|         |                                                              |      |            |            |   |      |            |            |   |   |            |           

The Company has accounted for certain items
(principally depreciation and the allowance for doubtful
accounts) for financial reporting purposes in periods different
from those for tax reporting purposes.

Deferred tax assets (liabilities) are
comprised of the following:

|                                |  |          |             |      |  |   |             |  
|------------------------------- |  | -------- | ----------- | ---- |  | - | ----------- | -
|                                |  |         
|                                |  | December
|                                |  |         
|                                |  | 2002     |             | 2001
|                                |  |          |             |     
|Depreciation                    |  | $        | 557,000     |      |  | $ | 422,000     |  
|Allowance for doubtful accounts |  |          | 505,000     |      |  |   | 93,000      |  
|Joint venture                   |  |          | (1,482,000  | )    |  |   | (931,000    | )
|Other                           |  |          | 221,000     |      |  |   | 269,000     |  
|Net operating loss carryforward |  |          | 31,613,000  |      |  |   | 26,463,000  |  
|                                |  |          |             |      |  |   |             |  
|                                |  |          | 31,414,000  |      |  |   | 26,316,000  |  
|Less valuation allowance        |  |          | (31,414,000 | )    |  |   | (26,316,000 | )
|                                |  |          |             |      |  |   |             |  
|Net deferred tax asset          |  | $        |            |      |  | $ |            |  
|                                |  |          |             |      |  |   |             |  

51



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


At December 28, 2002 the Company had net
operating loss carryforwards of approximately $84,000,000 for
U.S. Federal tax purposes, and approximately $5,000,000 of
operating loss carryforwards in Canada. Included in the U.S.
Federal tax net operating loss carryforwards are approximately
$7,000,000 related to U.S. subsidiaries of Helix pre-combination
whose annual utilization would be limited due to the ownership
change of Helix in connection with the combination with the
Company. Should tax benefits ever be realized from such Helix
pre-combination net operating loss carryforwards, the valuation
allowance would be reduced and the benefit would be recorded as
a reduction of the goodwill resulting from the Helix combination.

The losses are available for carryforward for
fifteen and twenty year periods and began to expire in 2002 and
continue expiring through 2022. Any future significant changes
in ownership of the Company may limit the annual utilization of
the tax net operating loss carryforwards.

The provision for income taxes differs from the
amount computed using the Federal statutory income tax rate as
follows:

|                                                         |  |      |            |      |  |      |            |   |  |   |            |  
|-------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                         |  | 2002 |            | 2001 |  | 2000
|                                                         |  |      |            |      |  |     
|Provision at Federal statutory rate                      |  | $    | (2,125,000 | )    |  | $    | (2,934,000 | ) |  | $ | (1,128,000 | )
|State income taxes, net of Federal Income tax
    effect |  |      | (227,000   | )    |  |      | (313,000   | ) |  |   | (120,000   | )
|Nondeductible expenses                                   |  |      | (22,000    | )    |  |      | (18,000    | ) |  |   | (18,000    | )
|Effect of foreign operations                             |  |      | 2,000      |      |  |      |           |   |  |   |           |  
|Increase in valuation allowance                          |  |      | 2,472,000  |      |  |      | 2,944,000  |   |  |   | 1,603,000  |  
|Other                                                    |  |      | (100,000   | )    |  |      | 321,000    |   |  |   | (337,000   | )
|                                                         |  |      |            |      |  |      |            |   |  |   |            |  
|Income tax provision                                     |  | $    |           |      |  | $    |           |   |  | $ |           |  
|                                                         |  |      |            |      |  |      |            |   |  |   |            |  

Provision has not been made for U.S. or
additional foreign taxes on undistributed earnings of the
Companys Canadian subsidiaries. Such earnings have been
and will continue to be reinvested but could become subject to
additional tax if they were remitted as dividends, or were
loaned to the Company, or if the Company should sell its stock
in the foreign subsidiaries. Such undistributed earnings are not
significant at December 28, 2002.

12.     Commitments
and Contingencies

The Company established the HearUSA Inc. 401(k)
plan in October 1998. All employees who have attained age 21
with at least three months of service are eligible to
participate in the plan. The Companys contribution to the
plan is determined from year to year by the Board of Directors.
The Companys contributions to the plan were approximately
$44,200, $45,800 and $45,400 for the years ended
December 28, 2002, December 29, 2001 and
December 29, 2000, respectively.

Effective December 14, 1999, the Company
entered into five year employment agreements with certain of its
executive officers that provide for annual salaries, severance
payments, and accelerated vesting of stock options upon
termination of employment under certain circumstances or a
change in control, as defined.

52



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


13.     Quarterly
Financial Data (Unaudited)

|                                               |  |         |            |         |  |         |            |         |  |   |            |   |  |   |            |  
|---------------------------------------------- |  | ------- | ---------- | ------- |  | ------- | ---------- | ------- |  | - | ---------- | - |  | - | ---------- | -
|Year Ended                                     |  | First   |            | Second  |  | Third   |            | Fourth 
|December 28, 2002                              |  | Quarter |            | Quarter |  | Quarter |            | Quarter
|                                               |  |         |            |         |  |         |            |        
|Net Revenues                                   |  | $       | 12,010,016 |         |  | $       | 12,661,032 |         |  | $ | 17,055,786 |   |  | $ | 17,864,940 |  
|Operating Expenses                             |  |         | 13,075,183 |         |  |         | 13,064,845 |         |  |   | 19,727,628 |   |  |   | 18,358,016 |  
|Loss from Operations                           |  |         | (1,065,167 | )       |  |         | (403,813   | )       |  |   | (2,671,842 | ) |  |   | (493,076   | )
|Interest Income                                |  |         | 22,066     |         |  |         | 69,986     |         |  |   | 14,373     |   |  |   | 7,727      |  
|Net Loss applicable to Common stockholders (a) |  |         | (1,563,486 | )       |  |         | (1,377,876 | )       |  |   | (3,463,784 | ) |  |   | (1,171,864 | )
|Earnings per share (a)                         |  |         | (.11       | )       |  |         | (.09       | )       |  |   | (.12       | ) |  |   | (.04       | )

|                                           |  |         |            |         |  |         |            |         |  |   |            |   |  |   |            |  
|------------------------------------------ |  | ------- | ---------- | ------- |  | ------- | ---------- | ------- |  | - | ---------- | - |  | - | ---------- | -
|Year Ended                                 |  | First   |            | Second  |  | Third   |            | Fourth 
|December 29, 2001                          |  | Quarter |            | Quarter |  | Quarter |            | Quarter
|                                           |  |         |            |         |  |         |            |        
|Net Revenues                               |  | $       | 12,488,191 |         |  | $       | 11,341,188 |         |  | $ | 12,370,798 |   |  | $ | 12,595,933 |  
|Operating Expenses                         |  |         | 15,436,835 |         |  |         | 14,037,415 |         |  |   | 13,100,630 |   |  |   | 14,420,580 |  
|Loss from Operations                       |  |         | (2,948,644 | )       |  |         | (2,696,227 | )       |  |   | (729,832   | ) |  |   | (1,824,647 | )
|Interest Income                            |  |         | 46,574     |         |  |         | 54,290     |         |  |   | 73,919     |   |  |   | 47,566     |  
|Net Loss applicable to Common stockholders |  |         | (3,113,224 | )       |  |         | (2,995,535 | )       |  |   | (1,157,723 | ) |  |   | (2,175,254 | )
|Earnings per share                         |  |         | (.25       | )       |  |         | (.23       | )       |  |   | (.09       | ) |  |   | (.15       | )



---



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | In connection with the combination with Helix,
    the fiscal year end of Helix for financial reporting purposes
    was changed from November 30 to the last Saturday in
    December to conform to the Companys fiscal year end. As a
    result, the following components of the Companys
    consolidated statements of operations for the three months ended
    March 30, 2002 and June 29, 2002 would be restated for the
    effect on the Companys equity in Helixs net loss.

|                                                             |  |                    |            |                    |  |   |            |  
|------------------------------------------------------------ |  | ------------------ | ---------- | ------------------ |  | - | ---------- | -
|                                                             |  | Three Months Ended |            | Three Months Ended
|                                                             |  | March 30, 2002     |            | June 29, 2002     
|                                                             |  |                    |            |                   
|Equity in net loss of affiliated company,                    |  | $                  | (61,405    | )                  |  | $ | (27,015    | )
|Equity in net loss of affiliated company, as
    restated    |  | $                  | (72,086    | )                  |  | $ | (558,717   | )
|Net loss applicable to common stockholders                   |  | $                  | (1,552,805 | )                  |  | $ | (846,174   | )
|Net loss applicable to common stockholders, as
    restated  |  | $                  | (1,563,486 | )                  |  | $ | (1,377,876 | )
|Net loss per common share-basic and diluted                  |  | $                  | (0.11      | )                  |  | $ | (0.05      | )
|Net loss per common share-basic and diluted, as
    restated |  | $                  | (0.11      | )                  |  | $ | (0.09      | )

14.     Fair Value of
Financial Instruments

SFAS 107 requires the disclosure of fair value of
financial instruments. The estimated fair value amounts have
been determined by the Companys management using available
market information and other valuation methods. However,
considerable judgment is required to interpret market data in
developing the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange.
The use of different market assumptions and/or estimation
methods may have a material effect on the estimated fair value
amounts. Furthermore, the Company does not intend to dispose of
a significant portion of its financial instruments and thus, any
aggregate unrealized gains or losses should not be interpreted
as a forecast of future earnings and cash flows. SFAS 107
excludes certain financial

53



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


instruments from its disclosure requirements,
such as leases. In addition, disclosure of fair value estimates
are not required for nonfinancial assets and liabilities, such
as fixed assets, intangibles and anticipated future business. As
a result, the following fair values are not comprehensive and
therefore do not reflect the underlying value of the Company.

The following methods and assumptions were used
in estimating fair value disclosure for financial instruments:

Cash and Cash
Equivalents the carrying
amounts reported in the consolidated balance sheets approximate
those assets fair value due to the short term nature of
these assets.

Investment
Securities the carrying
amounts reported in the consolidated balance sheets approximate
those assets fair value (Note 2).

Accounts and Notes
Receivable the carrying
amounts reported in the consolidated balance sheets approximate
those assets fair value due primarily to the short term
nature of these assets.

Accounts Payable and Accrued
Expenses the carrying
amounts reported in the consolidated balance sheets approximate
those liabilities fair value, due primarily to the short
term nature of these liabilities.

Long-Term
Debt the carrying amounts
reported in the consolidated balance sheets approximate those
liabilities fair value, as current borrowing rates approximate
the actual fixed interest rates of these liabilities.

15.     Recent
Accounting Pronouncements

In June 2001, the FASB finalized FASB Statements
No. 141, Business Combinations(SFAS
141), and No. 142, Goodwill and Other Intangible
Assets (SFAS 142). SFAS 141 requires the use of the
purchase method of accounting and prohibits the use of the
pooling-of-interest method of accounting for business
combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible
assets apart from goodwill if the acquired intangible assets
meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for purchase
business combinations completed on or after July 1, 2001.
It also requires, upon adoption of SFAS 142, that the Company
reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS 141.

SFAS 142 requires, among other things, that
companies no longer amortize goodwill, but instead test goodwill
for impairment at least annually. In addition, SFAS 142
requires that the Company identify reporting units for the
purpose of assessing potential future impairments of goodwill,
reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangibles assets
with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required
to be applied in fiscal years beginning after December 15,
2001 to all goodwill and other intangible assets recognized at
that date, regardless of when those assets were initially
recognized. SFAS 142 requires the Company to complete
transitional goodwill impairment test six months from the date
of adoption. The Company is also required to reassess the useful
lives of other intangible assets within the first interim
quarter after adoption of SFAS 142. The Companys previous
business combinations were accounted for using the purchase
method. The impact of the adoption of SFAS 141 and SFAS 142 on
the Companys financial position and results of operations
was not material.

In October 2001, the FASB issued SFAS
No. 144 Accounting for the Impairment or Disposal
of Long-Lived Assetswhich resolves significant
implementation issues related to FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be

54



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


Disposed Of,and supersedes the accounting and
reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions,for the
disposal of a business segment. SFAS 144 is effective for
fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early application
encouraged. The impact of adoption of SFAS 144 on the
Companys financial position and results of operations was
not material.

In April 2002, the FASB issued SFAS No. 145
(SFAS 145), Rescission of SFAS No.s 4, 44, and 64,
Amendment of SFAS No. 13, and Technical Corrections. In
addition to rescinding the aforementioned statements,
SFAS 145 also amends SFAS 13, Accounting for Leases,
to eliminate an inconsistency between the required accounting
for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This statement also
amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe
their applicability under changed conditions. SFAS 145 is
generally effective for fiscal years beginning after
May 15, 2002. The impact of adoption of SFAS 145 on the
Companys financial position and results of operations was
not material.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. The standard requires companies to recognize
costs associated with exit (including restructuring) or disposal
activities at fair value when the related liability is incurred
rather than at the date of a commitment to an exit or disposal
plan under current practice. Costs covered by the standard
include certain contract termination costs, certain employee
termination benefits and other costs to consolidate or close
facilities and relocate employees that are associated with an
exit activity or disposal of long-lived assets. The new
requirements are effective prospectively for exit or disposal
activities initiated after December 31, 2002 and will be
adopted by the Company effective January 1, 2003. The
adoption of SFAS No. 146 is expected to impact the timing
of recognition of costs associated with future exit and disposal
activities.

In December 2002, the FASB issued SFAS,
No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure. This
statement amends SFAS 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition,
this statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim
financial statements about the method of accounting for
stock-based accounting for employee compensation and the effect
of the method used on reported results. SFAS 148 is generally
effective for financial statements for fiscal years ending after
December 15, 2002. The impact of adoption of SFAS 148 on
the Companys financial position and results of operations
was not material as the Company continues to use the intrinsic
value method.

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Others (FIN 45). FIN 45
elaborates on the disclosures that a guarantor should make in
its interim and annual financial statements regarding its
obligations relating to the issuance of certain guarantees. It
also requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this interpretation are applicable on
a prospective basis to guarantees issued or modified after
December 31, 2002. The impact of adopting FIN 45 on the
Companys financial position and results of operations is
not expected to be material.

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities, which
clarifies the application of Accounting Research Bulletin
No. 51, Consolidated Financial State-

55



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


ments, to certain entities in which equity
investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is
applicable immediately for variable interest entities created
after January 31, 2003. For variable interest entities
created prior to January 31, 2003, the provisions of FIN 46
are applicable no later than July 1, 2003. The Company does
not expect this Interpretation to have an effect on the
consolidated financial statements.

16.     Liquidity and
Subsequent Event

As of December 28, 2002, the Company has an
excess of current liabilities over current assets of
approximately $10.2 million. For the twelve months ended
December 28, 2002, the Company incurred a net loss of
approximately $6.9 million. The Company is dependent upon
generating sufficient cash flow from operations or financings to
repay its liabilities. Additionally, the Companys supply
agreement with Siemens requires full payment for hearing aids
purchased from Siemens within 60 days. As of
December 28, 2002, the Company was not in compliance with
those payment provisions. Upon such noncompliance, Siemens may
declare the Company to be in default of the supply agreement by
written notification, which, if not cured within 60 days of
the date of written notification, would be an event of default
under the Companys $51,875,000 secured credit agreement
with Siemens. On February 19, 2003, the Company obtained a
waiver of the non-compliance with the 60-day payment term of the
supply agreement from Siemens as of December 28, 2002.
Future non-compliance with the supply agreement could have a
material adverse effect on the Companys financial
condition and continued operations. As a result of the
completion of the combination with Helix and significant cost
cutting initiatives taken throughout 2001 and 2002, the Company
believes that funds available under the Siemens credit facility,
current cash, investment securities and revenues from
operations, at current net revenue levels, will be sufficient to
support the Companys operational needs through the next
twelve months, although there can be no assurance that the
Company can maintain compliance with Siemens loan
covenants, that net revenue levels will remain at or higher than
current levels or that unexpected capital needs will not arise
for which the credit facility, cash, investments and revenues
from operations will be sufficient. Should the Company determine
that additional financing is necessary one or more of the
following opportunities will be evaluated: accounts receivable
financing, short term debt or additional equity or debt
offerings. There can be no assurance, however, that such
financing would be available to the Company on favorable terms
or at all.

On March 14, 2003, the Company obtained
additional funding of $3,500,000 in the form of a five-year note
payable to Siemens (Tranche E) with 10% interest. The Company is
required to make monthly payments of interest only in the first
year. In years two through five, the Company must make monthly
principal and interest payments. The additional funding was
obtained pursuant to an amendment to the Companys credit
agreement with Siemens and is otherwise subject to the terms and
conditions of the credit agreement and related security
agreement.

56



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##### 



HearUSA Inc.

Schedule II  Valuation and Qualifying
Accounts


|                  |                                 |            |   |           |  |            |   |            |     |  |   |          |      |  |   |           | 
|----------------- | ------------------------------- | ---------- | - | --------- |  | ---------- | - | ---------- | --- |  | - | -------- | ---- |  | - | --------- | 
|                  |                                 | Balance at |   |           |  |            |   | Balance at
|                  |                                 | Beginning  |   |           |  |            |   | End Of    
|                  |                                 | Of Period  |   | Additions |  | Deductions |   | Period    
|                 
|                 
|December 28, 2002 |                                 |            |   |           |  |            |   |            |     |  |   |          |      |  |   |          
|                  | Allowance for doubtful accounts |            | $ | 185,814   |  |            | $ | 1,563,869  | (2) |  | $ | (406,786 | )(1) |  | $ | 1,342,897 | 
|                  | Allowance for sales returns     |            | $ | 500,780   |  |            |   | 330,279    | (3) |  |   |         |      |  | $ | 831,059   | 
|                 
|December 29, 2001 |                                 |            |   |           |  |            |   |            |     |  |   |          |      |  |   |          
|                  | Allowance for doubtful accounts |            | $ | 212,657   |  |            | $ | 125,206    |     |  | $ | (152,049 | )(1) |  | $ | 185,814   | 
|                  | Allowance for sales returns     |            | $ | 772,976   |  |            |   |            |     |  | $ | (272,196 | )    |  | $ | 500,780   | 
|                 
|December 29, 2000 |                                 |            |   |           |  |            |   |            |     |  |   |          |      |  |   |          
|                  | Allowance for doubtful accounts |            | $ | 535,609   |  |            | $ | 377,500    |     |  | $ | (700,452 | )(1) |  | $ | 212,657   | 
|                  | Allowance for sales returns     |            | $ | 497,412   |  |            | $ | 275,564    |     |  |   |          |      |  | $ | 772,976   | 
|                 



|    |                                                                    
|--- | -------------------------------------------------------------------
|(1) | Uncollectible accounts written off, net of
    recoveries.         
|   
|(2) | Includes Allowances for doubtful accounts of
    Helix of $767,346.
|   
|(3) | Includes allowance for sales returns of Helix of
    $151,775.     

57



---



##### 





|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.

58



---



##### 



PART III



|         |                                     
|-------- | ------------------------------------
|Item 10. | Directors and Executive
    Officers

The information required by this Item for
directors is set forth in the Companys 2003 Proxy
Statement under the heading Election of Directors
and is incorporated herein by this reference as if set forth in
full.

The information required by this Item for
executive officers is set forth in Part I of this report
under the heading Executive Officers of the Company.



|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this Item is set
forth in the Companys 2003 Proxy Statement under the
heading Election of Directors and is incorporated
herein by this reference as if set forth in full.



|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The information required by this Item is set
forth in the Companys 2003 Proxy Statement under the
heading Election of Directors and is incorporated
herein by this reference as if set forth in full.

The following table sets forth certain
information regarding the Companys equity compensation
plans as of December 28, 2002:

|                             |  |                      |           |                      |  |                       |      |  |  |  |           |    
|---------------------------- |  | -------------------- | --------- | -------------------- |  | --------------------- | ---- |  |  |  | --------- | ---
|                            
|                            
|                             |  | Number of securities
|                             |  | remaining available 
|                             |  | Number of Securities |           |                      |  | for future issuance  
|                             |  | to be issued upon    |           | Weighted-average     |  | under equity         
|                             |  | exercise of          |           | exercise price of    |  | compensation plans   
|                             |  | outstanding options, |           | outstanding options, |  | (excluding securities
|                             |  | warrants and rights  |           | warrants and rights  |  | reflected in column  
|Plan Category                |  | (a)                  |           | (b)                  |  | (a)) (c)             
|                            
|                            
|Equity compensation plans    |  |                      |           |                      |  |                       |      |  |  |  |           |    
|approved by security holders |  |                      | 1,688,044 |                      |  | $                     | 3.46 |  |  |  | 2,712,503 | (1)
|                            
|                            
|Equity compensation plans    |  |                      |           |                      |  |                       |      |  |  |  |           |    
|not approved by security     |  |                      |           |                      |  |                       |      |  |  |  |           |    
|holders                      |  |                      | 589,946   | (2)                  |  | $                     | 3.34 |  |  |  | 50,000    |    
|                            



| |     |                                                                                                                                                                 | 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (1) | The plans authorize an annual increase in
    authorized shares equal to 10% of the number of shares
    authorized as of the prior year.                       | 
|
| | (2) | Consists of non-qualified options granted outside
    the Companys 1987 Stock Option Plan and 1995 Flexible
    Stock Plan in 1993, 1995, 1996, 1999 and 2001. | 

The material features of the outstanding options
which were granted outside the 1987 Stock Option Plan and 1995
Flexible Stock Plan are as follows:

1999 Non-plan Option Grants:

An option to purchase 100,000 shares of common
stock was granted to Dr. Paul A. Brown, the Companys
Chairman of the Board of Directors, pursuant to his employment
contract, at an exercise price of $3.875, which was equal to the
closing price of Common Stock as reported on the American Stock
Exchange of the shares on the effective date of his employment
contract. The options vest at a rate of 25% per year and have a
ten-year life.

An option to purchase 113,246 shares of common
stock was granted to Stephen J. Hansbrough, the Companys
Chief Executive Officer, pursuant to his employment contract, at
an exercise

59



---



##### 



price of $3.875, which was equal to the closing
price of Common Stock as reported on the American Stock Exchange
of the shares on the effective date of his employment contract.
The options vest at a rate of 25% per year and have a ten-year
life.


2001 Non-plan Option Grant:

An option to purchase 300,000 shares of common
stock was approved by the Board of Directors and granted to
Stephen J. Hansbrough, the Companys Chief Executive
Officer, at an exercise price of $0.77, which was equal to the
closing price of Common Stock as reported on the American Stock
Exchange of the shares on the grant date. The options vested
immediately and have a ten-year life.

Other Non-plan Option Grants:

Options to purchase 76,700 shares of common stock
were approved by the Board of Directors and granted to various
employees and consultants between 1993 and 1996, at exercise
prices ranging from $10.00 to $20.00, which were equal to the
closing prices of the Common Stock on the grant dates. These
options are fully vested and have a ten year life.



|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this item is set
forth in the Companys 2003 Proxy Statement under the
heading Election of Directors and is incorporated
herein by this reference as if set forth in full.



|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Within the 90 days prior to the date of this
    report, the Company evaluated the effectiveness of its
    disclosure controls and procedures pursuant to Exchange Act
    Rule 13a-14. Based upon that evaluation, the Companys
    Chief Executive Officer and Chief Financial Officer concluded
    that the Companys disclosure controls and procedures are
    effective in timely alerting them to material information
    relating to the Company required to be included in its periodic
    SEC filings.



| |    |                                                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | There have been no significant changes in the
    Companys internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    the evaluation referenced above.

PART IV



|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Report on Form 8-K

(a) (1) The following financial
statements are filed as part of this report:



| |     |                                                                               
| | --- | ------------------------------------------------------------------------------
| | (i) | Consolidated Balance Sheets as of
    December 28, 2002 and December 29, 2001.



| |      |                                                                                                                              
| | ---- | -----------------------------------------------------------------------------------------------------------------------------
| | (ii) | Consolidated Statements of Operations for the
    years ended December 28, 2002, December 29, 2001 and
    December 29, 2000.



| |       |                                                                                                                                                   
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------
| | (iii) | Consolidated Statements of Changes in
    Stockholders Equity for the years ended December 28,
    2002, December 29, 2001 and December 29, 2000.



| |      |                                                                                                                              
| | ---- | -----------------------------------------------------------------------------------------------------------------------------
| | (iv) | Consolidated Statements of Cash Flows for the
    years ended December 28, 2002, December 29, 2001 and
    December 29, 2000.



| |     |                                           
| | --- | ------------------------------------------
| | (v) | Notes to Consolidated Financial Statements

60



---



##### 





| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | (2) The following financial statement
    schedule is filed as part of this report and contained on
    page 56.

|            |  |                                  
|----------- |  | ---------------------------------
|Schedule II |  | Valuation and Qualifying Accounts
|            |  |                                  



| |              
| | -------------
| | (3) Exhibits:

| |     |  |  |                                                                                                                                                                                                                                                                                                                                
| | --- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.1 |  |  | The Amended and Restated Merger Agreement, dated
    November 6, 2001, between HEARx and Helix Hearing Care of
    America Corp. (incorporated herein by reference as
    Exhibit 2.1 to the Companys Joint Proxy
    Statement/Prospectus on Form S-4 (Reg. No. 333-73022)                                                   
| | 2.2 |  |  | Interim Order issued by the Superior Court of
    Quebec and Notice of Application (incorporated herein by
    reference as Exhibit 2.2 to the Companys Joint Proxy
    Statement/Prospectus Form S-4 (Reg. No. 333-73022)                                                                                                    
| | 2.3 |  |  | Plan of Arrangement, including exchangeable share
    provisions (incorporated herein by reference as Exhibit 2.3
    to the Companys Joint Proxy Statement/Prospectus on
    Form S-4 (Reg. No. 333-73022)                                                                                                                   
| | 3.1 |  |  | Restated Certificate of Incorporation of HEARx
    Ltd., including certain certificates of designations,
    preferences and rights of certain preferred stock of the Company
    (incorporated herein by reference as Exhibit 3 to the
    Companys Current Report on Form 8-K, filed
    May 17, 1996 (File No. 001-11655)).
| | 3.2 |  |  | Amendment to the Restated Certificate of
    Incorporation (incorporated herein by reference as
    Exhibit 3.1A to the Companys Quarterly Report on
    Form 10-Q for the period ended June 28, 1996 (File
    No. 001-11655)).                                                                                              
| | 3.3 |  |  | Amendment to Restated Certificate of
    Incorporation including one for ten reverse stock split and
    reduction of authorized shares (incorporated herein as
    Exhibit 3.5 to the Companys Quarterly Report on
    Form 10-Q for the period ending July 2, 1999 (File
    No. 001-11655)).                               
| | 3.4 |  |  | Amendment to Restated Certificate of
    Incorporation including an increase in authorized shares and
    change of name (incorporated herein by reference as
    Exhibit 3.1 to the Companys Current Report on
    Form 8-K, filed July 17, 2002
    (File No. 001-11655)).                                                  
| | 3.5 |  |  | Certificate of Designations, Preferences and
    Rights of the Companys 1998 Convertible Preferred Stock
    (incorporated herein by reference as Exhibit 3 to the
    Companys Current Report on Form 8-K, filed
    August 27, 1998 (File No. 001-11655)).                                                                 
| | 3.6 |  |  | Certificate of Designations, Preferences and
    Rights of the Companys 1999 Series H Junior
    Participating Preferred Stock (incorporated herein by reference
    as Exhibit 4 to the Companys Current Report on
    Form 8-K, filed December 17, 1999 (File
    No. 001-11655)).                                         
| | 3.7 |  |  | Certificate of Designations, Preferences and
    Rights of the Companys Special Voting Preferred Stock
    (incorporated herein by reference as Exhibit 3.2 to the
    Companys Current Report on Form 8-K, filed July 19,
    2002 (File No. 001-11655)).                                                                   
| | 3.8 |  |  | Amendment to Certificate of Designations,
    Preferences and Rights of the Companys 1999 Series H
    Junior Participating Preferred Stock (incorporated herein by
    reference as Exhibit 4 to the Companys Current Report
    on Form 8-K, filed July 17, 2002 (File
    No. 001-11655)).                                
| | 3.9 |  |  | Amended and Restated By-Laws of HearUSA, Inc.                                                                                                                                                                                                                                                                                  
| | 4.1 |  |  | Specimen of Certificate representing Common Stock
    (incorporated herein by reference as Exhibit 4.1 to the
    Companys Registration Statement on Form S-18, filed
    September 4, 1987 (File No. 33-17041-NY)).                                                                                                          
| | 4.2 |  |  | Securities Purchase Agreement, dated
    August 27, 1998, between HEARx Ltd. and each purchaser set
    forth on the signature pages thereto (incorporated herein by
    reference as Exhibit 4.1 to the Companys Current
    Report on Form 8-K, filed August 27, 1998 (File
    No. 001-11655)).                            
| | 4.3 |  |  | Registration Rights Agreement, dated
    August 27, 1998, between HEARx Ltd. and each purchaser set
    forth on the signature pages thereto (incorporated herein by
    reference as Exhibit 4.2 to the Companys Current
    Report on Form 8-K, filed August 27, 1998 (File
    No. 001-11655)).                            
| | 4.4 |  |  | Form of Placement Agent Warrant (to purchase up
    to 1,125,000 shares of Common Stock at an exercise price equal
    to $1.80 per share) (incorporated herein by reference as
    Exhibit 4.3 to the Companys Current Report on
    Form 8-K, filed August 27, 1998 (File
    No. 001-11655)).                              

61



---



##### 



| |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ---- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.5  |  |  | Securities Purchase Agreement, dated May 9,
    2000, between HEARx Ltd. and each of the purchasers set forth on
    the signature pages thereto (incorporated herein by reference as
    Exhibit 4.1 to the Companys Current Report on
    Form 8-K, filed May 9, 2000 (File No. 001-11655)).                                                                                                                 
| | 4.6  |  |  | Registration Rights Agreement, dated May 9,
    2000, between HEARx Ltd. and each of the purchasers set forth on
    the signatures pages thereto (incorporated herein by reference
    as Exhibit 4.2 to the Companys Current Report on
    Form 8-K, filed May 9, 2000 (File No. 001-11655)).                                                                                                                
| | 4.7  |  |  | Form of Placement Agent Warrant (to purchase up
    to 203,390 shares of Common Stock at an exercise price equal to
    $4.46 per share) (incorporated herein by reference as
    Exhibit 4.3 to the Companys Current Report on
    Form 8-K, filed May 9, 2000 (File No. 001-11655)).                                                                                                                         
| | 4.8  |  |  | Exchange and Redemption Agreement, dated as of
    December 4, 2001, by and between HEARx and Advantage Fund
    II Ltd. (incorporated herein by reference as Exhibit 10.1
    to the Companys Current Report on Form 8-K, filed
    December 26, 2001 (File No. 001-11655)).                                                                                                                                  
| | 4.9  |  |  | Registration Rights Agreement, dated as of
    December 13, 2001, by and between HEARx and Advantage Fund
    II Ltd. (incorporated herein by reference as Exhibit 10.3
    to the Companys Current Report on Form 8-K, filed
    December 26, 2001 (File No. 001-11655)).                                                                                                                                     
| | 4.10 |  |  | Escrow Agreement, dated as of December 13,
    2001, by and among HEARx, Advantage Fund II Ltd. and American
    Stock Transfer & Trust Company, as Escrow Agent
    (incorporated herein by reference as Exhibit 10.2 to the
    Companys Current Report on Form 8-K, filed
    December 26, 2001 (File No. 001-11655)).                                                                                      
| | 4.11 |  |  | Release, dated as of December 13, 2001, by
    and between HEARx and Advantage Fund II Ltd. (incorporated
    herein by reference as Exhibit 10.4 to the Companys
    Current Report on Form 8-K, filed December 26, 2001
    (File No. 001-11655)).                                                                                                                                                           
| | 4.12 |  |  | Amended and Restated Rights Agreement, dated
    July 11, 2002 between HEARx and the Rights Agent, which
    includes an amendment to the Certificate of Designations,
    Preferences and Rights of the Companys 1999 Series H
    Junior Participating Preferred Stock. (incorporated herein by
    reference as Exhibit 4.9.1 to the Companys Joint
    Proxy/Prospectus on Form S-4 (Reg. No. 333-73022)).
| | 4.13 |  |  | Form of Support Agreement among HEARx Ltd., HEARx
    Canada Inc. and HEARx Acquisition ULC (incorporated herein by
    reference as Exhibit 99.3 to the Companys Joint Proxy
    Statement/ Prospectus on Form S-4 (Reg. No. 333-73022)).                                                                                                                                                                     
| | 9.1  |  |  | Form of Voting and Exchange Trust Agreement among
    HearUSA, Inc., HEARx Canada, Inc. and HEARx Acquisition ULC and
    ComputerShare Trust Company of Canada (incorporated herein by
    reference as Exhibit 9.1 to the Companys Joint Proxy
    Statement/ Prospectus on Form S-4 (Reg No. 333-73022)).                                                                                                   
| | 10.1 |  |  | HEARx Ltd. 1987 Stock Option Plan (incorporated
    herein by reference as Exhibit 10.11 to the Companys
    Registration Statement of Form S-18 (Reg
    No. 33-17041-NY)).#                                                                                                                                                                                                                                  
| | 10.2 |  |  | HEARx Ltd. Stock Option Plan for Non-Employee
    Directors and (b) Form of Option Agreement (incorporated
    herein by reference as Exhibits 10.35 and 10.48 to
    Post-Effective Amendment No. 1 to the Companys
    Registration Statement of Form S-18 (Reg.
    No. 33-17041-NY)).#                                                                                                                     
| | 10.3 |  |  | 1995 Flexible Employee Stock Plan (incorporated
    herein by reference as Exhibit 4 to the Companys 1995
    Proxy Statement (File No. 001-11655)).#                                                                                                                                                                                                                                                          
| | 10.4 |  |  | Executive Employment Agreement, dated
    December 14, 1999 with Dr. Paul A. Brown
    (incorporated herein by reference as an exhibit to the
    Companys Current Report on Form 8-K, filed
    December 17, 1999 (File No. 001-11655)).#                                                                                                                                                                     
| | 10.5 |  |  | Executive Employment Agreement, dated
    December 14, 1999 with Stephen J. Hansbrough
    (incorporated herein by reference as an exhibit to the
    Companys Current Report on Form 8-K, filed
    December 17, 1999 (File No. 001-11655)).#                                                                                                                                                                 
| | 10.6 |  |  | Credit Agreement, dated December 7, 2001
    between HEARx Ltd and Siemens Hearing Instruments, Inc.
    (incorporated herein by reference as Exhibit 10.1 to the
    Companys Current Report on Form 8-K, filed
    December 26, 2001 (File No. 001-11655)).                                                                                                                                                  
| | 10.7 |  |  | Security Agreement, dated December 7, 2001
    between HEARx Ltd and Siemens Hearing Instruments, Inc
    (incorporated herein by reference as Exhibit 10.2 to the
    Companys Current Report on Form 8-K,
    December 26, 2001 (File No. 001-11655)).                                                                                                                                                       

62



---



##### 



| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.8  |  |  | Supply Agreement, dated December 7, 2001
    between HEARx Ltd and Siemens Hearing Instruments, Inc
    (incorporated herein by reference as Exhibit 10.3 to the
    Companys Current Report on Form 8-K,
    December 26, 2001 (File No. 001-11655)).                                                                                                                                                            
| | 10.9  |  |  | Form of Stock Purchase Agreement dated
    March 29, 2002 by and between HEARx Ltd and each purchaser
    named therein (incorporated herein by reference as
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q for the period ended June 28, 2002 (File No.
    001-11655)).                                                                                                                     
| | 10.10 |  |  | Form of Warrant to purchase Common Stock issued
    in connection with March 29, 2002 private placement
    (incorporated herein by reference as Exhibit 10.2 to the
    Companys Quarterly Report on Form 10-Q for the period
    ended June 28, 2002 (File No. 001-11655)).                                                                                                                                     
| | 10.11 |  |  | Form of HearUSA 2002 Flexible Stock Plan
    (incorporated herein by reference as Exhibit 10.9 to the
    Companys Joint Proxy Statement/ Prospectus on
    Form S-4 (Reg. No. 333-73022 (File No. 001-11655)).#                                                                                                                                                                                                  
| | 10.12 |  |  | Subscription Agreement, dated January 14,
    2002, between HEARx Ltd. and Helix Hearing Care of America Corp.
    (incorporated herein by reference as Exhibit 10.17 to the
    Companys Joint Proxy Statement/ Prospectus on
    Form S-4 (Reg. No. 333-73022)).                                                                                                                                                
| | 10.13 |  |  | Credit Agreement dated as of April 30, 2002,
    among HEARx Ltd., Helix Hearing Care of America, Corp. and each
    of its direct and indirect subsidiaries (incorporated herein by
    reference as Exhibit 10.18 to the Companys Joint
    Proxy Statement/ Prospectus on Form S-4 (Reg.
    No. 333-73022)).                                                                                                  
| | 10.14 |  |  | Form of Master Security Agreement Collateral
    Assignment and Equity Pledge among HEARx Ltd., Helix Hearing
    Care of America Corp. and each of its direct and indirect
    subsidiaries, and Cousineau, Doucet, Parent, Forget
    Audioprothesistes s.e.n.c. (incorporated herein by reference as
    Exhibit 10.19 to the Companys Joint Proxy Statement/
    Prospectus on Form S-4 (Reg. No. 333-73022)).
| | 10.15 |  |  | Form of Owners Equity Pledge and Security
    Agreement among HEARx Ltd., Steve Forget and Cousineau, Doucet,
    Parent, Forget Audioprothesistes s.e.n.c. (incorporated herein
    by reference as Exhibit 10.20 to the Companys Joint
    Proxy Statement/ Prospectus on Form S-4 (Reg.
    No. 333-73022)).                                                                                                  
| | 10.16 |  |  | Supply Agreement dated December 1, 2000
    between Cousineau, Doucet, Parent, Forget, Audioprothesistes,
    s.e.n.c. (d/b/a Le Group Forget) and Les Services
    Dapprovisionnement Hearing Care of America Inc. (English
    translation)                                                                                                                                                                     
| | 10.17 |  |  | Management Agreement dated December 1, 2000
    between Cousineau, Doucet, Parent, Forget, Audioprothesistes,
    s.e.n.c. (d/b/a Le Group Forget) and Les Services De Gestion
    Hearing Care of America Inc. (English Translation)                                                                                                                                                                              
| | 10.18 |  |  | Equipment Rental Agreement dated December 1,
    2000 between Cousineau, Doucet, Parent, Forget,
    Audioprothesistes, s.e.n.c. (d/b/a Le Group Forget) and Les
    Services De Location Hearing Care of America Inc. (English
    translation)                                                                                                                                                                   
| | 21    |  |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                               
| | 23    |  |  | Consent of Independent Certified Public
    Accountants                                                                                                                                                                                                                                                                                                                                                            
| | 99.1  |  |  | CEO Certification, pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                   
| | 99.2  |  |  | CFO Certification, pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                   



---



|  |                                                                              
|- | -----------------------------------------------------------------------------
|# | Denotes compensatory plan or arrangement for
    Company Officer or Director.

(b) Reports on Form 8-K :

A current report on Form 8-K, dated
October 22, 2002, was filed with the Securities and
Exchange Commission on October 22, 2002, in which the
Company reported its discovery of apparently improper Medicaid
billing at a unit of a recently acquired business operating in
Massachusetts and that the Company has reported its findings to
Massachusetts authorities. The Company also reported the
resignation of Mr. Steve Forget as the Companys
president.

63



---



##### 



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.



| |             
| | ------------
| | HearUSA Inc.
| | (Registrant)

|                     |  |     |  |                                                                                  
|-------------------- |  | --- |  | ---------------------------------------------------------------------------------
|Date: March 28, 2003 |  | By: |  | /s/ Paul A. Brown, M.D.     Paul A.
    Brown, M.D.     Chairman of the
    Board

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                                   |  |                                      |  |               
|-------------------------------------------------- |  | ------------------------------------ |  | --------------
|Signature                                          |  | Title                                |  | Date          
|                                                   |  |                                      |  |               
|/s/ PAUL A. BROWNPaul A. Brown, M.D.               |  | Chairman of the Board And Director   |  | March 28, 2003
|                                                  
|/s/ STEPHEN J. HANSBROUGHStephen J. Hansbrough     |  | Chief Executive Officer and Director |  | March 28, 2003
|                                                  
|/s/ GINO CHOUINARDGino Chouinard                   |  | Chief Financial Officer              |  | March 28, 2003
|                                                  
|/s/ DAVID J. MCLACHLANDavid J. McLachlan           |  | Director                             |  | March 28, 3003
|                                                  
|/s/ THOMAS W. ARCHIBALDThomas W. Archibald         |  | Director                             |  | March 28, 2003
|                                                  
|/s/ JOSEPH L. GITTERMAN IIIJoseph L. Gitterman III |  | Director                             |  | March 28, 2003
|                                                  
|/s/ MICHEL LABADIEMichel Labadie                   |  | Director                             |  | March 28, 2003
|                                                  
|/s/ PIERRE BOURGIEPierre Bourgie                   |  | Director                             |  | March 28, 2003
|                                                  
|/s/ STEVE FORGETSteve Forget                       |  | Director                             |  | March 28, 2003

64



---



##### 



Sarbanes-Oxley Section 302
Certification

I, Stephen J. Hansbrough, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of HearUSA, Inc.;                                                                                                                                                                                                                                                                       
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

Date: March 28, 2003

| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | /s/ Stephen J. Hansbrough 
     _________________________________________ 
     Stephen J. Hansbrough 
     Chief Executive Officer

65



---



##### 



Sarbanes-Oxley Section 302
Certification

I, Gino Chouinard, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of HearUSA, Inc.;                                                                                                                                                                                                                                                                       
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

Date: March 28, 2003

| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | /s/ Gino Chouinard 
     _________________________________________ 
     Gino Chouinard 
     Chief Financial Officer

66