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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 27,
    2003                                              
|          
|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).    o         No þ

As of June 28, 2003, 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 $14,945,729.

On March 12, 2004, 30,423,636 shares of the
Registrants common stock were outstanding, including
1,166,041 of exchangeable shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrants definitive Proxy
Statement for the 2004 Annual Meeting of the Registrants
Stockholders (2004 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) has a network of 156 company-owned hearing
care centers (the centers) in 11 states and the
Province of Ontario, Canada. The Company also sponsors
approximately 1,400 credentialed audiology providers (the
network providers or the network) that
participate in selected hearing benefit programs contracted by
the company with employer groups, health insurers and benefit
sponsors in 49 states. The centers and the network providers
provide audiological products and services for the hearing
impaired.

HearUSA seeks to increase market share and market
penetration in its center and network markets through creative
marketing and an organized delivery system that targets the
medical and consumer communities. HearUSA will also look for
acquisitions in its center markets. The Companys strategy
for increasing market penetration includes advertising to the
non-insured self-pay market, positioning itself as the leading
provider of hearing care to healthcare providers and increasing
awareness of physicians about hearing care services and products
in the Companys 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 the
public in general.

HearUSA was incorporated in Delaware on
April 11, 1986, under the name HEARx Ltd., and formed HEARx
West LLC; a fifty-percent owned joint venture with Kaiser
Permanente, in 1998. In July of 2002, the Company acquired Helix
Hearing Care of America Corp. (Helix) and changed
its name from HEARx Ltd. to HearUSA, Inc.

2003 Developments

On March 14, 2003, the Company obtained an
additional $3,500,000 secured five-year term loan from Siemens
Hearing Instruments, Inc. (Siemens) (the Tranche E
Loan). The Tranche E Loan 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. See
Business  Siemens Hearing Instruments
Inc., below. Proceeds of this financing have been used
mainly for working capital purposes.

On July 15, 2003, because of the complexity
of the Quebec legislation governing the provision of hearing
care, the Company sold 100% of the shares of the Companys
three subsidiaries and selected assets associated with the
management of the centers located in the Canadian Province of
Quebec. The Quebec subsidiaries and selected assets had been
acquired by the Company as part of the Helix acquisition in July
2002. The sale was made to Forget & Sauve,
Audioprothesistes, S.E.N.C. (Forget & Sauve) and
6068065 Canada Inc., private entities owned and controlled by
Steve Forget, a former Company and Helix officer and director.
See Notes 12 and 18, Notes to Consolidated Financial
Statements, included herein.

On August 27, 2003, the Company exchanged
all 4,563 outstanding shares of its 1998 Convertible Preferred
Stock for 4,563 shares of the newly designated E
Series Convertible Preferred Stock
(E Convertible Preferred Stock). All
E Series Convertible Preferred Stock not converted or
redeemed by December 18, 2006 must be redeemed by the
Company on December 18, 2006. The old 1998 Convertible
Preferred Stock was scheduled to convert by its terms into
common stock on August 27, 2003. As part of the
transaction, the Company has agreed that accrued but unpaid
premiums on the 1998 Convertible Preferred Stock and the 10%
premium on the E Series Convertible Preferred Stock will be
paid in cash each month beginning in November 2003 and
continuing until December 2006. The holders have agreed that
they will not convert the preferred stock prior to
November 1, 2005, except in certain circumstances. See
Note 8 and Note 9E, Notes to Consolidated Financial
Statements, included herein.

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On October 3, 2003, the Company completed an
interim financing in the form of a private placement of
$2 million in unsecured notes and common stock purchase
warrants with a number of investors, including three members of
the Companys board of directors. Proceeds from the
financing were used to pay Siemens under the supply agreement.
As of December 27, 2003, these notes were fully repaid
using proceeds from the December 19, 2003 financing
described below. Only the warrants remain outstanding. See
Note 7, Notes to Consolidated Financial Statements,
included herein.

On December 19, 2003, the Company completed
a private placement of $7.5 million of five-year
convertible subordinated notes with five-year common stock
purchase warrants. Proceeds from this financing were used to
repay the $2 million notes issued on October 3, 2003
and for working capital purposes. The Company used approximately
$1.8 million of the net proceeds to pay Siemens under the
credit agreement in January 2004. See Note 7, Notes to
Consolidated Financial Statements, included herein.

Siemens Hearing Instruments, Inc.

In 2001, the Company entered into a credit
agreement with Siemens. The credit agreement provides for 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). As described above, Siemens and the
Company amended the credit agreement in March 2003 to add a
$3,500,000 secured five-year term loan facility (the
Tranche E Loan), increasing the secured credit facility to
$55,375,000. As of December 27, 2003 all of the Tranches
were drawn upon, available funds under the Tranche B at the
end of 2003 were approximately $24.9 million.

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 the HearUSA centers hearing aid purchases
for a period of ten years (an initial five year term and a five
year renewal term) at specified prices. As long as the Company
purchases, on a cumulative basis, the certain minimum percentage
requirement under the supply agreement, preferred pricing
reductions are received from Siemens and applied against the
quarterly payments of principal and related interest due on
Tranches A, B and C.

Facilities and Services

Each HearUSA center is staffed by a licensed and
credentialed audiologist or hearing instrument specialist and at
least one patient care coordinator. Experienced audiologists
supervise clinical operations. The majority of the
Companys centers are conveniently located in shopping or
medical centers, and the centers are typically 1,000 
2,500 square feet in size (1,000  2,000 for the Helix
centers and 2,000  2,500 for the HEARx and HEARx West
centers). The Company has a total of 286 examining rooms. The
Companys goal is to have all centers similar in design,
exterior marking and signage, because 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               
|
| |  | Aural rehabilitation and follow up care                                 
|
| |  | Standardized reporting and physician
    communications                 

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In some markets, a full range of audiovestibular
testing is also available to aid in the diagnosis of medical and
vestibular disorders.

Each network provider operates independently from
the Company. However, to ensure compliance with its hearing
benefit programs, the Company performs annual credential
verification on each of the network providers to ensure they
meet the minimum criteria to be part of the network. Also, on a
random basis, the Company performs patient surveys on the
quality of their services.

Products

HearUSAs centers offer a complete range of
quality hearing aids, with emphasis on the latest digital
technology. While the centers may order a hearing aid from any
manufacturer, it is likely the majority of the hearing aids sold
by the centers will be manufactured by Siemens and its
subsidiaries, Rexton and Electone. The centers also sell hearing
aids manufactured by Phonak, Oticon, Starkey, Sonic Innovation
and Unitron.

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

The network providers also provide hearing aids,
assistive listening devices and other products related to
hearing care. Although some of the providers sell hearing aids
manufactured by Siemens and its subsidiaries, Rexton and
Electone, they have no commitment such as the Company does to
purchase their products from Siemens.

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, employer groups, health insurers,
benefit sponsors, 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 are the availability of distribution
sites, quality control and standardization of products and
services. The Company believes its system of high quality,
uniform company-owned centers meets the needs of the patients
and their hearing benefit providers and that the network
providers can expand available distribution sites for these
patients

HearUSA usually enters into provider agreements
with hearing benefit providers for the furnishing of hearing
care on three different bases: (a) discount arrangement
based on a contractual rate offered by the centers and/or the
network providers to hearing benefit providers members
(all paid for by the patient); (b) an encounter fee for
service basis where the centers and/or the network providers are
paid a contracted fee by the hearing benefit provider for each
hearing aid sold (with the balance paid by the individual
member); or (c) a per capita basis, which is a fixed
payment per member per month from the hearing benefit provider
to HearUSA, determined by the benefit offered to the patient and
the number of patients (the balance, if necessary, is paid by
the individual member). When involving the network providers,
HearUSA reimburses them a portion of the per-member-per-month
payment, net of administration fees.

The terms of most of these provider agreements
are renegotiated annually, and most of these agreements may be
terminated by either party on 90-days notice. 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

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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 and its subsidiary HEARx West LLC
(HEARx West), a joint venture with Permanente
Federation LLC (an affiliate of Kaiser Permanente), currently
receive a per-member-per-month fee for more than
1.1 million managed care members. In total, HearUSA
services over 268 benefit programs for hearing care with various
health maintenance organizations preferred provider
organizations, insurers, benefit administrators, and healthcare
providers.

Marketing and Revenues

HearUSAs marketing plan for its centers
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
    in its markets 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 domestic national
    call center, which supports all HearUSA centers. The national
    call center is responsible for both inbound and outbound
    telemarketing.                                                                                                                                                                             

For the fiscal years 2003, 2002 and 2001, HearUSA
revenues were $70,545,154, $57,230,128, and $48,796,110,
respectively. During 2003, 2002 and 2001, the Company did not
have revenues totaling 10% or more of total net revenues from a
single customer.

Segments

Centers

At the end of 2003, the company-owned a total of
156 centers located in Florida, New York, New Jersey,
Massachusetts, Ohio, Michigan, Wisconsin, Minnesota, Missouri,
Washington, California and the Province of Ontario, Canada.
These centers offer people with hearing loss a complete range of
services and products, including diagnostic audiological
testing, the latest technology in hearing aids and assistive
listening devices to improve their quality of life. These
centers include the centers acquired in 2002 when the Company
acquired Helix Hearing Care of America Corp.

Through HEARx West, LLC, the joint venture with
the Permanente Federation LLC (an affiliate of Kaiser
Permanente), the Company operates a network of retail centers
bearing the HEARx name to serve the needs of the hearing
impaired principally in California. HearUSA is responsible for
the daily operation of the centers. All clinical and quality
issues are the responsibility of a joint committee comprised of
HearUSA and Kaiser 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 2003, HearUSA operated 20
full-time and 2 part-time HEARx West centers in southern
California, which are included in the 156 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

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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

The Company also sponsors a network of
approximately 1,400 credentialed audiology providers that
support hearing benefit programs with employer groups, health
insurers and benefit sponsors in 49 states. This network, called
HearUSA Hearing Care Network, was created early in 2001 with the
participation of Siemens and grew significantly in July of 2002
with the acquisition of Helix which had acquired, with the help
of the Company, 100% of the shares of Auxiliary Health Benefit
Corporation doing business as National Ear Care Plan
(NECP). NECP and its 1,400 credentialed audiology
providers are now part of the HearUSA network.

Unlike the company-owned centers, the network is
comprised of hearing care practices owned by independent
audiologists. 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
center markets. The networks revenues are mainly derived
from administrative fees paid by employer groups, health
insurers and benefit sponsors to administer their benefit
programs as well as maintaining an affiliated provider network
and from royalties paid by Siemens for each Siemens unit
purchased by a participating provider.

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 designed as a marketing
tool to inform the public and generate referrals for centers and
for network providers.

Financial information regarding our three
business segments and financial information by geographic area
are provided in Note 19, Notes to the Consolidated Financial
Statements included herein.

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 the
strengthening of consumer confidence and the differentiation of
HearUSA from other hearing care providers. To this end, the
Company has taken the following unique steps:

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 as a preferred provider organization
in hearing care, 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 interested network providers.

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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. This system is only used in the
company-owned centers.

The Companys corporate system is fully
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. Another unique
aspect of CMS is its data mining capability which allows for
targeted marketing to its customer base. The national call
center also has the ability to access the CMS system and can
directly schedule appointments.

Competition

The U.S. hearing care industry is highly
fragmented with approximately 11,000 practitioners providing
hearing care products and services. Surveys by Hearing Review in
June 2001 indicate that over 60% of the hearing aids are sold by
audiologists.

In the Canadian Province of Ontario, the
traditional hearing instrument distribution system is made up 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 the Companys competitors in every market where it 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 600 authorized
distributors in the United States and Canada. Large discount
retailers, such as Costco, also sell hearing aids and present a
competitive threat in selected HearUSA markets. All of 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 and membership organizations. Many independent
hearing care providers belong to more than one network. In
addition, contract terms for membership are typically

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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. The Company competes principally based on price and
services offered.


Reliance on Manufacturers

The Companys supply agreement with Siemens
requires that a certain portion of the company-owned
center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 Electone) 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 186 licensed
hearing professionals, of which 139 are audiologists and 47 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 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. Furthermore, 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 is violative of these Federal laws.

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The Health Insurance Portability and
Accountability Act of 1996 (HIPAA) 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, HIPAA required HHS to adopt
standards to protect the security and privacy of health-related
information. Final regulations containing privacy standards
became effective on April 14, 2003 and HearUSA believes it
has taken the necessary steps to be in full compliance 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 Federal Trade Commission (FTC) issued
the amended Telemarketing Sales Rule on January 29, 2003.
Like the original Telemarketing Sales Rule issued in 1995, the
amended rule gives effect to the Telemarketing and Consumer
Fraud and Abuse Prevention Act. This legislation gives the FTC
and state attorneys general law enforcement tools to combat
telemarketing fraud, give consumers added privacy protections
and defenses against unscrupulous telemarketers, and help
consumers tell the difference between fraudulent and legitimate
telemarketing. One significant amendment to the Telemarketing
Sales Rule is inclusion of a prohibition on calling consumers
who have put their telephone numbers on the national Do
Not Call registry unless one of several exceptions is
applicable to the call or to the consumer. Other FTC guidelines
pertinent to the Company involve professional business practices
relating to issues such as transmitting the callers
telephone number on caller id, abandoning calls and speaking to
consumers in a non-professional manner. The Company adheres to
policies set forth by the FTC, and has established policies and
procedures to ensure its compliance with FTC regulations and
with the requirements relating to the national Do Not
Call registry.

The CAN-SPAM Act of 2003 regulates commercial
electronic mail on a nationwide basis. It imposes certain
requirements on senders of commercial electronic mail. The
Company adheres to the law by properly representing the nature
of its commercial email messages in the subject line and
provides opt in and opt out alternatives for the consumer. At
any time a consumer may request exclusion from the
Companys list and the name will be deleted from the list
in one business day.

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 of the hearing care
industry, 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

8



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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. The
Company believes, however, that because the State of
Californias Department of Consumer Affairs has indicated
that speech-language pathologists may be employed by business
corporations, the Company may employee audiologists. The
similarity of speech-language pathology to audiology, and the
fact that speech-language 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

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.

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.

9



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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 27, 2003, HearUSA had 462
full-time employees and 43 part-time employees, of which 81 were
employed by HEARx West.

Where to Find More Information

The Company makes information available free of
charge on its website (www.hearusa.com). Through the website,
interested persons can access the Companys annual report
on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K after such material is
electronically filed with the SEC.

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 27, 2003, the
Company operated 31 centers in Florida, 15 in New Jersey, 15 in
New York, 9 in Massachusetts, 8 in Ohio, 8 in Michigan, 2 in
Wisconsin, 6 in Minnesota, 8 in Missouri, 14 in Washington and
22 HEARx West centers in California. HearUSA also operates 18
centers in the Province of Ontario. 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 $4,000 to $104,000. The
Company believes these locations are suitable to serve its
patients needs. The network is operated from an office
located in Denver, Colorado (head office of NECP at the time of
its acquisition). The lease for this location expires in
December 2004. The Company has no interest or involvement in the
network providers properties or leases. The e-commerce business
is operated from the Companys corporate office in West
Palm Beach.

Item 3.     Legal
Proceedings

The Company has from time to time 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.

10



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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, renewed in 2003, with
5-year terms expiring in 2008 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 2004 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 Officer Director   |  |     | 57 |                      |  |  | 1993 | 
|Gino Chouinard
    Chief Financial Officer                   |  |     | 35 |                      |  |  | 2002 | 
|Donna L. Taylor
    Senior Vice President Sales & Operations |  |     | 47 |                      |  |  | 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 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

11



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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 12, 2004, the Company had 30,423,626 shares of common
stock outstanding, including 1,166,041 exchangeable shares. The
closing price on March 12, 2004 was $2.41 for the common
stock and canadian $3.15 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
|               |  |              |      |    
|2003           |  |              |      |     |  |   |      | 
|First          |  | $            | 0.44 |     |  | $ | 0.25 | 
|Second         |  | $            | 0.83 |     |  | $ | 0.33 | 
|Third          |  | $            | 1.67 |     |  | $ | 0.75 | 
|Fourth         |  | $            | 2.80 |     |  | $ | 1.14 | 
|2002           |  |              |      |     |  |   |      | 
|First          |  | $            | 1.25 |     |  | $ | 0.80 | 
|Second         |  | $            | 1.25 |     |  | $ | 0.75 | 
|Third          |  | $            | 0.88 |     |  | $ | 0.39 | 
|Fourth         |  | $            | 0.49 |     |  | $ | 0.22 | 

As of March 12, 2004, there were 1,603
holders of record 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.

Recent Sales of Unregistered
Securities

On October 3, 2003, the Company completed an
interim financing in the form of a private placement of
$2 million in unsecured convertible notes and common stock
purchase warrants with a number of accredited investors,
including three members of the Companys board of
directors. The terms of the notes included conversion to common
stock in the event of a default in payment of the notes at a
conversion rate of $0.75 per share. The financing included
seven-year warrants, which cannot be exercised during the first
two years, to purchase up to 800,000 shares of the
Companys common stock. The outside investors
warrants have an exercise price of $1.25 per share, the quoted
closing price of the common stock on the day of the financing,
while the participating directors warrants have an
exercise price of $1.31 per share. Proceeds from the financing
were

12



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##### 



used to pay Siemens under the supply agreement.
The Company relied on Section 4(2) of the Securities Act of
1933 in connection with this offering because it was a private
placement only to accredited investors. These notes were paid in
full with the proceeds of the December 2003 financing described
below.


On December 19, 2003, the Company completed
a private placement of $7.5 million of five-year
convertible subordinated notes with 2,642,750 five-year common
stock purchase warrants to accredited investors. The notes may
not be converted and warrants to purchase 2,142,750 common
shares may not be exercised for a two-year period. The remaining
warrants to purchase 500,000 shares are exercisable beginning in
June 2005 at $1.75 per share. Beginning in December 2005, the
$7.5 million notes may be converted at $1.75 per share and
warrants may be exercised for up to 2,142,750 shares at $1.75
per share. Proceeds from this financing were used to repay the
$2 million notes issued on October 3, 2003 and for
working capital purposes. The Company used approximately
$1.8 million of the net proceeds to pay Siemens under the
credit agreement in January 2004. The Company relied on
Section 4 (2) of the Securities Act of 1933 for the
exemption from registration of this offer and sale because the
offering was only to accredited investors and was conducted
exclusively as a private offering and sale.

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 on the
next two pages has been derived from the audited consolidated
financial statements of the Company:

OPERATING STATEMENT DATA:

|                                                                                                               |                                                                                                |             |            |             |   |             |            |             |   |             |            |       |   |   |            |       |   |   |            |       |  
|-------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ----------- | ---------- | ----------- | - | ----------- | ---------- | ----------- | - | ----------- | ---------- | ----- | - | - | ---------- | ----- | - | - | ---------- | ----- | -
|                                                                                                               |                                                                                                |            
|                                                                                                               |                                                                                                | Year Ended 
|                                                                                                               |                                                                                                |            
|                                                                                                               |                                                                                                | December 27 |            | December 28 |   | December 29 |            | December 29 |   | December 31
|                                                                                                               |                                                                                                | 2003        |            | 2002(1)     |   | 2001        |            | 2000        |   | 1999       
|                                                                                                               |                                                                                                |             |            |             |   |             |            |             |   |            
|Net revenues                                                                                                   |                                                                                                | $           | 70,545,154 |             |   | $           | 57,230,128 |             |   | $           | 48,796,110 |       |   | $ | 56,114,832 |       |   | $ | 47,476,764 |      
|Total operating costs and expenses                                                                             |                                                                                                |             | 68,645,516 |             |   |             | 61,713,300 |             |   |             | 56,995,460 |       |   |   | 59,696,818 |       |   |   | 52,010,728 |      
|                                                                                                               |                                                                                                |             |            |             |   |             |            |             |   |             |            |       |   |   |            |       |   |   |            |      
|Income (loss) from operations                                                                                  |                                                                                                |             | 1,899,638  |             |   |             | (4,483,172 | )           |   |             | (8,199,350 | )     |   |   | (3,581,986 | )     |   |   | (4,533,964 | )    
|Non-operating income (expense):                                                                                |                                                                                                |             |            |             |   |             |            |             |   |             |            |       |   |   |            |       |   |   |            |      
|Interest income                                                                                                |                                                                                                |             | 20,836     |             |   |             | 114,152    |             |   |             | 222,349    |       |   |   | 294,132    |       |   |   | 210,104    |      
|Interest expense (including approximately
    $517,000, $0, $0, $0, $0 of non-cash debt discount amortization) |                                                                                                |             | (2,828,327 | )           |   |             | (1,722,467 | )           |   |             | (652,530   | )     |   |   | (28,723    | )     |   |   | (27,713    | )    
|Other expense                                                                                                  |                                                                                                |             |           |             |   |             | (523       | )           |   |             |           |       |   |   |           |       |   |   |           |      
|                                                                                                               |                                                                                                |             |            |             |   |             |            |             |   |             |            |       |   |   |            |       |   |   |            |      
|Loss before minority interest and equity in loss
    of affiliated company                                     |                                                                                                |             | (907,853   | )           |   |             | (6,092,010 | )           |   |             | (8,629,531 | )     |   |   | (3,316,577 | )     |   |   | (4,351,573 | )    
|Minority Interest                                                                                              |                                                                                                |             |           |             |   |             |           |             |   |             |           |       |   |   |           |       |   |   | 347,677    |      
|Equity in loss of affiliated company                                                                           |                                                                                                |             |           |             |   |             | (630,801   | )           |   |             |           |       |   |   |           |       |   |   |           |      
|                                                                                                               |                                                                                                |             |            |             |   |             |            |             |   |             |            |       |   |   |            |       |   |   |            |      
|Loss from continuing operations                                                                                |                                                                                                |             | (907,853   | )           |   |             | (6,722,811 | )           |   |             | (8,629,531 | )     |   |   | (3,316,577 | )     |   |   | (4,003,896 | )    
|Discontinued operations                                                                                        |                                                                                                |             | (201,536   | )           |   |             | (157,658   | )           |   |             |           |       |   |   |           |       |   |   |           |      
|Dividends on preferred stock                                                                                   |                                                                                                |             | (626,956   | )           |   |             | (696,541   | )           |   |             | (812,205   | )     |   |   | (1,346,872 | )     |   |   | (821,387   | )    
|                                                                                                               |                                                                                                |             |            |             |   |             |            |             |   |             |            |       |   |   |            |       |   |   |            |      
|Net loss applicable to common stockholders                                                                     |                                                                                                | $           | (1,736,345 | )           |   | $           | (7,577,010 | )           |   | $           | (9,441,736 | )     |   | $ | (4,663,449 | )     |   | $ | (4,825,283 | )    
|                                                                                                               |                                                                                                |             |            |             |   |             |            |             |   |             |            |       |   |   |            |       |   |   |            |      
|Loss per common share                                                                                          |                                                                                                |             |            |             |   |             |            |             |   |             |            |       |   |   |            |       |   |   |            |      
|                                                                                                               | Basic and diluted, loss from continuing
    operations, including dividends on preferred stock |             | $          | (.05        | ) |             | $          | (0.33       | ) |             | $          | (0.72 | ) |   | $          | (0.39 | ) |   | $          | (0.45 | )
|                                                                                                               |                                                                                                |             |            |             |   |             |            |             |   |             |            |       |   |   |            |       |   |   |            |      
|Basic and diluted, net loss applicable to common
    stockholders                                              |                                                                                                | $           | (.06       | )           |   | $           | (0.34      | )           |   | $           | (0.72      | )     |   | $ | (0.39      | )     |   | $ | (0.45      | )    
|                                                                                                               |                                                                                                |             |            |             |   |             |            |             |   |             |            |       |   |   |            |       |   |   |            |      
|Weighted average number of common shares
    outstanding                                                       |                                                                                                |             | 30,424,262 |             |   |             | 22,534,393 |             |   |             | 13,120,137 |       |   |   | 11,834,388 |       |   |   | 10,775,006 |      
|                                                                                                               |                                                                                                |             |            |             |   |             |            |             |   |             |            |       |   |   |            |       |   |   |            |      
|Cash dividends per common share                                                                                |                                                                                                |             | None       |             |   |             | None       |             |   |             | None       |       |   |   | None       |       |   |   | None       |      
|                                                                                                               |                                                                                                |             |            |             |   |             |            |             |   |             |            |       |   |   |            |       |   |   |            |      



---



|    |                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As discussed in Note 5 to the Consolidated
    Financial Statements, effective June 30, 2002, the Company
    completed its business combination with Helix.

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BALANCE SHEET DATA:

|                                                                       |  |             |            |             |  |             |              |             |  |             |            |   |  |   |            |  |  |   |            | 
|---------------------------------------------------------------------- |  | ----------- | ---------- | ----------- |  | ----------- | ------------ | ----------- |  | ----------- | ---------- | - |  | - | ---------- |  |  | - | ---------- | 
|                                                                       |  |            
|                                                                       |  | As of      
|                                                                       |  |            
|                                                                       |  | December 27 |            | December 28 |  | December 29 |              | December 29 |  | December 31
|                                                                       |  | 2003        |            | 2002(1)     |  | 2001        |              | 2000        |  | 1999       
|                                                                       |  |             |            |             |  |             |              |             |  |            
|Total assets                                                           |  | $           | 66,183,350 |             |  | $           | 64,996,870   |             |  | $           | 21,341,522 |   |  | $ | 21,872,123 |  |  | $ | 21,377,110 | 
|Working capital (deficit)                                              |  |             | (2,330,035 | )           |  |             | (10,231,372  | )           |  |             | (738,562   | ) |  |   | 2,350,832  |  |  |   | 938,815    | 
|Long-term debt, net of current portion                                 |  |             | 20,579,977 |             |  |             | 22,082,389(2 | )           |  |             | 8,750,999  |   |  |   | 175,887    |  |  |   | 322,332    | 
|Convertible subordinated notes, net of debt
    discount of $7,423,596 |  |             | 76,404     |             |  |             |             |             |  |             |           |   |  |   |           |  |  |   |           | 
|Mandatorily redeemable convertible preferred stock                     |  |             | 4,600,107  |             |  |             |             |             |  |             |           |   |  |   |           |  |  |   |           | 



---



|    |                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As discussed in Note 5 to the Consolidated
    Financial Statements, effective June 30, 2002, the Company
    completed its business combination with Helix.
|   
|(2) | Includes $110,890 of long-term debt of
    discontinued operations.                                                                                         

15



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|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Results of Operations and
    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 was 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..
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.

On July 15, 2003, the Company sold 100% of
the shares of the Companys three subsidiaries and selected
assets associated with the management of the centers located in
the Canadian Province of Quebec, previously acquired as part of
the Helix combination. The results of the Quebec operations have
been excluded from results of operations and are classified as
discontinued operations in the accompanying financial statements.

As a result of the combination with Helix and
following the divestiture of the Quebec subsidiaries, the
Company now has a network of 156 company-owned hearing care
centers in the states of Florida, New York, New Jersey,
Massachusetts, Ohio, Michigan, Wisconsin, Minnesota, Missouri,
Washington and California and the Province of Ontario, Canada.
The Company now has a network of approximately 1,400
credentialed audiology providers that participate in hearing
benefit programs contracted by the Company with employer groups,
health insurers and benefit sponsors in 49 states.

The Company intends, as its long-term goal, to
establish a nationwide network of centers and network providers.
During 2003, the Company completed its integration of the Helix
centers and capitalized on synergies resulting from the
combination with Helix to reduce its cost structure and improve
its profitability. In 2004, the Company will focus on improving
its revenue per transaction and other key performance
indicators, such as its conversion, return and binaural rate,
while maintaining the same volume of transactions in its
centers. The Company will also focus on entering more national
managed care contracts in order to increase its network revenues.

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

The majority of the Companys goodwill
resulted from the combination with Helix. On at least an annual
basis, the Company is required to assess whether its goodwill is
impaired. The Company elected to perform this analysis on the
first day of its fourth quarter. In order to do this, management
applied judgment in determining its reporting units,
which represent distinct parts of the Companys business.
The reporting units determined by management are the centers,
the network and e-commerce. The definition of the reporting
units affects the Companys goodwill impairment
assessments. The 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 charge. Calculating the fair
value of the reporting units requires significant estimates and
long-term assumptions. The Company utilized an independent
appraisal firm to test goodwill for impairment as of the first
day of the Companys fourth quarter during 2002 and 2003,
and each of these tests

16



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indicated no impairment. 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. Significant changes in
key assumptions about the business and its prospects, or changes
in market conditions, stock price, interest rates or other
externalities, could result in an impairment charge.


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
healthcare 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.

When the actual utilization of the benefit by the
member population exceeds the amount received on a per-capita
basis (over utilization), the excess is recorded as accounts
receivable on the balance sheet. Usually, the hearing benefit is
structured in a way that the member can use it only once every
three years. In these circumstances, historical data shows that
the benefit will generally be over utilized the first year,
appropriately utilized the second year and under utilized the
third year. The Company estimates an allowance to reduce the
accounts receivable from over utilization to a level equivalent
to the estimated future under utilization during the remaining
term of the benefit.

Allowance for doubtful accounts

Certain of the accounts receivable of the Company
are from health insurance and managed care organizations and
government agencies. These organizations could take up to nine
months before paying a claim made by the Company and also impose
a limit on the time the claim can be billed. 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.

In order to calculate that allowance, the Company
first identifies any known uncollectible amounts in its accounts
receivable listing and charges them against the existing
allowance for doubtful accounts. Then a specific percent per
plan and per ageing categories is applied against the remaining
receivables to estimate the new allowance. Any changes in the
percent assumptions per plan and ageing categories could result
in a change in the allowance for doubtful accounts. For example,
an increase of 10% in the percent used would increase the
allowance for doubtful accounts by approximately $30,000.

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. The Company
calculates its allowance for returns using estimates based upon
actual historical returns. The cost of the hearing aid is
reimbursed to the Company by the manufacturer if the return is
made within 90 days from the time of delivery to the
hearing center.

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RESULTS OF OPERATIONS

2003 Compared to 2002

Net revenues in 2003 increased approximately
$13.3 million, or 23.3%. This increase in revenues is
mainly attributable to the revenues of the centers acquired in
the Helix acquisition in July 2002 of approximately
$10.6 million for the first six months of 2003, which were
not included in the first six months of 2002. Excluding the
Helixs revenues for the first six months of 2003, the
Companys revenues increased approximately
$2.7 million or 4.8%, of which approximately $382,000 is
related to a change in the average Canadian exchange rate from
2002 to 2003. The remaining increase of approximately
$2.4 million is mainly due to an increase of approximately
8.8% in hearing aids sold in the U.S. centers representing
approximately $4.2 million in incremental revenues, offset
by a decrease in the average selling price of approximately 4.3%
representing approximately a $2.3 million decrease in
revenues. The reduction in average selling price is mainly
attributable to a different mix of promotions in 2003 compared
to 2002.

Cost of products sold in 2003 increased
approximately $3.7 million, or 22.3%. The increase is the
direct result of inclusion of cost of products sold at the
former Helix centers of approximately $2.9 million for the
first six months of 2003, which was not included in the
comparable period of 2002. Excluding the Helix cost of product
sold for the first six months of 2003, cost of products sold
increased by approximately $740,000, or 4.5%, of which
approximately $153,000 is attributable to a change in the
average Canadian exchange rate from 2002 to 2003. The remaining
increase of approximately $587,000 is the direct result of the
increase in the number of hearing aids sold, offset by a
reduction from improved product pricing the Company received as
a result of the former Helix centers selling more Siemens
products during the last six months of 2003 as compared to the
same period in 2002. Included in the cost of products sold are
preferred pricing reductions of approximately $3.9 million
and $3.8 million for 2003 and 2002, respectively. Such
pricing reductions from Siemens are accounted for as reductions
of cost of products sold for financial reporting purposes and
applied, pursuant to the credit agreement, against the principal
and interest payments due on Tranches A, B and C. The cost
of products sold as a percent of net revenues was 28.5% and
28.7% for 2003 and 2002, respectively.

Center operating expenses increased approximately
$3.5 million, or 11.0%, in 2003. This increase is related
to inclusion of operating expenses for the former Helix centers
of approximately $5.0 million for the first six months of
2003, which were not included in the comparable period of 2002.
HearUSA center operating expenses, excluding the former Helix
centers for the first six months, decreased approximately
$1.5 million or 4.7%, in 2003 compared to 2002, offset by a
small increase due to the change in the average Canadian
exchange rate. This decrease is attributable to the cost
reduction and control program the Company first implemented in
May 2001 and maintained throughout 2002 and 2003. In particular,
the Company continued to reduce its marketing programs, reducing
center advertising expense to approximately $4.2 million,
or 7.1% of revenue, excluding the former Helix centers
expenses for the first six months of 2003, in 2003, down from
approximately $5.2 million or 9.1% in 2002. In addition,
center wage expense and regional office costs also decreased
approximately $156,000 or 1.0%, and approximately $325,000 or
17.9%, respectively.

General and administrative expenses decreased
approximately $714,000, or 6.4%, in 2003, net of an increase of
approximately $30,000 due to the change in the average Canadian
exchange rate. This decrease is mainly attributable to the
completion of the integration of the Helix corporate overhead
within the Companys structure, at the end of 2002 and
beginning of 2003, resulting in reduction of expenses of
approximately $281,000 in 2003 as compared to 2002 and severance
expense recorded at the end of 2002 in the amount of
approximately $335,000, compared to no severance recorded at the
end of 2003.

Depreciation and amortization expense increased
$495,000 or 19.6% in 2003. This increase is related to the
former Helix depreciation and amortization expense for the first
six months of 2003, which was not included in the comparable
period of 2002, and additional amortization of certain

18



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intangible assets acquired in the combination,
which were being amortized for twelve months in 2003 compared to
only six months in 2002. These increases in depreciation and
amortization were offset by decreases due to property and
equipment being fully depreciated.


Interest income decreased $93,000, or 81.8%, in
2003. This decrease is primarily attributable to the decline in
the average daily balance of cash and investments prior to the
receipt of proceeds of the $7.5 million financing in
December 2003.

Interest expense increased $1.1 million or
64.2% in 2003, of which $517,000 is non-cash as explained below.
This increase is attributable to Helix interest expense of
approximately $289,000 for the first six months of 2003, which
was not included in the comparable period of 2002, approximately
$277,000 in interest on the credit facility with Siemens due to
the issuance of Tranche E in March 2003, approximately
$627,000 of interest on the $2 million financing done on
October 3, 2003, and approximately $119,000 of interest on
the $7.5 million financing done December 19, 2003. These
increases were offset by a decrease of approximately $170,000 in
interest on existing balances due to repayments of principal
during 2003.

The non-cash $517,000 charge included in the
interest expense in 2003 is the amortization of the debt
discount resulting from the proceeds allocated to the warrants
to purchase 800,000 shares of the Companys common stock
issued with the $2 million financing in October 2003 of
approximately $429,000 based on relative fair values, and
approximately $88,000 of amortization of debt discount resulting
from the intrinsic value of the beneficial conversion option,
and the proceeds allocated to the warrants to purchase 2,642,750
shares of the Companys common stock based on relative fair
values of the $7.5 million financing in December 2003 (see
Note 7 of the Notes to the Consolidated Financial
Statements, included herein). These non-cash charges do not have
any impact on the liquidity and working capital of the Company.

2002 Compared to 2001

Net revenues increased $8.4 million, or
17.3%, in 2002. The increase in revenues is related to Helix
revenues of approximately $11.0 million for 2002. HearUSA
net revenues, excluding Helix, for 2002, decreased
$2.6 million, from $48.8 million in 2001 to
$46.2 million in 2002. This decrease is primarily the
result of the economic downturn. Management believes that
continuing economic uncertainties during 2002 were causing the
Companys primary market, the nations elderly
population, to reduce discretionary spending.

Cost of products sold increased
$1.0 million, or 6.5%, in 2002. The increase in cost of
products sold is related to Helix cost of products sold of
approximately $3.4 million for 2002. HearUSA cost of
products sold, excluding Helix, decreased $2.4 million in
2002 to $13.0 million in 2002 from $15.4 million in
2001. This decrease in cost of goods sold is primarily the
result of the increase in preferred pricing reductions of
approximately $2.1 million from $1.7 million in 2001
to $3.8 million 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 preferred pricing
reductions were applied by the Company, pursuant to the credit
agreement, against the principal and interest payments due on
Tranches A, B and C. The cost of products sold as a percent of
net revenues, was 28.7% and 31.6% for 2002 and 2001,
respectively.

Center operating expenses increased
$2.9 million, or 9.9%, in 2002. This increase is related to
Helix center operating expenses of approximately
$5.5 million for 2002. HearUSA center operating expenses,
excluding Helix, decreased approximately $2.6 million in
2002 from approximately $28.7 million in 2001 to
approximately $26.1 million in 2002. This decrease is
attributable to the cost reduction and control program the
Company first implemented in May 2001 and maintained throughout
2002. The Company reduced its marketing programs, reducing
center advertising expense to $4.7 million, or 8.2% of net
revenues, in 2002 down from $6.0 million, or 12.3% in 2001.
In

19



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addition, center wages expenses and regional
office costs also decreased approximately $623,000 or 4.7%, and
$579,000 or 26.7%, respectively, to $12.7 million and
$1.6 million, respectively, in 2002, from
$13.3 million and $2.2 million, respectively, in 2001.
Finally, a $78,000 write off of leasehold improvements due to a
center relocation occurred in 2001.


General and administrative expenses increased
$744,000 or 7.1%, in 2002. This increase is related to
Helixs corporate general and administration expense of
approximately $512,000 in 2002. HearUSA general and
administrative expenses, excluding Helix, increased $232,000 in
2002. 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 $382,000
to $405,000 in 2002 compared with $787,000 in 2001. Shareholder
relations expense decreased $179,000 or 44.8%, to $220,000 in
2002 from $398,000 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
$112,000, or 4.7%, in 2002. HearUSA depreciation and
amortization expenses, excluding Helix, decreased $376,000 to
$2.0 million for 2002 from $2.4 million 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 $375,000 for 2002, and additional amortization of
approximately $112,000 of certain intangible assets acquired in
the combination.

Interest income decreased $108,000 or 48.7%, to
$114,000 in 2002 from $222,000 in 2001. This decrease is
attributable to the decline in average interest rates earned
primarily on cash and cash equivalents. Interest expense
increased $1.1 million to $1.7 million in 2002 from
$653,000 in 2001. This increase is primarily attributable to the
addition of interest on the line of credit with Siemens,
beginning in December 2001.

LIQUIDITY AND CAPITAL RESOURCES

On December 7, 2001, the Company obtained a
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).
On March 14, 2003, the Company obtained an additional
$3,500,000 secured five-year term loan from Siemens bearing
interest at a rate of 10% annually (the Tranche E Loan).
Tranche E Loan 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. At December 27, 2003,
$5,889,000, $83,000, $2,100,000, $13,000,000 and $3,500,000,
representing principal on the Tranche A, Tranche B,
Tranche C, Tranche D, and Tranche E Loans,
respectively, were outstanding. As of December 27, 2003,
approximately $24,900,000 is available to the Company for
acquisitions under Tranche B of the credit facility.

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 1%,
on the Tranche D Loan is payable on the final maturity
date. The Company is required to make monthly payments of
interest only on the Tranche E Loan in the first year. In
years two through five, the Company must make monthly principal
and interest payments. 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. During

20



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2003, 2002 and 2001, approximately
$3.9 million, $3.8 million and $1.7 million,
respectively, of earned preferred pricing reductions were
recorded as a reduction of cost of products sold, and
$1.0 million, $1.3 million and $390,000, respectively,
of interest and $2.9 million, $3.1 million and $0 of
principal, respectively, were repaid through such preferred
pricing reductions. (See Note 6, Notes to Consolidated
Financial Statements.) The Company is also required to make
additional payments on the Tranche D Loan under the
following conditions: The Company must make a payment equal to
25% of net proceeds it receives from the issuance of stock or
stock equivalents. In addition, within 120 days of any
fiscal year end, the Company must make a payment equal to 20% of
Excess Cash Flow (as defined in the credit agreement) for such
fiscal year end. The total of such payments in 2004 is estimated
to be approximately $2.2 million, of which approximately
$1.3 million is included as a current maturity of
Tranche D and approximately $910,000 as a current maturity
of Tranche E, based on approval by Siemens of the
application of the payments.


The Siemens credit facility imposes certain
financial and other covenants on the Company, which are
customary for loans of this size and nature, including
restrictions on the conduct of the Companys business, the
occurrence of indebtedness, merger or sale of assets, the
modification of material agreements, changes in capital
structure, making certain payments and paying dividends. 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. Also, the Companys supply
agreement with Siemens requires full payment for hearing aids
purchased from Siemens within 60 days from statement date.
As of December 27, 2003, the Company was in compliance with
those payment provisions. Upon 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 facility with Siemens and
Siemens would have the right to declare all amounts outstanding
under the credit facility immediately due and payable. Any
non-compliance with the supply agreement could have a material
adverse effect on the Companys financial condition and
continued operations.

During 2003, working capital increased
$7.9 million to a negative $2.3 million as of
December 27, 2003 from a negative $10.2 million as of
December 28, 2002. This is mainly the result of the
additional $3.5 million financing the Company received from
Siemens in March 2003 and the $7.5 million of new
convertible subordinated notes issued in December 2003, offset
by an increase of $2.4 million of current maturities of
long-term debt mainly related to the current portion of the
Siemens Tranches D and E. The working capital of negative
$2.3 million includes approximately $2.9 million
representing the current portion of the long-term debt to
Siemens for Tranche A, B and C, which may be repaid through
preferred pricing reductions. In 2003, the Company generated
income from operations of approximately $1.9 million
compared to a loss of $4.5 million in 2002 and cash and cash
equivalents as of December 27, 2003 was approximately
$6.7 million.

The Company believes that current cash and cash
equivalents and cash flow 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 the Siemens loan covenants, that net revenue levels will
remain at or higher than current levels or that unexpected cash
needs will not arise for which the cash, cash equivalents and
cash flow from operations will be sufficient. In the event of a
shortfall in cash, the Company might consider short term debt,
or additional equity or debt offerings. There can be no
assurance however, that such financing will be available to the
Company on favorable terms or at all. The Company also is
continuing its aggressive cost controls and sales and gross
margin improvements.

21



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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 27, 2003.

Payments Due by Period

|                                                                                  |  |       |            |             |  |             |            |             |  |           |            |  |  |   |            |  |  |   |         | 
|--------------------------------------------------------------------------------- |  | ----- | ---------- | ----------- |  | ----------- | ---------- | ----------- |  | --------- | ---------- |  |  | - | ---------- |  |  | - | ------- | 
|                                                                                  |  |       |            |             |  |             |            |             |  |          
|Contractual                                                                       |  |       |            | Less than 1 |  |             |            |             |  | More than
|Obligations                                                                       |  | Total |            | Year        |  | 1  3 Years |            | 4  5 Years |  | 5 Years  
|                                                                                  |  |       |            |             |  |             |            |             |  |          
|Long-term debt(1)                                                                 |  | $     | 27,016,000 |             |  | $           | 6,436,000  |             |  | $         | 7,014,000  |  |  | $ | 13,566,000 |  |  | $ |        | 
|Interest to be paid on long- term debt(2)                                         |  |       | 4,390,000  |             |  |             | 1,106,000  |             |  |           | 1,010,000  |  |  |   | 2,274,000  |  |  |   |        | 
|Operating leases                                                                  |  |       | 15,900,000 |             |  |             | 5,668,000  |             |  |           | 7,392,000  |  |  |   | 2,493,000  |  |  |   | 347,000 | 
|Convertible subordinated notes(3)                                                 |  |       | 7,500,000  |             |  |             |           |             |  |           | 2,500,000  |  |  |   | 5,000,000  |  |  |   |        | 
|Interest to be paid on convertible subordinated
    notes(3)                      |  |       | 2,635,000  |             |  |             | 869,000    |             |  |           | 1,350,000  |  |  |   | 416,000    |  |  |   |        | 
|Mandatorily redeemable convertible preferred
    stock and redemption premiums(4) |  |       | 4,928,000  |             |  |             |           |             |  |           | 4,928,000  |  |  |   |           |  |  |   |        | 
|Premiums to be paid on mandatorily redeemable
    convertible preferred stock     |  |       | 2,056,000  |             |  |             | 1,004,000  |             |  |           | 1,052,000  |  |  |   |           |  |  |   |        | 
|Purchase obligations                                                              |  |       | 1,921,000  |             |  |             | 769,000    |             |  |           | 1,152,000  |  |  |   |           |  |  |   |        | 
|                                                                                  |  |       |            |             |  |             |            |             |  |           |            |  |  |   |            |  |  |   |         | 
|Total contractual cash obligations                                                |  | $     | 66,346,000 |             |  | $           | 15,852,000 |             |  | $         | 26,398,000 |  |  | $ | 23,749,000 |  |  | $ | 347,000 | 
|                                                                                  |  |       |            |             |  |             |            |             |  |           |            |  |  |   |            |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Approximately $8.1 million (Tranches A,
    B and C) can be repaid through preferred pricing reductions from
    Siemens, including $2.9 million in less than 1 year,
    $4.9 million in years 1  3 and $300,000 in years
    4  5.                                                            
|   
|(2) | Interest on long-term debt excludes $1,158,000 of
    accrued but unpaid interest on Tranche D presented with
    long-term debt in (1) above. In addition, approximately
    $1.3 million of interest on Tranches A, B and C can be
    repaid through preferred pricing reductions from Siemens.
|   
|(3) | These notes and corresponding interest can be
    repaid at the option of the Company in common stock at the time
    payment becomes due. (See Note 7  Notes to the
    Consolidated Financial Statements, included herein.)                                                                    
|   
|(4) | Includes approximately $365,000 of the 8% premium
    payable upon redemption in December 2006, of which $37,000 has
    been accreted as of December 27, 2003.                                                                                                                                   

Also, the Company expects using a range of
$150,000 to $700,000 in cash in 2004 to replace existing
computers and equipment as well as for center relocations upon
lease expirations.

2003 Compared to 2002

The Company used approximately $4.8 million
of cash in operating activities in 2003 compared approximately
$1.8 million in 2002. This decrease is primarily the result
of an increase in accounts receivable, inventories and prepaid
expenses and other of approximately $750,000 in 2003, compared
to a decrease of approximately $1.5 million in 2002, and a
decrease in accounts payable and accrued expenses and accrued
salaries and other compensation of approximately
$4.9 million,

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compared to an increase of $2.1 million in
2002, offset by a decrease in net loss from continuing
operations of approximately $5.8 million. The decrease in
accounts payable and accrued expenses mainly is attributable to
the payment of approximately $3.8 million of additional
Siemens trade payables during 2003, in order to comply with the
original terms of the supply agreement.


In 2003, the Company generated approximately
$1.4 million of cash from investing activities compared to
cash used of approximately $12.8 million in 2002. The cash
provided by investing activities in 2003 is mainly attributable
to the proceeds from the sale of discontinued operations of the
Quebec subsidiaries of approximately $1.9 million, offset
by cash used for purchase of property and equipment of
approximately $260,000 and business acquisitions of
approximately $252,000. The change from 2002 is attributed to
the cash used in the Helix transactions in that particular year
of $8.4 million for issuance of a note receivable and the
advance to Helix pre-combination, net of cash acquired of
$1.2 million, the purchase of pre-combination investment in
Helix of $2.0 million and the cost of the business
combination of $1.6 million.

Net cash provided by financing activities
decreased from approximately $11.6 million in 2002 to
approximately $7.8 million in 2003. The cash generated by
financing activities in 2003 is attributable to the
$3.5 million financing from Siemens in March of 2003, the
$7.0 million received in connection with the
$7.5 million financing done in December of 2003 ($500,000
of this financing was received in January of 2004) and the
$2.0 million financing in October of 2003, offset by
repayments of principal on long-term debt of approximately
$1.2 million, repayment of the October 2003
$2.0 million financing, payment of dividends on preferred
stock of approximately $1.1 million, and issuance costs of
the financing of approximately $266,000. The decrease of cash
provided by financing activities over 2002 is primarily
attributable to lower proceeds from issuance of long-term debt
and capital stock. During 2003 and 2002, $2.9 million and
$3.1 million, respectively, of preferred pricing reductions
were applied against principal payments due on Tranches A,
B and C. These payments, being non-cash, were not presented as
principal repayments on long-term debt in the consolidated
statements of cash flows.

2002 Compared to 2001

Net cash used by operating activities decreased
from $5.0 million in 2001, to $1.8 million in 2002.
The decrease in net cash used in operating activities was
primarily the result of a decrease in net loss from continuing
operations between periods of approximately $1.9 million, a
net decrease in the change in accounts receivable, inventories
and prepaid expenses of approximately $167,000 and an increase
in the change in accounts payable and accrued expenses and
accrued salaries and other compensation of the periods of
approximately $2.8 million.

Net cash used by investing activities increased
from $2.5 million in 2001, to $12.8 million in 2002.
In 2002, purchases of investment securities in excess of
proceeds were approximately $285,000 compared to proceeds from
investment securities in excess of purchases of maturities of
investments of approximately $843,000 in 2001. Purchases of
property and equipment decreased approximately
$1.2 million. Cash used to fund a note receivable and
advances to Helix prior to the combination as of June 30,
2002 totaled approximately $8.4 million, net of cash
acquired in the combination with Helix of approximately
$1.2 million. Cash used to purchase a common stock
investment in Helix prior to the combination totaled
$2.0 million. Costs incurred for the Helix acquisition
during 2002 were approximately $1.6 million, compared to
approximately $977,000 in 2001.

Net cash provided by financing activities
increased from $8.8 million in 2001 to $11.6 million
in 2002. This increase is primarily the result of the net
proceeds of $13.0 million from the Siemens Tranche D
Loan and $1.5 million from the 2002 private placement of
common stock, offset by approximately $1.8 million in
repayments of long-term debt and approximately $1.0 million
of preferred stock dividends paid in cash, compared to net
proceeds of the $7.5 million Siemens Tranche A Loan
received in 2001. During 2002 and 2001, $3.1 million and
$0, respectively, of

23



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preferred pricing reductions were applied against
principal payments due on Tranches A, B and C. These
payments, being non-cash, were not presented as principal
payments on long-term debt in the consolidated statements of
cash flows.


RECENT ACCOUNTING PRONOUNCEMENTS

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. As of the
Companys adoption of SFAS No. 146 on
January 1, 2003 all exit and disposal activities are
accounted for and disclosed in accordance with
SFAS No. 146.

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 was not material.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities(FIN 46), which
provided guidance on how to identify variable interest entities
(VIEs) and determine when the assets, liabilities,
noncontrolling interests, and results of operations of VIEs need
to be included in a companys consolidated financial
statements. FIN 46 was applicable to VIEs created
after January 31, 2003. In the original provisions of
FIN 46, VIEs created prior to February 1, 2003,
were to be consolidated effective December 31, 2003.
Disclosures were required currently if the Company expects to
consolidate any VIEs. In December 2003, the FASB
redeliberated certain proposed modifications and revised
FIN 46 to FIN 46R. The revised provisions are
applicable no later than the first reporting period ending after
March 15, 2004. FIN 46R did not have a material effect
on the Companys consolidated financial statements.

Effective July 1, 2003, the Company adopted
EITF Issue No. 00-21 (EITF 00-21),
Accounting For Revenue Arrangements with Multiple
Deliverables, which establishes criteria for whether
revenue on a deliverable can be recognized separately from other
deliverables in a multiple deliverable arrangement. The criteria
considers whether the delivered item has stand-alone value to
the customer, whether the fair value of each of the
undeliverable items can be reliably determined and the
customers right of return for the delivered items. The
Companys adoption of EITF 00-21 did not have an
effect on its consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. It is
effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003. This Statement establishes standards for how
an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances).
Many of those instruments were previously classified as equity.
This Statement did not have a material effect on its
consolidated results of operations or financial position.

24



---



##### 



Forward Looking Statements

This Annual Report on Form 10-K and, in
particular, this management discussion and analysis contain or
incorporate a number of forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Act of 1934. These
forward-looking statements are based on current expectations,
estimates, forecasts and projections about the industry and
markets in which we operate and managements beliefs and
assumptions. Any statements that are not statements of
historical fact should be considered forward-looking statements
and should be read in conjunction with our consolidated
financial statements and notes to the consolidated financial
statements included in this report. The statements are not
guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. We
do not intend to update publicly any forward-looking statements
whether as a result of new information, future events or
otherwise.



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

The Company does not engage in derivative
transactions. The Company does become exposed to foreign
currencies as a result of its operations in Canada, 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 and convertible
subordinated notes. 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 and Convertible Subordinated
Notes

|                        |                                                                          |              |             |             |             |           |            |           |            |            |            |       |            |       |            |   |          |   |            |   |            |   |            |   |          |   |             |   |             |  
|----------------------- | ------------------------------------------------------------------------ | ------------ | ----------- | ----------- | ----------- | --------- | ---------- | --------- | ---------- | ---------- | ---------- | ----- | ---------- | ----- | ---------- | - | -------- | - | ---------- | - | ---------- | - | ---------- | - | -------- | - | ----------- | - | ----------- | -
|                        |                                                                          |              |             |             |             |          
|                        |                                                                          |              |             | Fixed Rate  |             |          
|                        |                                                                          |              |             |             |             |          
|                        |                                                                          |              |             | Yr 1  2    |             |           |            |          
|                        |                                                                          | Variable     |             | 11%         |             |           |            |          
|                        |                                                                          | Rate         |             | Yr 3  5 8% |             |           |            |          
|                        |                                                                          | Prime Rate   |             | due         |             |           |            | 10% note  |            |            |            |      
|                        |                                                                          | +1% note due |             | November    |             | 10% notes |            | 10% notes |            | due Dec 1, |            | Other |            |      
|                        |                                                                          | April 2007   |             | 2008        |             | due 2008  |            | due 2007  |            | 2006       |            | notes |            | Total
|                        |                                                                          |              |             |             |             |           |            |           |            |            |            |       |            |      
|As of December 27, 2003 |                                                                          |              |             |             |             |           |            |           |            |            |            |       |            |       |            |   |          |   |            |   |            |   |            |   |          |   |             |  
|                        | Estimated cash inflow (outflow) by fiscal
    year of principal maturity |              |             |             |             |           |            |           |            |            |            |       |            |       |            |   |          |   |            |   |            |   |            |   |          |   |             |   |            
|                        |                                                                          | 2004         |             |             | (1,309,000  | )         |            |           |           |            |            |       | (1,465,000 | )     |            |   | (621,000 | ) |            |   | (2,300,000 | ) |            |   | (741,000 | ) |             |   | (6,436,000  | )
|                        |                                                                          | 2005         |             |             |            |           |            |           |           |            |            |       | (807,000   | )     |            |   | (621,000 | ) |            |   | (2,300,000 | ) |            |   | (420,000 | ) |             |   | (4,148,000  | )
|                        |                                                                          | 2006         |             |             |            |           |            |           | (2,500,000 | )          |            |       | (892,000   | )     |            |   | (621,000 | ) |            |   | (1,300,000 | ) |            |   | (53,000  | ) |             |   | (5,366,000  | )
|                        |                                                                          | 2007         |             |             | (12,849,000 | )         |            |           | (2,500,000 | )          |            |       | (336,000   | )     |            |   | (320,000 | ) |            |   |           |   |            |   | (61,000  | ) |             |   | (16,066,000 | )
|                        |                                                                          | 2008         |             |             |            |           |            |           | (2,500,000 | )          |            |       |           |       |            |   |         |   |            |   |           |   |            |   |         |   |             |   | (2,500,000  | )
|                        |                                                                          |              |             |             |             |           |            |           |            |            |            |       |            |       |            |   |          |   |            |   |            |   |            |   |          |   |             |  
|Total                   |                                                                          |              | (14,158,000 | )           |             |           | (7,500,000 | )         |            |            | (3,500,000 | )     |            |       | (2,183,000 | ) |          |   | (5,900,000 | ) |            |   | (1,275,000 | ) |          |   | (34,516,000 | )
|                        |                                                                          |              |             |             |             |           |            |           |            |            |            |       |            |       |            |   |          |   |            |   |            |   |            |   |          |   |             |  
|Estimated fair value    |                                                                          |              | (14,158,000 | )           |             |           | (7,500,000 | )         |            |            | (3,500,000 | )     |            |       | (2,183,000 | ) |          |   | (5,900,000 | ) |            |   | (1,275,000 | ) |          |   | (34,516,000 | )
|                        |                                                                          |              |             |             |             |           |            |           |            |            |            |       |            |       |            |   |          |   |            |   |            |   |            |   |          |   |             |  
|Carrying Value          |                                                                          |              | (14,158,000 | )           |             |           | (7,500,000 | )         |            |            | (3,500,000 | )     |            |       | (2,183,000 | ) |          |   | (5,900,000 | ) |            |   | (1,275,000 | ) |          |   | (34,516,000 | )
|                        |                                                                          |              |             |             |             |           |            |           |            |            |            |       |            |       |            |   |          |   |            |   |            |   |            |   |          |   |             |  

25



---



##### 



Item 8.     Financial
Statements and Supplementary Data

|                                                                                                                             |                                                                                                                                                   |      |    |       | 
|---------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | -- | ----- | 
|                                                                                                                             |                                                                                                                                                   | Page
|                                                                                                                             |                                                                                                                                                   |     
|Index to Financial Statements                                                                                                |                                                                                                                                                   |      |    |      
|Financial Statements:                                                                                                        |                                                                                                                                                   |      |    |      
|                                                                                                                             | Report of Independent Certified Public Accountants                                                                                                |      |    | 27    | 
|                                                                                                                             | Consolidated Balance Sheets at December 27,
    2003 and December 28, 2002                                                                        |      |    | 28    | 
|                                                                                                                             | Consolidated Statements of Operations for the
    years ended December 27, 2003, December 28, 2002, and
    December 29, 2001                     |      |    | 29    | 
|                                                                                                                             | Consolidated Statements of Changes in
    Stockholders Equity for the years ended December 27,
    2003, December 28, 2002 and December 29, 2001 |      |    | 30-31 | 
|                                                                                                                             | Consolidated Statements of Cash Flows for the
    years ended December 27, 2003, December 28, 2002, and
    December 29, 2001                     |      |    | 32-33 | 
|                                                                                                                             | Notes to Consolidated Financial Statements                                                                                                        |      |    | 34-63 | 
|Financial Statement Schedule:                                                                                                |                                                                                                                                                   |      |    |      
|II Valuation and Qualifying Accounts 
    For the years ended December 27, 2003 December 28,
    2002 and December 29, 2001 |                                                                                                                                                   |      | 64 |      

26



---



##### 



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 27, 2003 and
December 28, 2002, 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 27, 2003. 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 27, 2003 and December 28, 2002, and the
results of its operations and its cash flows for each of the
three years in the period ended December 27, 2003 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 12, 2004

27



---



##### 



HearUSA, Inc.

Consolidated Balance Sheets


|                                                                                                                                   |                                                                                                                   |                                                          |                            |              |     |            |            |             |       |            | 
|---------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | -------------------------- | ------------ | --- | ---------- | ---------- | ----------- | ----- | ---------- | 
|                                                                                                                                   |                                                                                                                   | December 27,                                             |                            | December 28,
|                                                                                                                                   |                                                                                                                   | 2003                                                     |                            | 2002        
|                                                                                                                                   |                                                                                                                   |                                                          |                            |             
|ASSETS                                                                                                                            
|Current assets:                                                                                                                    |                                                                                                                   |                                                          |                            |              |     |            |            |            
|Cash and cash equivalents                                                                                                          |                                                                                                                   | $                                                        | 6,714,881                  |              |     | $          | 2,410,023  |            
|Investment securities (Note 2)                                                                                                     |                                                                                                                   |                                                          | 435,000                    |              |     |            | 435,000    |            
|Accounts and notes receivable, less allowance for
    doubtful accounts of $490,881 and $578,323                                   |                                                                                                                   |                                                          | 6,539,149                  |              |     |            | 5,963,677  |            
|Inventories                                                                                                                        |                                                                                                                   |                                                          | 979,092                    |              |     |            | 945,743    |            
|Prepaid expenses and other                                                                                                         |                                                                                                                   |                                                          | 1,115,393                  |              |     |            | 889,197    |            
|Assets of discontinued operations (Note 18)                                                                                        |                                                                                                                   |                                                          |                           |              |     |            | 1,472,849  |            
|                                                                                                                                   |                                                                                                                   |                                                          |                            |              |     |            |            |            
|                                                                                                                                   |                                                                                                                   |                                                          | Total current assets       |              |     | 15,783,515 |            |             |       | 12,116,489 | 
|Property and equipment, net(Notes 3 & 6)                                                                                           |                                                                                                                   |                                                          | 4,969,265                  |              |     |            | 6,921,795  |            
|Goodwill(Notes 4 and 5)                                                                                                            |                                                                                                                   |                                                          | 33,222,779                 |              |     |            | 32,613,726 |            
|Intangibles assets, net(Note 4 and 5)                                                                                              |                                                                                                                   |                                                          | 11,577,097                 |              |     |            | 11,813,209 |            
|Deposits and other                                                                                                                 |                                                                                                                   |                                                          | 630,694                    |              |     |            | 398,697    |            
|Other assets of discontinued operations(Note 18)                                                                                   |                                                                                                                   |                                                          |                           |              |     |            | 1,132,954  |            
|                                                                                                                                   |                                                                                                                   |                                                          |                            |              |     |            |            |            
|                                                                                                                                   |                                                                                                                   | $                                                        | 66,183,350                 |              |     | $          | 64,996,870 |            
|                                                                                                                                   |                                                                                                                   |                                                          |                            |              |     |            |            |            
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                          
|Current liabilities:                                                                                                               |                                                                                                                   |                                                          |                            |              |     |            |            |            
|                                                                                                                                   | Accounts payable                                                                                                  |                                                          | $                          | 6,750,234    |     |            | $          | 9,675,004   |      
|                                                                                                                                   | Accrued expenses                                                                                                  |                                                          |                            | 2,492,094    |     |            |            | 4,665,547   |      
|                                                                                                                                   | Accrued salaries and other compensation                                                                           |                                                          |                            | 1,706,252    |     |            |            | 1,868,772   |      
|                                                                                                                                   | Current maturities of long-term debt (Note 6)                                                                     |                                                          |                            | 6,436,271    |     |            |            | 4,017,007   |      
|                                                                                                                                   | Dividends payable (Notes 8, 9C and 9E)                                                                            |                                                          |                            | 728,699      |     |            |            | 1,215,167   |      
|                                                                                                                                   | Liabilities for discontinued operations
    (Note 18)                                                             |                                                          |                            |             |     |            |            | 906,364     |      
|                                                                                                                                   |                                                                                                                   |                                                          |                            |              |     |            |            |            
|                                                                                                                                   |                                                                                                                   |                                                          | Total current liabilities  |              |     | 18,113,550 |            |             |       | 22,347,861 | 
|                                                                                                                                   |                                                                                                                   |                                                          |                            |              |     |            |            |            
|Long-term debt(Note 6)                                                                                                             |                                                                                                                   |                                                          | 20,579,977                 |              |     |            | 21,971,499 |            
|Long-term debt of discontinued operations(Note 18)                                                                                 |                                                                                                                   |                                                          |                           |              |     |            | 110,890    |            
|                                                                                                                                   |                                                                                                                   |                                                          |                            |              |     |            |            |            
|Commitments and contingencies(Notes 3,6,7,8,10 and 14)                                                                             |                                                                                                                   |                                                          |                           |              |     |            |           |            
|Convertible subordinated notes, net of debt
    discount of $7,423,596(Note 7)                                                     |                                                                                                                   |                                                          | 76,404                     |              |     |            |           |            
|Mandatorily redeemable convertible preferred
    stock(Note 8)                                                                     |                                                                                                                   |                                                          | 4,600,107                  |              |     |            |           |            
|Stockholders equity:                                                                                                              |                                                                                                                   |                                                          |                            |              |     |            |            |            
|Preferred stock:                                                                                                                   |                                                                                                                   |                                                          |                            |              |     |            |            |            
|                                                                                                                                   | (Aggregate liquidation preference $2,330,000 and
    $8,108,167) $1 par, 5,000,000 shares authorized
    (Note 9) |                                                          |                            |              |     |            |            |             |      
|                                                                                                                                   |                                                                                                                   | Series H Junior Participating (0 shares
    outstanding) |                            |              |    |            |            |             |      |           
|                                                                                                                                   |                                                                                                                   | Series J (233 shares outstanding)                        |                            |              | 233 |            |            |             | 233   |           
|                                                                                                                                   |                                                                                                                   | 1998 Convertible (0 & 4,563 shares
    outstanding)      |                            |              |    |            |            |             | 4,563 |           
|                                                                                                                                   |                                                                                                                   |                                                          |                            |              |     |            |            |            
|                                                                                                                                   |                                                                                                                   |                                                          | Total preferred stock      |              |     | 233        |            |             |       | 4,796      | 
|Common stock: $.10 par; 50,000,000 shares
    authorized; 29,528,432 and 24,457,055 shares issued
    (Notes 4, 5, 7, 8, 9 and 10) |                                                                                                                   |                                                          | 2,952,845                  |              |     |            | 2,445,705  |            
|                                                                                                                                   | Stock subscription (Note 9B)                                                                                      |                                                          |                            | (412,500     | )   |            |            | (412,500    | )    
|                                                                                                                                   | Additional paid-in capital                                                                                        |                                                          |                            | 120,226,050  |     |            |            | 117,314,681 |      
|                                                                                                                                   | Accumulated deficit                                                                                               |                                                          |                            | (98,501,791  | )   |            |            | (96,765,446 | )    
|                                                                                                                                   | Accumulated other comprehensive income                                                                            |                                                          |                            | 1,033,616    |     |            |            | 462,825     |      
|                                                                                                                                   | Treasury stock, at cost: 523,662 & 518,660
    common shares                                                      |                                                          |                            | (2,485,141   | )   |            |            | (2,483,441  | )    
|                                                                                                                                   |                                                                                                                   |                                                          |                            |              |     |            |            |            
|                                                                                                                                   |                                                                                                                   |                                                          | Total stockholders equity |              |     | 22,813,312 |            |             |       | 20,566,620 | 
|                                                                                                                                   |                                                                                                                   |                                                          |                            |              |     |            |            |            
|                                                                                                                                   |                                                                                                                   | $                                                        | 66,183,350                 |              |     | $          | 64,996,870 |            
|                                                                                                                                   |                                                                                                                   |                                                          |                            |              |     |            |            |            

See accompanying notes to consolidated
financial statements

28



---



##### 



HearUSA, Inc.

Consolidated Statements of Operations


|                                                                                                                      |                                     |                                    |            |              |            |              |            |            |            |   |            |            |            | 
|--------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ---------------------------------- | ---------- | ------------ | ---------- | ------------ | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                                                                                      |                                     |                                   
|                                                                                                                      |                                     | Year Ended                        
|                                                                                                                      |                                     |                                   
|                                                                                                                      |                                     | December 27,                       |            | December 28, |            | December 29,
|                                                                                                                      |                                     | 2003                               |            | 2002         |            | 2001        
|                                                                                                                      |                                     |                                    |            |              |            |             
|Net revenues                                                                                                          |                                     | $                                  | 70,545,154 |              |            | $            | 57,230,128 |            |            | $ | 48,796,110 |           
|                                                                                                                      |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Operating costs and expenses:                                                                                         |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|                                                                                                                      | Cost of products sold               |                                    |            | 20,097,594   |            |              |            | 16,428,569 |            |   |            | 15,421,587 |           
|                                                                                                                      | Center operating expenses           |                                    |            | 35,059,925   |            |              |            | 31,577,182 |            |   |            | 28,722,667 |           
|                                                                                                                      | General and administrative expenses |                                    |            | 10,470,717   |            |              |            | 11,185,160 |            |   |            | 10,441,046 |           
|                                                                                                                      | Depreciation and amortization       |                                    |            | 3,017,280    |            |              |            | 2,522,389  |            |   |            | 2,410,160  |           
|                                                                                                                      |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|                                                                                                                      |                                     | Total operating costs and expenses |            |              | 68,645,516 |              |            |            | 61,713,300 |   |            |            | 56,995,460 | 
|                                                                                                                      |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Income (loss) from operations                                                                                         |                                     |                                    | 1,899,638  |              |            |              | (4,483,172 | )          |            |   | (8,199,350 | )         
|Non-operating income (expense):                                                                                       |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Interest income                                                                                                       |                                     |                                    | 20,836     |              |            |              | 114,152    |            |            |   | 222,349    |           
|Interest expense (including approximately
    $517,000, $0, and $0 of non-cash debt discount amortization)            |                                     |                                    | (2,828,327 | )            |            |              | (1,722,467 | )          |            |   | (652,530   | )         
|Other expense                                                                                                         |                                     |                                    |           |              |            |              | (523       | )          |            |   |           |           
|                                                                                                                      |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Loss before equity in loss of affiliated
    company                                                                  |                                     |                                    | (907,853   | )            |            |              | (6,092,010 | )          |            |   | (8,629,531 | )         
|Equity in loss of affiliated company                                                                                  |                                     |                                    |           |              |            |              | (630,801   | )          |            |   |           |           
|                                                                                                                      |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Loss from continuing operations                                                                                       |                                     |                                    | (907,853   | )            |            |              | (6,722,811 | )          |            |   | (8,629,531 | )         
|Discontinued operations
    (Note 18):                                                                                |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Loss from discontinued operations (including loss
    on disposal of $105,296, $0 and $0)                             |                                     |                                    | (201,536   | )            |            |              | (157,658   | )          |            |   |           |           
|                                                                                                                      |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Net loss                                                                                                              |                                     |                                    | (1,109,389 | )            |            |              | (6,880,469 | )          |            |   | (8,629,531 | )         
|Dividends on preferred stock (Notes 8, 9C
    and 9E)                                                                 |                                     |                                    | (626,956   | )            |            |              | (696,541   | )          |            |   | (812,205   | )         
|                                                                                                                      |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Loss applicable to common
    stockholders                                                                            |                                     | $                                  | (1,736,345 | )            |            | $            | (7,577,010 | )          |            | $ | (9,441,736 | )         
|                                                                                                                      |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Loss from continuing operations, including
    dividends on preferred stock, per common share  basic
    and diluted |                                     | $                                  | (.05       | )            |            | $            | (.33       | )          |            | $ | (.72       | )         
|                                                                                                                      |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Net loss applicable to common stockholders per
    common share  basic and diluted
    (Note 1)                      |                                     | $                                  | (.06       | )            |            | $            | (.34       | )          |            | $ | (.72       | )         
|                                                                                                                      |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Weighted average number of shares of common
    stock outstanding (Notes 1, 9 and 10)                                 |                                     |                                    | 30,424,262 |              |            |              | 22,524,393 |            |            |   | 13,120,137 |           
|                                                                                                                      |                                     |                                    |            |              |            |              |            |            |            |   |            |           

See accompanying notes to consolidated
financial statements

29



---



##### 



HearUSA, Inc.

Consolidated Statements of Changes in Stockholders
Equity


|                            |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |            |           |   |   |             |            |   |  |            |           |   |   |            |            |  
|--------------------------- | -------------------------- | ---------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | ----------------- | - | ----------- | ---------- | ------ |  | ---------- | --------- | - | - | ----------- | ---------- | - |  | ---------- | --------- | - | - | ---------- | ---------- | -
|                            |                            |                                                                                                            |  |                   |           |                  
|                            |                            | Year Ended                                                                                                 |  | Year Ended        |           | Year Ended       
|                            |                            | December 27, 2003                                                                                          |  | December 28, 2002 |           | December 29, 2001
|                            |                            |                                                                                                            |  |                   |           |                  
|                            |                            | Shares                                                                                                     |  | Amount            |           | Shares            |   | Amount      |            | Shares |  | Amount    
|                            |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |           
|Preferred Stock:            |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |            |           |   |   |             |            |   |  |            |           |   |   |           
|                            | Balance, beginning of year |                                                                                                            |  | 4,796             |           |                   | $ | 4,796       |            |        |  | 5,010      |           |   | $ | 5,010       |            |   |  | 6,015      |           |   | $ | 6,015      |           
|                            |                            | Exchange/redemption of preferred stock                                                                     |  |                   | (4,563    | )                 |   |             | (4,563     | )      |  |            | (214      | ) |   |             | (214       | ) |  |            | (285      | ) |   |            | (285       | )
|                            |                            | Conversion of preferred stock                                                                              |  |                   |          |                   |   |             |           |        |  |            |          |   |   |             |           |   |  |            | (720      | ) |   |            | (720       | )
|                            |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |            |           |   |   |             |            |   |  |            |           |   |   |           
|                            | Balance, end of year       |                                                                                                            |  | 233               |           |                   | $ | 233         |            |        |  | 4,796      |           |   | $ | 4,796       |            |   |  | 5,010      |           |   | $ | 5,010      |           
|                            |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |            |           |   |   |             |            |   |  |            |           |   |   |           
|Common Stock:               |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |            |           |   |   |             |            |   |  |            |           |   |   |           
|                            | Balance, beginning of year |                                                                                                            |  | 24,457,055        |           |                   | $ | 2,445,705   |            |        |  | 14,559,403 |           |   | $ | 1,455,940   |            |   |  | 12,364,139 |           |   | $ | 1,236,414  |           
|                            |                            | Exchange/redemption of preferred stock                                                                     |  |                   |          |                   |   |             |           |        |  |            | 136,018   |   |   |             | 13,602     |   |  |            | 606,710   |   |   |            | 60,671     |  
|                            |                            | Conversion of preferred stock                                                                              |  |                   |          |                   |   |             |           |        |  |            |          |   |   |             |           |   |  |            | 1,388,519 |   |   |            | 138,852    |  
|                            |                            | Exercise of employee stock options                                                                         |  |                   | 2         |                   |   |             | 2          |        |  |            |          |   |   |             |           |   |  |            | 35        |   |   |            | 3          |  
|                            |                            | 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 of common stock for exchangeable shares                                                           |  |                   | 5,071,375 |                   |   |             | 507,138    |        |  |            |          |   |   |             |           |   |  |            |          |   |   |            |           |  
|                            |                            | Issuance common stock- Helix combination                                                                   |  |                   |           |                   |   |             |            |        |  |            | 8,120,154 |   |   |             | 812,015    |   |  |            |          |   |   |            |           |  
|                            |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |            |           |   |   |             |            |   |  |            |           |   |   |           
|                            | Balance, end of year       |                                                                                                            |  | 29,528,432        |           |                   | $ | 2,952,845   |            |        |  | 24,457,055 |           |   | $ | 2,445,705   |            |   |  | 14,559,403 |           |   | $ | 1,455,940  |           
|                            |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |            |           |   |   |             |            |   |  |            |           |   |   |           
|Treasury Stock:             |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |            |           |   |   |             |            |   |  |            |           |   |   |           
|                            | Balance, beginning of year |                                                                                                            |  | (518,660          | )         |                   | $ | (2,483,441  | )          |        |  | (518,660   | )         |   | $ | (2,483,441  | )          |   |  | (518,660   | )         |   | $ | (2,483,441 | )         
|                            |                            | Purchase of treasury stock                                                                                 |  |                   | (5,002    | )                 |   |             | (1,700     | )      |  |            |          |   |   |             |           |   |  |            |          |   |   |            |           |  
|                            |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |            |           |   |   |             |            |   |  |            |           |   |   |           
|                            | Balance, end of year       |                                                                                                            |  | (523,662          | )         |                   | $ | (2,485,141  | )          |        |  | (518,660   | )         |   | $ | (2,483,441  | )          |   |  | (518,660   | )         |   | $ | (2,483,441 | )         
|                            |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |            |           |   |   |             |            |   |  |            |           |   |   |           
|Stock Subscription:         |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |            |           |   |   |             |            |   |  |            |           |   |   |           
|                            | Balance, beginning of year |                                                                                                            |  |                   |           |                   | $ | (412,500    | )          |        |  |            |           |   | $ | (412,500    | )          |   |  |            |           |   | $ |           |           
|                            |                            | Stock Subscription                                                                                         |  |                   |           |                   |   |             |           |        |  |            |           |   |   |             |           |   |  |            |           |   |   |            | (412,500   | )
|                            |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |            |           |   |   |             |            |   |  |            |           |   |   |           
|                            | Balance, End of Year       |                                                                                                            |  |                   |           |                   | $ | (412,500    | )          |        |  |            |           |   | $ | (412,500    | )          |   |  |            |           |   | $ | (412,500   | )         
|                            |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |            |           |   |   |             |            |   |  |            |           |   |   |           
|Additional Paid-in Capital: |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |            |           |   |   |             |            |   |  |            |           |   |   |           
|                            | Balance, beginning of year |                                                                                                            |  |                   |           |                   | $ | 117,314,681 |            |        |  |            |           |   | $ | 91,438,475  |            |   |  |            |           |   | $ | 92,695,792 |           
|                            |                            | Exchange/redemption of preferred stock, including
    issuance costs                                       |  |                   |           |                   |   |             | (4,759,324 | )      |  |            |           |   |   |             | (277,388   | ) |  |            |           |   |   |            | (1,707,930 | )
|                            |                            | Value of warrants and beneficial conversion
    feature issued with convertible subordinated notes payable |  |                   |           |                   |   |             | 7,708,229  |        |  |            |           |   |   |             |           |   |  |            |           |   |   |            |           |  
|                            |                            | Value of warrants issued with debt                                                                         |  |                   |           |                   |   |             | 429,339    |        |  |            |           |   |   |             |           |   |  |            |           |   |   |            |           |  
|                            |                            | Conversion of preferred stock                                                                              |  |                   |           |                   |   |             |           |        |  |            |           |   |   |             |           |   |  |            |           |   |   |            | 58,046     |  
|                            |                            | Stock subscription                                                                                         |  |                   |           |                   |   |             |           |        |  |            |           |   |   |             |           |   |  |            |           |   |   |            | 392,500    |  
|                            |                            | Exercise of employee stock options                                                                         |  |                   |           |                   |   |             | 13         |        |  |            |           |   |   |             |           |   |  |            |           |   |   |            | 67         |  
|                            |                            | Issuance of common stock for exchangeable shares                                                           |  |                   |           |                   |   |             | (507,138   | )      |  |            |           |   |   |             |           |   |  |            |           |   |   |            |           |  
|                            |                            | Proceeds on Board of Directors stock                                                                       |  |                   |           |                   |   |             | 40,250     |        |  |            |           |   |   |             |           |   |  |            |           |   |   |            |           |  
|                            |                            | 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       |                                                                                                            |  |                   |           |                   | $ | 120,226,050 |            |        |  |            |           |   | $ | 117,314,681 |            |   |  |            |           |   | $ | 91,438,475 |           
|                            |                            |                                                                                                            |  |                   |           |                   |   |             |            |        |  |            |           |   |   |             |            |   |  |            |           |   |   |           

See accompanying notes to consolidated
financial statements

30



---



##### 



HearUSA, Inc.

Consolidated Statements of Changes in Stockholders
Equity


|                                            |                            |                                         |            |                   |            |                   |            |             |            |   |            |             |            |  
|------------------------------------------- | -------------------------- | --------------------------------------- | ---------- | ----------------- | ---------- | ----------------- | ---------- | ----------- | ---------- | - | ---------- | ----------- | ---------- | -
|                                            |                            |                                        
|                                            |                            | Year Ended                             
|                                            |                            |                                        
|                                            |                            | December 27, 2003                       |            | December 28, 2002 |            | December 29, 2001
|                                            |                            |                                         |            |                   |            |                  
|                                            |                            | Amount                                  |            | Amount            |            | Amount           
|                                            |                            |                                         |            |                   |            |                  
|Accumulated Deficit:                        |                            |                                         |            |                   |            |                   |            |             |            |   |            |            
|                                            | Balance, beginning of year |                                         | $          | (96,765,446       | )          |                   | $          | (89,188,436 | )          |   | $          | (79,746,700 | )         
|                                            |                            | Net loss for the year                   |            |                   | (1,109,389 | )                 |            |             | (6,880,469 | ) |            |             | (8,629,531 | )
|                                            |                            | Preferred stock dividends               |            |                   | (626,956   | )                 |            |             | (696,541   | ) |            |             | (812,205   | )
|                                            |                            |                                         |            |                   |            |                   |            |             |            |   |            |            
|                                            | Balance, end of year       |                                         | $          | (98,501,791       | )          |                   | $          | (96,765,446 | )          |   | $          | (89,188,436 | )         
|                                            |                            |                                         |            |                   |            |                   |            |             |            |   |            |            
|Accumulated Other Comprehensive
    Income: |                            |                                         |            |                   |            |                   |            |             |            |   |            |            
|                                            | Balance, beginning of year |                                         | $          | 462,825           |            |                   | $          |            |            |   | $          |            |           
|                                            |                            | Foreign currency translation adjustment |            |                   | 570,791    |                   |            |             | 462,825    |   |            |             |           |  
|                                            |                            |                                         |            |                   |            |                   |            |             |            |   |            |            
|                                            | Balance, end of year       |                                         | $          | 1,033,616         |            |                   | $          | 462,825     |            |   | $          |            |           
|                                            |                            |                                         |            |                   |            |                   |            |             |            |   |            |            
|Comprehensive Income (Loss):                |                            |                                         |            |                   |            |                   |            |             |            |   |            |            
|Net loss for the year                       |                            | $                                       | (1,109,389 | )                 |            | $                 | (6,880,469 | )           |            | $ | (8,629,531 | )          
|Other comprehensive income (loss)           |                            |                                         | 570,791    |                   |            |                   | 462,825    |             |            |   |           |            
|                                            |                            |                                         |            |                   |            |                   |            |             |            |   |            |            
|Comprehensive loss                          |                            | $                                       | (538,598   | )                 |            | $                 | (6,417,644 | )           |            | $ | (8,629,531 | )          
|                                            |                            |                                         |            |                   |            |                   |            |             |            |   |            |            

See notes to accompanying consolidated
financial statements

31



---



##### 



HearUSA, Inc.

Consolidated Statements of Cash Flows


|                                                                                |                                                                                                         |                                         |            |              |            |              |             |            |           |   |            |             |           |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | --------------------------------------- | ---------- | ------------ | ---------- | ------------ | ----------- | ---------- | --------- | - | ---------- | ----------- | --------- | -
|                                                                                |                                                                                                         |                                        
|                                                                                |                                                                                                         | Year Ended                             
|                                                                                |                                                                                                         |                                        
|                                                                                |                                                                                                         | December 27,                            |            | December 28, |            | December 29,
|                                                                                |                                                                                                         | 2003                                    |            | 2002         |            | 2001        
|                                                                                |                                                                                                         |                                         |            |              |            |             
|Cash flows from operating
    activities:                                       |                                                                                                         |                                         |            |              |            |              |             |            |           |   |            |            
|Net loss                                                                        |                                                                                                         | $                                       | (1,109,389 | )            |            | $            | (6,880,469  | )          |           | $ | (8,629,531 | )          
|Loss from discontinued operations                                               |                                                                                                         |                                         | (201,536   | )            |            |              | (157,658    | )          |           |   |           |            
|                                                                                |                                                                                                         |                                         |            |              |            |              |             |            |           |   |            |            
|Loss from continuing operations                                                 |                                                                                                         |                                         | (907,853   | )            |            |              | (6,722,811  | )          |           |   | (8,629,531 | )          
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                                                         |                                         |            |              |            |              |             |            |           |   |            |            
|                                                                                | Depreciation and amortization                                                                           |                                         |            | 3,017,280    |            |              |             | 2,522,389  |           |   |            | 2,410,160   |          
|                                                                                | Provision for doubtful accounts                                                                         |                                         |            | 801,303      |            |              |             | 796,523    |           |   |            | 125,206     |          
|                                                                                | Debt discount amortization                                                                              |                                         |            | 516,992      |            |              |             |           |           |   |            |            |          
|                                                                                | Principal payments on long-term debt made through
    preferred pricing reductions                      |                                         |            | (2,920,804   | )          |              |             | (3,100,004 | )         |   |            |            |          
|                                                                                | Interest on Siemens Tranche D                                                                           |                                         |            | 710,027      |            |              |             | 447,499    |           |   |            |             |          
|                                                                                | Loss on disposition of equipment                                                                        |                                         |            | 648          |            |              |             | 178,369    |           |   |            | 105,127     |          
|                                                                                | Equity loss in affiliated company                                                                       |                                         |            |             |            |              |             | 630,801    |           |   |            |            |          
|                                                                                | Compensation expense from the issuance of capital
    stock                                             |                                         |            |             |            |              |             | 40,250     |           |   |            |            |          
|                                                                                | (Increase) decrease in:                                                                                 |                                         |            |              |            |              |             |            |           |   |            |             |          
|                                                                                |                                                                                                         | Accounts and notes receivable           |            |              | (842,031   | )            |             |            | 1,015,235 |   |            |             | 1,643,800 |  
|                                                                                |                                                                                                         | Inventories                             |            |              | (33,531    | )            |             |            | 281,146   |   |            |             | (4,180    | )
|                                                                                |                                                                                                         | Prepaid expenses and other              |            |              | 125,874    |              |             |            | 211,272   |   |            |             | 35,005    |  
|                                                                                | Increase (decrease) in:                                                                                 |                                         |            |              |            |              |             |            |           |   |            |             |          
|                                                                                |                                                                                                         | Accounts payable and accrued expenses   |            |              | (4,761,611 | )            |             |            | 862,123   |   |            |             | (506,371  | )
|                                                                                |                                                                                                         | Accrued salaries and other compensation |            |              | (123,107   | )            |             |            | 1,234,601 |   |            |             | (180,223  | )
|                                                                                |                                                                                                         |                                         |            |              |            |              |             |            |           |   |            |            
|Net cash used in operating activities                                           |                                                                                                         |                                         | (4,416,813 | )            |            |              | (1,602,607  | )          |           |   | (5,001,007 | )          
|Net cash used in discontinued operations                                        |                                                                                                         |                                         | (415,788   | )            |            |              | (198,346    | )          |           |   |           |            
|                                                                                |                                                                                                         |                                         |            |              |            |              |             |            |           |   |            |            
|Net cash used in operating activities                                           |                                                                                                         |                                         | (4,832,601 | )            |            |              | (1,800,953  | )          |           |   | (5,001,007 | )          
|                                                                                |                                                                                                         |                                         |            |              |            |              |             |            |           |   |            |            
|Cash flows from investing
    activities:                                       |                                                                                                         |                                         |            |              |            |              |             |            |           |   |            |            
|                                                                                | Purchase of property and equipment                                                                      |                                         |            | (259,683     | )          |              |             | (480,647   | )         |   |            | (1,640,464  | )        
|                                                                                | Capital expenditures from discontinued operations                                                       |                                         |            | (8,196       | )          |              |             |           |           |   |            |            |          
|                                                                                | Proceeds from sale of discontinued operations                                                           |                                         |            | 1,880,244    |            |              |             |           |           |   |            |            |          
|                                                                                | Proceeds from sale of equipment                                                                         |                                         |            |             |            |              |             |           |           |   |            | 600         |          
|                                                                                | Business acquisitions                                                                                   |                                         |            | (251,533     | )          |              |             | (113,685   | )         |   |            |            |          
|                                                                                | Purchase of investments                                                                                 |                                         |            |             |            |              |             | (5,542,524 | )         |   |            | (10,129,206 | )        
|                                                                                | Proceeds from maturities of investments                                                                 |                                         |            |             |            |              |             | 5,257,524  |           |   |            | 10,972,430  |          
|                                                                                | 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 provided by (used in) investing
    activities                         |                                                                                                         |                                         | 1,360,832  |              |            |              | (12,834,137 | )          |           |   | (2,473,322 | )          
|                                                                                |                                                                                                         |                                         |            |              |            |              |             |            |           |   |            |            
|Cash flows from financing
    activities:                                       |                                                                                                         |                                         |            |              |            |              |             |            |           |   |            |            
|                                                                                | Proceeds from issuance of long-term debt                                                                |                                         |            | 3,500,000    |            |              |             | 13,227,095 |           |   |            | 11,790,434  |          
|                                                                                | Proceeds from convertible notes, net of issuing
    costs $266,000                                      |                                         |            | 8,734,000    |            |              |             |           |           |   |            |            |          
|                                                                                | Payments on long-term debt from discontinued
    operations                                             |                                         |            | (29,822      | )          |              |             | (26,473    | )         |   |            |            |          
|                                                                                | Principal payments on long-term debt                                                                    |                                         |            | (1,160,696   | )          |              |             | (1,826,839 | )         |   |            | (875,396    | )        
|                                                                                | Principal payments on convertible subordinated
    notes                                                |                                         |            | (2,000,000   | )          |              |             |           |           |   |            |            |          
|                                                                                | Acquisition of treasury stock                                                                           |                                         |            | (1,700       | )          |              |             |           |           |   |            |            |          
|                                                                                | Exchange & redemption of capital stock                                                                  |                                         |            | (200,877     | )          |              |             | (264,000   | )         |   |            | (2,129,584  | )        
|                                                                                | Proceeds from exercise of employee stock options                                                        |                                         |            | 15           |            |              |             |           |           |   |            | 70          |          
|                                                                                | Proceeds from Board of Director sale of stock                                                           |                                         |            | 40,250       |            |              |             |           |           |   |            |            |          
|                                                                                | Proceeds from issuance of capital stock, net of
    offering costs                                      |                                         |            |             |            |              |             | 1,500,000  |           |   |            |            |          
|                                                                                | Dividends on preferred stock                                                                            |                                         |            | (1,076,317   | )          |              |             | (1,002,427 | )         |   |            |            |          
|                                                                                |                                                                                                         |                                         |            |              |            |              |             |            |           |   |            |            
|Net cash provided by financing activities                                       |                                                                                                         |                                         | 7,804,853  |              |            |              | 11,607,356  |            |           |   | 8,785,524  |            
|                                                                                |                                                                                                         |                                         |            |              |            |              |             |            |           |   |            |            

See accompanying notes to consolidated
financial statements

32



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##### 



HearUSA, Inc.

Consolidated Statements of Cash Flows


|                                                                                                            |  |              |           |              |  |              |            |   |  |   |           | 
|----------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ------------ |  | ------------ | ---------- | - |  | - | --------- | 
|                                                                                                            |  |             
|                                                                                                            |  | Year Ended  
|                                                                                                            |  |             
|                                                                                                            |  | December 27, |           | December 28, |  | December 29,
|                                                                                                            |  | 2003         |           | 2002         |  | 2001        
|                                                                                                            |  |              |           |              |  |             
|Effects of exchange rate changes on cash                                                                    |  | $            | (28,226   | )            |  | $            | (123,851   | ) |  | $ |          | 
|                                                                                                            |  |              |           |              |  |              |            |   |  |   |           | 
|Net increase (decrease) in cash and cash
    equivalents                                                    |  |              | 4,304,858 |              |  |              | (3,151,585 | ) |  |   | 1,311,195 | 
|Cash and cash equivalents at beginning of year                                                              |  |              | 2,410,023 |              |  |              | 5,561,608  |   |  |   | 4,250,413 | 
|                                                                                                            |  |              |           |              |  |              |            |   |  |   |           | 
|Cash and cash equivalents at end of year                                                                    |  | $            | 6,714,881 |              |  | $            | 2,410,023  |   |  | $ | 5,561,608 | 
|                                                                                                            |  |              |           |              |  |              |            |   |  |   |           | 
|Supplemental disclosure of cash flow
    information:                                                       |  |              |           |              |  |              |            |   |  |   |           | 
|Cash paid for interest                                                                                      |  | $            | 424,337   |              |  | $            | 81,252     |   |  | $ | 414,516   | 
|                                                                                                            |  |              |           |              |  |              |            |   |  |   |           | 
|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   | 
|Preferred stock dividend paid through
    exchange/redemption by issuance of new preferred and common stock |  |              |          |              |  |              |           |   |  |   | 451,093   | 
|Issuance of note payable and assumption of
    accounts payable in exchange business acquisitions           |  |              | 100,492   |              |  |              | 225,000    |   |  |   |          | 
|Issuance of capital lease in exchange for
    property and equipment                                        |  |              | 401,883   |              |  |              | 290,434    |   |  |   |          | 
|See Note 5 for impact of Helix combination                                                                  |  |              |           |              |  |              |            |   |  |   |           | 

See accompanying notes to consolidated
financial statements

33



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##### 



HearUSA, Inc.

Notes to Consolidated Financial Statements


1.     Description of
the Company and 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 centers to serve the
needs of the hearing impaired. As of December 27, 2003, the
Company has a network of 156 company-owned hearing care centers
(The centers) in 11 states and the Province of
Ontario, Canada. The Company also sponsors a network of
approximately 1,400 credentialed audiology providers (The
network providers or the network) that
participate in selected hearing benefit programs contracted by
the company with employer groups, health insurers and benefit
sponsors in 49 States. The centers and the network providers
provide audiological products and services for the hearing
impaired.

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.

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.

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.

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.

34



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


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, effective in 2002 goodwill amortization
ceased and is subject to impairment assessments. A
fair-value-based test is applied at the reporting unit level.
This test requires various judgments and estimates. A goodwill
impairment loss would be recorded for any goodwill that is
determined to be impaired. The Company utilized an independent
appraisal firm to test goodwill for impairment as of the first
day of the Companys fourth quarter during 2002 and 2003,
and each of these tests indicated no impairment. Other
intangible assets include finite lived intangible assets, such
as patient files and customer lists, which are amortized over
the estimated useful life of the assets of 15 years,
generally based upon estimated undiscounted future cash flows
resulting from use of the asset. Indefinite lived assets include
trademarks and tradenames, which are not amortized.

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 27, 2003 and
December 28, 2002, no long-lived assets were held for
disposal.

Convertible Instruments, Warrants,
Amortization of Warrant and Fair Value Determination

In 2003 the Company issued debt instruments which
are convertible into its common stock and include the issuance
of warrants. These financing transactions are recorded in
accordance with Emerging Issues Task Force Issue
No.s 98-5 Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios and 00-27 Application of Issue
No. 98-5 to Certain Convertible Instruments.
Accordingly, the beneficial conversion feature embedded in the
convertible instrument and the value allocated to the related
warrants based upon a relative fair value allocation of the
proceeds of the instrument is recognized on the balance sheet as
debt discount. The debt discount is amortized as interest
expense over the life of the respective debt instrument.

Advertising Costs

Costs for newspaper, television, and other media
advertising are expensed as incurred and were $4,797,000,
$5,596,000 and $6,781,000 in 2003, 2002, and 2001, respectively.

35



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


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.

When the actual utilization of the benefit by the
member population exceeds the amount received on a per-capita
basis (over utilization), the excess is recorded as accounts
receivable on the balance sheet. Usually, the hearing benefit is
structured in a way that the member can use it only once every
three years. In these circumstances, historical data shows that
the benefit will generally be over utilized the first year,
appropriately utilized the second year and under utilized the
third year. The Company estimates an allowance to reduce the
accounts receivable from over utilization to a level equivalent
to the estimated future under utilization during the remaining
term of the benefit.

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.

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 common 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.
Under the if-converted method, securities are assumed to be
converted

36



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


at the beginning of the period and the resulting
common shares are included in the denominator of the diluted
earnings per share calculation for the entire period presented.
Convertible preferred stock, stock options and stock warrants
are excluded from the computations of net loss per common share
because the effect of their inclusion would be anti-dilutive.

Due to the Companys net losses the
following common stock equivalents for convertible debt,
mandatorily redeemable convertible preferred stock, outstanding
options and warrants to purchase common stock, of 18,984,654,
12,965,555 and 8,228,413, respectively were excluded from the
computation of net loss per common share  diluted at
December 27, 2003, December 28, 2002 and
December 29, 2001 because they were anti-dilutive. For
purposes of computing net loss per common share 
basic and diluted, for the years ended December 27, 2003
and December 28, 2002, the weighted average number of
shares of common stock outstanding includes the effect of the
1,418,848 and 6,490,223, respectively, exchangeable shares of
HEARx Canada, Inc. described in Note 5, 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 2002 and 2001 financial
statements have been reclassified in order to conform to the
2003 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 10. The Company accounts for those plans
using the intrinsic value method under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees. No stock-based employee compensation cost has
been reflected in net loss, 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

37



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


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

|                                               |                                                                                                                     |      |   |            |   |      |   |            |   |  |   |             |  
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ---- | - | ---------- | - | ---- | - | ---------- | - |  | - | ----------- | -
|                                               |                                                                                                                     | 2003 |   | 2002       |   | 2001
|                                               |                                                                                                                     |      |   |            |   |     
|Net Loss applicable to Common
    Stockholders |                                                                                                                     |      |   |            |   |      |   |            |   |  |   |            
|                                               | As reported                                                                                                         |      | $ | (1,736,345 | ) |      | $ | (7,577,010 | ) |  | $ | (9,441,736  | )
|                                               | Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards |      |   | (447,000   | ) |      |   | (394,990   | ) |  |   | (758,264    | )
|                                               |                                                                                                                     |      |   |            |   |      |   |            |   |  |   |            
|                                               | Pro forma                                                                                                           |      |   | (2,183,345 | ) |      |   | (7,972,000 | ) |  |   | (10,200,000 | )
|                                               |                                                                                                                     |      |   |            |   |      |   |            |   |  |   |            
|Loss per share  basic and
    diluted         |                                                                                                                     |      |   |            |   |      |   |            |   |  |   |            
|                                               | As reported                                                                                                         |      | $ | (.06       | ) |      | $ | (0.34      | ) |  | $ | (0.72       | )
|                                               |                                                                                                                     |      |   |            |   |      |   |            |   |  |   |            
|                                               | Pro forma                                                                                                           |      | $ | (.07       | ) |      | $ | (0.35      | ) |  | $ | (0.78       | )
|                                               |                                                                                                                     |      |   |            |   |      |   |            |   |  |   |            

For purposes of the above disclosure, the
determination of the fair value of stock options granted in
2003, 2002 and 2001 was based on the following: (i) a risk
free interest rate of 2.90%, 3.29% and 4.66% 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 98%, 95% and 93% 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 27, 2003       |  |           |         |                |  |           |   |  |  |   |         | 
|Certificates of Deposit |  | $         | 435,000 |                |  | $         |  |  |  | $ | 435,000 | 
|                        |  |           |         |                |  |           |   |  |  |   |         | 
|                       
|December 28, 2002       |  |           |         |                |  |           |   |  |  |   |         | 
|Certificates of Deposit |  | $         | 435,000 |                |  | $         |  |  |  | $ | 435,000 | 
|                        |  |           |         |                |  |           |   |  |  |   |         | 

At December 27, 2003, certificates of
deposit of $150,000 with contractual maturities of one year, and
a certificate of deposit of $285,000 with a contractual maturity
of one month, were pledged as collateral to a financial
institution for automated clearing house exposure.

38



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


3.     Property and
Equipment and Leases

Property and equipment consists of the following:

|                                               |  |              |            |              |  |              |            |  |  |   |            | 
|---------------------------------------------- |  | ------------ | ---------- | ------------ |  | ------------ | ---------- |  |  | - | ---------- | 
|                                               |  | Range of     |            | December 27, |  | December 28,
|                                               |  | Useful Lives |            | 2003         |  | 2002        
|                                               |  |              |            |              |  |             
|Equipment, furniture and fixtures              |  |              | 5-10 years |              |  | $            | 11,308,356 |  |  | $ | 11,083,590 | 
|Leasehold Improvements                         |  |              | 5-10 years |              |  |              | 7,543,354  |  |  |   | 7,117,479  | 
|Computer systems                               |  |              | 3 years    |              |  |              | 4,546,162  |  |  |   | 5,036,726  | 
|Leasehold improvements in progress             |  |              | N/A        |              |  |              | 108,210    |  |  |   | 214,171    | 
|                                               |  |              |            |              |  |              |            |  |  |   |            | 
|                                               |  |              |            |              |  |              | 23,506,082 |  |  |   | 23,451,966 | 
|Less accumulated depreciation and amortization |  |              |            |              |  |              | 18,536,817 |  |  |   | 16,530,171 | 
|                                               |  |              |            |              |  |              |            |  |  |   |            | 
|                                               |  |              |            |              |  | $            | 4,969,265  |  |  | $ | 6,921,795  | 
|                                               |  |              |            |              |  |              |            |  |  |   |            | 

Approximate future minimum rental commitments
under operating leases are as follows: $5,668,000 in 2004;
$4,756,000 in 2005; $2,636,000 in 2006; $1,462,000 in 2007;
$1,031,000 in 2008 and $347,000 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 27, 2003, December 28, 2002 and
December 29, 2001 was $6,237,000, $5,351,000 and
$3,759,000, respectively.

4.     Goodwill and
Intangible Assets

A summary of changes in the Companys
goodwill during the years ended December 27, 2003 and
December 28, 2002, by business segment are as follows:

|        |  |              |            |                |  |             |         |              |  |   |         |  |  |   |            | 
|------- |  | ------------ | ---------- | -------------- |  | ----------- | ------- | ------------ |  | - | ------- |  |  | - | ---------- | 
|        |  | December 28, |            | Additions &    |  | Currency    |         | December 27,
|        |  | 2002(a)      |            | Adjustments(a) |  | Translation |         | 2003        
|        |  |              |            |                |  |             |         |             
|Center  |  | $            | 31,734,000 |                |  | $           | 140,000 |              |  | $ | 469,000 |  |  | $ | 32,343,000 | 
|Network |  |              | 880,000    |                |  |             |        |              |  |   |        |  |  |   | 880,000    | 
|        |  |              |            |                |  |             |         |              |  |   |         |  |  |   |            | 
|        |  | $            | 32,614,000 |                |  | $           | 140,000 |              |  | $ | 469,000 |  |  | $ | 33,223,000 | 
|        |  |              |            |                |  |             |         |              |  |   |         |  |  |   |            | 

|        |  |              |        |                |  |             |            |              |  |   |   |  |  |   |            | 
|------- |  | ------------ | ------ | -------------- |  | ----------- | ---------- | ------------ |  | - | - |  |  | - | ---------- | 
|        |  | December 29, |        | Additions &    |  | Currency    |            | December 28,
|        |  | 2001         |        | Adjustments(a) |  | Translation |            | 2002(a)     
|        |  |              |        |                |  |             |            |             
|Center  |  | $            | 59,000 |                |  | $           | 31,675,000 |              |  | $ |  |  |  | $ | 31,734,000 | 
|Network |  |              |       |                |  |             | 880,000    |              |  |   |  |  |  |   | 880,000    | 
|        |  |              |        |                |  |             |            |              |  |   |   |  |  |   |            | 
|        |  | $            | 59,000 |                |  | $           | 32,555,000 |              |  | $ |  |  |  | $ | 32,614,000 | 
|        |  |              |        |                |  |             |            |              |  |   |   |  |  |   |            | 



| |    |                                                                                                                                                                                                                               
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | At December 28, 2002 approximately $60,000
    of goodwill associated with the Quebec operations was included
    in other assets of discontinued operations (see Note 18) in the
    accompanying consolidated balance sheet.

39



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


As of December 27, 2003 and
December 28, 2002, intangible assets consisted of the
following:

|                                   |  |              |            |              |  |   |            |  
|---------------------------------- |  | ------------ | ---------- | ------------ |  | - | ---------- | -
|                                   |  | December 27, |            | December 28,
|                                   |  | 2003         |            | 2002        
|                                   |  |              |            |             
|Amortizable intangible assets:     |  |              |            |              |  |   |            |  
|Patient files and customer lists   |  | $            | 5,560,000  |              |  | $ | 5,323,000  |  
|Accumulated amortization           |  |              | (1,227,000 | )            |  |   | (710,000   | )
|                                   |  |              |            |              |  |   |            |  
|Amortizable intangible assets, net |  |              | 4,333,000  |              |  |   | 4,613,000  |  
|Trademark and tradenames           |  |              | 7,244,000  |              |  |   | 7,200,000  |  
|                                   |  |              |            |              |  |   |            |  
|                                   |  | $            | 11,577,000 |              |  | $ | 11,813,000 |  
|                                   |  |              |            |              |  |   |            |  

The Company had a patient file intangible asset
of approximately $790,000 relating to the Quebec operations with
a net carrying amount of approximately $712,000 (see Note 18)
which was included in other assets of discontinued operations in
the accompanying consolidated balance sheet as of
December 28, 2002. The aggregate amortization expense for
the Quebec patient file intangible during 2003 prior to
disposition was approximately $42,000. For each year ended
December 27, 2003 and December 28, 2002 and
December 29, 2001, the aggregate amortization expense for
these assets was approximately $457,000 and $240,000 and
$115,000, respectively. At December 27, 2003, the estimated
amortization expense for the next five fiscal years is
approximately: 2004  $496,000,
2005  $483,000, 2006  $465,000,
2007  $446,000, 2008  $428,000,
and thereafter  $2,015,000.

5.     Business
Acquisitions

Helix Acquisition

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 Canadian
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.

The Company acquired 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, the Company issued
8,120,154 shares of the Companys common stock, 5,071,375
exchangeable shares of HEARx Canada, Inc., which have been
exchanged, and 1,418,848 exchangeable shares, which remain
issued as of December 27, 2003. 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.
(See Note 9I) In addition, the Company 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

40



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


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 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 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. Of the $29,915,000
of goodwill, $29,035,000 was allocated to the centers segment
and $880,000 to the network segment. None of the $29,915,000 of
goodwill is expected to be deductible for tax purposes.

The following summary of unaudited pro forma
condensed combined statements of operations data gives effect to
the combination as if occurred at the beginning of each 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:

|                                           |  |                   |             |                   |  |   |             |  
|------------------------------------------ |  | ----------------- | ----------- | ----------------- |  | - | ----------- | -
|                                           |  | 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       | )
|                                           |  |                   |             |                   |  |   |             |  

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 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

41



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


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 27, 2003, approximately $2,485,000 from this
transaction is included in goodwill. 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.

Other Business Acquisitions

In November 2003, the Company acquired the
operation of a group of 3 centers, including a customer list and
selected assets with fair values of approximately $150,000 and
$18,000, respectively of K. Myers Audiology Services Inc., in
the Province of Ontario, Canada for consideration of
approximately $196,000 in cash, assumption of liabilities of
$7,000 and a two-year note in the amount of approximately
$100,000, resulting in goodwill of approximately $135,000. The
note bears interest at 5% and is payable in two annual
installments of $50,000 plus interest, beginning in November
2004. (See Notes 6b and 12)

In 2003, the Company acquired customer lists and
selected assets of two audiological practices, one in Orlando,
Florida and one in Windsor, Ontario with fair values of
approximately $26,000 and $28,000 for consideration of
approximately $59,000 in cash resulting in goodwill of
approximately $5,000.

In December 2002, the Company acquired the
operation of 3 centers, including a customer list, other net
receivables and selected assets of Hear America, Inc. in
Missouri with fair values of approximately $63,000, $19,000 and
$42,000, respectively, for consideration of approximately
$114,000 in cash, and a three-year note in the amount of
$225,000 resulting in goodwill of approximately $215,000. The
note bears interest at 7% and is payable in three annual
installments of $75,000 plus interest beginning December 9,
2003. The balance of this note as of December 27, 2003 and
December 28, 2002 was $150,000 and $225,000, respectively.
(See Note 6b)

On July 31, 1999, the Company acquired the
operation of one audiological practice, including equipment of
$100,000 and customer lists of $382,000 of an individual in
California for consideration of cash of $75,000, a $325,000
promissory note payable to the individual, and assumed trade
payables of approximately $82,000. The note bears interest at
8.75% and is payable in four annual installments of $81,250 plus
accrued interest, beginning July 1, 2000, and is
collateralized by its equipment and customer list purchased. The
promissory note to this employee was fully repaid in July 2003.
(See Notes 6b and 12)

42



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


6.     Long-term
Debt

Long term debt consists of the following:

|                                                                       |           |              |            |             |  |   |            |            | 
|---------------------------------------------------------------------- | --------- | ------------ | ---------- | ----------- |  | - | ---------- | ---------- | 
|                                                                       |           | December 27, |            | December 28
|                                                                       |           | 2003         |            | 2002       
|                                                                       |           |              |            |            
|Notes payable to a Siemens  see
    (a) below:                        |           |              |            |             |  |   |            |           
|                                                                       | Tranche A |              | $          | 5,899,992   |  |   | $          | 8,200,000  | 
|                                                                       | Tranche B |              |            | 83,200      |  |   |            | 104,000    | 
|                                                                       | Tranche C |              |            | 2,100,000   |  |   |            | 2,700,000  | 
|                                                                       | Tranche D |              |            | 14,158,403  |  |   |            | 13,000,000 | 
|                                                                       | Tranche E |              |            | 3,500,000   |  |   |            |           | 
|                                                                       | Other     |              |            | 196,165     |  |   |            | 387,345    | 
|                                                                       |           |              |            |             |  |   |            |           
|Total notes payable to Siemens                                         |           |              | 25,937,760 |             |  |   | 24,391,345 |           
|Notes payable resulting from business
    acquisitions  see (b) below |           |              | 751,788    |             |  |   | 1,306,256  |           
|Other                                                                  |           |              | 326,700    |             |  |   | 290,905    |           
|                                                                       |           |              |            |             |  |   |            |           
|                                                                       |           |              | 27,016,248 |             |  |   | 25,988,506 |           
|Less current maturities                                                |           |              | (6,436,271 | )           |  |   | (4,017,007 | )         
|                                                                       |           |              |            |             |  |   |            |           
|                                                                       |           |              | 20,579,977 |             |  | $ | 21,971,499 |           
|                                                                       |           |              |            |             |  |   |            |           

The approximate aggregate maturities on long-term
debt obligations in years subsequent to 2003 are as follows:
2004  $6,436,000;
2005  $4,148,000;
2006  $2,866,000;
2007  $13,304,000 and
2008  $262,000.



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | 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).                                                                                                                                                                                                                                     
|
| |    | Furthermore, on March 14, 2003, the Company
    obtained additional funding of $3,500,000 in the form of a
    five-year note payable to Siemens (the Tranche E Loan) 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.                                                                                                                                                                                              
|
| |    | 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; (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 Preferred Stock. The Tranche B
    Loan may be used only for future acquisitions by the Company,
    subject to guidelines established by the 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 5. Approximately $24,900,000 is
    available to the Company for

43



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)




| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | acquisitions under the Tranche B loan as of
    December 27, 2003. The Tranche C Loan proceeds have
    been used 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | 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 (4.00% at
    December 27, 2003) plus 1%, on the Tranche D Loan is
    payable on the final maturity date of April 2007. The Company is
    also required to make additional payments on the Tranche D
    Loan under the following conditions: The Company must make a
    payment equal to 25% of net proceeds it receives from the
    issuance of stock or stock equivalents. In addition, within
    120 days of any fiscal year end, the Company must make a
    payment equal to 20% of Excess Cash Flow (as defined in the
    credit agreement) for such fiscal year end. As of
    December 27, 2003, these additional maturities totaled
    approximately $2.2 million. 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
    products sold for the preferred pricing earned as it meets
    minimum purchase percentages from Siemens. The preferred pricing
    receivable is then applied against the quarterly principal
    payments and related interest when they become due and payable.
    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.



| |                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table shows the preferred pricing
    reductions received from Siemens, pursuant to the supply
    agreement, and the application of such pricing reductions
    against principal and interest payments on Tranches A, B and C:

|                                                                                  |  |      |            |      |  |         |            |   |  |  |            |  
|--------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ------- | ---------- | - |  |  | ---------- | -
|                                                                                  |  | 2003 |            | 2002 |  | 2001(1)
|                                                                                  |  |      |            |      |  |        
|Preferred pricing reductions recorded as a
    reduction of cost of products sold |  |      | 3,947,000  |      |  |         | 3,765,000  |   |  |  | 1,665,000  |  
|                                                                                  |  |      |            |      |  |         |            |   |  |  |            |  
|Portion applied against quarterly principal
    payments                          |  |      | (2,921,000 | )    |  |         | (3,100,000 | ) |  |  |           |  
|Portion applied against quarterly interest
    payments                           |  |      | (1,026,000 | )    |  |         | (1,315,000 | ) |  |  | (390,000   | )
|Portion received as credit memo from Siemens                                      |  |      |           |      |  |         |           |   |  |  | (625,000   | )
|Portion applied to accounts receivable                                            |  |      |           |      |  |         | 650,000    |   |  |  | (650,000   | )
|                                                                                  |  |      |            |      |  |         |            |   |  |  |            |  
|                                                                                  |  |      | (3,947,000 | )    |  |         | (3,765,000 | ) |  |  | (1,665,000 | )
|                                                                                  |  |      |            |      |  |         |            |   |  |  |            |  

44



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)




| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | In 2001, only $390,000 of the $1,665,000 pricing
    reduction was applied against interest payments. $625,000 was
    received in the form of a credit memo applied against accounts
    payable and the Company made a cash payment in the same amount
    against Tranche A in 2001. The remaining $650,000 was
    recorded as a preferred pricing reduction receivable at the end
    of 2001 which was applied against principal payments in 2002.



| |  |                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
    company-owned centers 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, a change
of control of the Company (as defined) will constitute an event
of default upon which Siemens may cancel its commitments under
the credit agreement and declare the entire outstanding amounts
under the credit facilities to be immediately due and payable.
Furthermore, if the surviving entity of such change of control
is a manufacturer of hearing aids or related products or owns,
directly or indirectly, a manufacturer of hearing aids or
related products, the surviving entity will have to pay Siemens
a $50 million breakup fee.



| |    |                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | Notes payable resulting from business
    acquisitions, bearing interest at rates ranging from 4% to
    8.75%, payable in monthly, quarterly and annual installments
    ranging from $2000 (monthly) to $75,000 (annually), maturing
    between 2004 and 2007, and collateralized by various equipment.
    (See Note 5- Business Acquisitions)

7.     Convertible
Subordinated Notes

On December 19, 2003, the Company completed
a private placement of $7.5 million five-year convertible
subordinated notes with five-year warrants to purchase 2,642,750
shares of the Companys common stock. The notes may not be
converted and warrants to purchase 2,142,750 shares may not be
exercised for a two-year period. The remaining warrants to
purchase 500,000 shares are exercisable beginning in June 2005
at $1.75 per share. Beginning in December 2005 the notes may be
converted at $1.75 per share and the warrants may be exercised
for up to 2,142,750 shares at $1.75 per share. The quoted
closing market price of the Companys common stock on the
commitment date was $2.37 per share. The notes bear interest at
11 percent per annum for the first two years and then at 8
percent per annum through the remainder of their term. Proceeds
from this financing have been used to repay the $2 million
financing issued on October 3, 2003 (described below) and
for working capital purposes. Approximately $1.8 million of the
net proceeds were used to make payments to Siemens in early
fiscal 2004 under the Credit Agreement, including 50% against
the Tranche D Loan and 50% against the Tranche E Loan.
As of December 27, 2003, $500,000 of the financing proceeds
was recorded as a subscription receivable under the caption
accounts and notes receivable in the accompanying consolidated
balance sheet, and was received in January 2004.

For the first two years of the term beginning on
March 25, 2004, the Company will make quarterly payments of
interest only. Beginning on March 25, 2006, the Company
will make twelve equal quarterly payments of principal plus
interest. Payments of interest and principal may be made, at the
Companys option, in cash or with the Companys common
stock. If payments are made using the Companys common
stock the shares to be issued would be computed at 90% of the
average closing price for the 20 day trading period
immediately preceding the payment date. Approximate

45



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


aggregate amount of maturities of the convertible
subordinated notes maturing in future years as of
December 27, 2003, is $2,500,000 in 2006; $2,500,000 in
2007; and $2,500,000 in 2008.

In addition to the 2,642,750 common stock
purchase warrants issued to the lenders in the $7.5 million
financing, the Company also issued 117,143 common stock purchase
warrants with the same terms as the lender warrants and paid
cash of approximately $206,000 to third parties as finder fees
and financing costs. These warrants were valued at approximately
$220,000 using a Black-Scholes option pricing model. The total
of such costs of approximately $426,000 are being amortized as
interest expense using the effective interest method over the
five year term of the notes.

The Company recorded a debt discount of
approximately $7,488,000 consisting of the intrinsic value of
the beneficial conversion of approximately $4,519,000 and the
portion of the proceeds allocated to the warrants issued to the
lenders of approximately $2,969,000, using the Black-Scholes
option pricing model, based on the relative fair values of the
warrants and the notes. The debt discount is being amortized as
interest expense over the five-year term of the notes using the
effective interest method.

During December 2003, approximately $119,000 of
prepaid financing fees and debt discount was amortized as
interest expense, including a non-cash portion of approximately
$88,000. The future non-cash debt discount and prepaid finder
fees to be amortized as interest expense over the next five
years are approximately $2,127,000 in 2004, $2,151,000 in 2005,
$1,763,000 in 2006, $1,145,000 in 2007 and $434,000 in 2008. In
the event the insiders convert or exercise the debt or warrants,
the Company will be required to accelerate the debt discount to
the period in which the exercise or conversion occurs.

On October 3, 2003, the Company completed a
private placement of $2 million in unsecured notes payable
and common stock purchase warrants with a number of investors,
including three members of the Companys board of
directors. The non-participating directors approved the
transaction. The notes bore interest at a rate of
15 percent for the first six months and 18 percent for
the second six months with principal and unpaid interest due on
maturity of October 1, 2004. The terms of the notes
included conversion to common stock in the event of default in
payment of the notes at a conversion rate of $0.75 per share.
The financing included seven-year warrants, which cannot be
exercised during the first two years, to purchase a total of
800,000 shares of the Companys common stock. The outside
investors warrants for 240,000 shares have an exercise
price of $1.25 per share while the participating directors
warrants for 560,000 shares have an exercise price of $1.31 per
share, the quoted closing price of the common stock on the day
of the financing. In addition, each investor was paid a
placement fee of 3% totaling $60,000, resulting in net proceeds
of $1,940,000. Proceeds from the financing were used to pay
Siemens under the supply agreement. As of December 27,
2003, these notes were fully repaid using the proceeds from the
December 2003 financing described above, and the 800,000 common
stock purchase warrants remain outstanding. A prepayment penalty
of $60,000 was paid to the investors upon the prepayment of the
note. The payments to certain foreign participants also resulted
in a foreign exchange loss of approximately $43,000.

The warrants were valued at approximately
$429,000, based on the relative fair values of the warrants and
the notes, using a Black-Scholes option pricing model which was
recorded as debt discount to be amortized as interest expense
over the one-year term of the notes. The $429,000 debt discount
along with the $60,000 prepayment penalty and the $60,000
placement fees were amortized as interest expense as of the
December 2003 repayment date of the $2 million notes.

46



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


8.     Mandatorily
Redeemable Convertible Preferred Stock

On August 27, 2003, the Company exchanged
all 4,563 outstanding shares of its 1998 Convertible Preferred
Stock (See Note 9 E) for 4,563 shares of E Series
Convertible Preferred Stock (E Convertible Preferred
Stock). All E Series Convertible Preferred Stock not
converted or redeemed by December 18, 2006 must be redeemed
by the Company on December 18, 2006 for a price equal to
108% of its stated value plus accrued and unpaid premiums. The
E Series Convertible Preferred Stock is presented as
Mandatorily Redeemable Convertible Preferred Stock in the
accompanying consolidated balance sheet as of December 27,
2003. The old 1998 Convertible Preferred Stock was scheduled to
convert by its terms into common stock on August 27, 2003.
The Company has the right to redeem the newly designated
preferred stock at its stated value plus accrued but unpaid
premiums for sixteen months and thereafter until the redemption
date at 108% of its stated value plus accrued but unpaid
premiums.

As part of the transaction, the Company has
agreed that accrued but unpaid premiums on the 1998 Convertible
Preferred Stock and the 10% premium on the E
Series Convertible Preferred Stock will be paid in cash
each month beginning in November 2003 and continuing until
December 2006. $736,517 of accrued premium has been paid in that
regard in November 2003. As of December 27, 2003, the
accrued and unpaid premium was $693,749 and was recorded as
dividends payable. Approximately $152,517 of premium on the
E Series Convertible Preferred Stock for the period from
issuance to December 27, 2003 is included in the caption
Dividends on preferred stock. The holders have agreed that they
will not convert the newly designated preferred stock into the
Companys common stock prior to November 1, 2005,
except in the event of a default in payment of premiums or
unless on or after December 10, 2004 the price of the
common stock reaches a trading price at or above $3.00 per share
and the holders sell at or above $3.00 per share. In the event
of default in payment of premiums, the holder may sell any
shares of the E Series Convertible Preferred Stock or
convert such shares under the same terms described below for the
period after November 1, 2005. If converted during the
period from December 10, 2004 until November 1, 2005
based on the trading price reaching $3.00 per share, the holders
can convert only a number of shares of the newly designated
preferred stock that would yield upon conversion no more than
744,911 shares of HearUSA common stock. Subsequent to
November 1, 2005, upon conversion of the E Series
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 E Series Convertible Preferred ($1,000
per share) so converted plus any unpaid premium, 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 fixed conversion price). The premium payable upon
conversion is equal to 10% of the stated value of the
Series E Convertible Preferred from the date of issuance
until the conversion date. If the closing price of the
Companys Common Stock on the date prior to any conversion
date is less than $10.00, the Company at its option may
redeem the E Series Convertible Preferred at a price
equal to 108% of its stated value plus any accrued and unpaid
premium, in lieu of converting such E Series Convertible
Preferred to Common Stock.

During 2003, approximately $152,000 of the 10%
premium and approximately $37,000 of the 8% premium due upon
redemption are included in the caption, Dividends under
Dividends on Preferred Stock in the accompanying Consolidated
Statement of Operations. Approximate future redemption payments
in years subsequent to 2003 are $4,928,000 in 2006 if none of
the E Series Convertible Preferred Stock is converted or
redeemed prior to the mandatory redemption date of
December 18, 2006.

47



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


9.     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 plans to register the common stock for
resale in 2004.

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. During 2003, the
participating members of the board of directors repaid the
$40,000 to the Company and the amount was recorded as an
increase of additional paid-in capital.

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 27, 2003, 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, of which $150,000 was recorded as
consulting expense during 2001. 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 9D 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.

48



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


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
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. During
November 2003 the Company agreed to pay $25,000 to the holder
during 2004 as settlement for not filing such registration
statement. The 470,530 shares of Common Stock issued in the
transaction, together with 129,470 shares of Common Stock then
held by the same holder, were placed in escrow and subject to
resale restrictions based on the trading price of the common
stock. Those shares have all been released from escrow and most
have been sold into the public market as of March 2004. During
2003, 2002 and 2001, approximately $140,000, $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

49



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


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 approximately
$283,000 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.

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.

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. 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 stated value for the period from
the date of issuance until the date of final distribution.
During 2002,

50



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


no shares of the 1998 Convertible Preferred Stock
were converted. During 2001 638 of the 1998 Convertible
Preferred, respectively, plus accrued dividends of $140,255 were
converted into 699,413 shares of the Companys Common Stock
In addition, during 2002 214 shares, of the 1998 Convertible
Preferred plus accrued dividends of $69,973, and an
8 percent premium of $17,120 was redeemed for cash of
approximately $351,000. The 2002 redemption included costs of
$50,000 in cash and 136,018 shares of the Companys common
stock. During 2003, 2002 and 2001 approximately $298,000,
$552,000 and $524,000, 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 expired 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 27, 2003, no warrants were outstanding.

All of the shares of the 1998 Convertible
Preferred Stock were exchanged on August 27, 2003, as
described in note 8 above, and no shares remain outstanding.

F. 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
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

51



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


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.

G. Warrants

No warrants were exercised in 2003 or 2002.

The aggregate number of common shares reserved
for issuance upon the exercise of warrants is 4,791,588 as of
December 27, 2003. In addition, warrants for 500,000 shares
of common stock were issued to finders in January 2004 with an
exercise price of $1.75 per share expiring in 2008 in connection
with the $7.5 million convertible subordinated debt issued
in December 2003. The expiration date and exercise prices of the
outstanding warrants are as follows:

|            |           |            |  |          |      |  |  |  |      | 
|----------- | --------- | ---------- |  | -------- | ---- |  |  |  | ---- | 
|Outstanding |           | Expiration |  | Exercise
|Warrants    |           | Date       |  | Price   
|            |           |            |  |         
|            | 131,695   |            |  |          | 2005 |  |  |  | 4.46 | 
|            | 1,500,000 |            |  |          | 2005 |  |  |  | 1.15 | 
|            | 100,000   |            |  |          | 2005 |  |  |  | 1.00 | 
|            | 2,259,893 |            |  |          | 2008 |  |  |  | 1.75 | 
|            | 240,000   |            |  |          | 2010 |  |  |  | 1.25 | 
|            | 560,000   |            |  |          | 2010 |  |  |  | 1.31 | 
|            |           |            |  |          |      |  |  |  |      | 
|            | 4,791,588 |            |  |          |      |  |  |  |      | 
|            |           |            |  |          |      |  |  |  |      | 

H. Aggregate and Per Share Cumulative
Preferred Dividends

As of December 27, 2003 and
December 28, 2002, the aggregate and per share amount of
arrearages in cumulative preferred dividends/premiums were
$728,699 and $1,215,167 and $.03/share and $.05/share,
respectively.

I. Exchangeable Shares

Immediately following the effectiveness of the
combination of the Company and Helix, each outstanding Helix
Common Share, other than shares held by dissenting Helix
Stockholders who were paid the fair value of their shares and
shares held by the Company, were automatically exchanged for, at
the election of the holder, 0.3537 fully-paid and non-assessable
exchangeable shares of HEARx Canada, Inc., or 0.3537 shares of
HearUSA, Inc. common stock. The exchangea-

52



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


ble shares are the economic equivalent of
HearUSA, Inc. common stock. Each exchangeable share will be
exchanged at any time at the option of the holder, for one share
of HearUSA, Inc. common stock, subject to any anti-dilution
adjustments. Until exchanged for HearUSA, Inc. common stock;
(i) each exchangeable share outstanding will entitle the
holder to one vote per share at all meetings of HearUSA, Inc.
common stockholders; (ii) if any dividends are declared on
HearUSA, Inc. common stock, an equivalent dividend must be
declared on such exchangeable shares and (iii) in the event
of the liquidation, dissolution or winding-up of HEARx Canada,
Inc., such exchangeable shares will be exchanged for an
equivalent number of shares of HearUSA, Inc. common stock. The
exchangeable shares will be subject to mandatory exchange on
July 27, 2006, the fifth anniversary of the transaction.
(See Note 5)

10.     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.

The Board of Directors adopted and on
June 26, 2002 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 originally authorized
for issuance under this plan. The plan authorizes an annual
increase in authorized shares equal to 10% of the 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.

53



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


As of December 27, 2003, 278 employees of
the Company held options permitting them to purchase an
aggregate 3,387,755 shares of Common Stock at prices ranging
from $.35 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 27, 2003 |           | December 28, 2002 |  | December 29, 2001
|                                                               |  |                   |           |                   |  |                  
|                                                               |  |                   |           | Weighted          |  |                   |      | Weighted |  |        |           | Weighted
|                                                               |  |                   |           | Average           |  |                   |      | Average  |  |        |           | Average 
|                                                               |  |                   |           | Exercise          |  |                   |      | Exercise |  |        |           | Exercise
|                                                               |  | Shares            |           | Price             |  | Shares            |      | Price    |  | Shares |           | Price   
|                                                               |  |                   |           |                   |  |                   |      |          |  |        |           |         
|Outstanding at beginning of year                               |  |                   | 2,168,290 |                   |  | $                 | 3.04 |          |  |        | 1,574,222 |          |  | $ | 3.32 |  |  |   | 873,957   |  |  | $ | 5.42 | 
|Granted                                                        |  |                   | 1,785,000 |                   |  | $                 | 0.46 |          |  |        | 644,342   |          |  | $ | 2.50 |  |  |   | 758,830   |  |  | $ | 1.04 | 
|Exercised                                                      |  |                   | 20        |                   |  | $                 | 0.77 |          |  |        |          |          |  |   |     |  |  |   | 35        |  |  | $ | 2.00 | 
|Forfeited                                                      |  |                   | 565,515   |                   |  | $                 | 2.47 |          |  |        | 50,274    |          |  | $ | 4.85 |  |  |   | 58,530    |  |  | $ | 5.17 | 
|                                                               |  |                   |           |                   |  |                   |      |          |  |        |           |          |  |   |      |  |  |   |           |  |  |   |      | 
|Outstanding at end of year                                     |  |                   | 3,387,755 |                   |  | $                 | 1.78 |          |  |        | 2,168,290 |          |  | $ | 3.04 |  |  |   | 1,574,222 |  |  | $ | 3.32 | 
|                                                               |  |                   |           |                   |  |                   |      |          |  |        |           |          |  |   |      |  |  |   |           |  |  |   |      | 
|Exercisable at end of year                                     |  |                   | 1,418,012 |                   |  |                   |      |          |  |        | 1,657,467 |          |  |   |      |  |  |   | 862,388   |  |  |   |      | 
|                                                               |  |                   |           |                   |  |                   |      |          |  |        |           |          |  |   |      |  |  |   |           |  |  |   |      | 
|Weighted average fair value of options granted
    during year |  | $                 | 0.37      |                   |  |                   |      |          |  | $      | 0.52      |          |  |   |      |  |  | $ | 0.80      |  |  |   |      | 
|                                                               |  |                   |           |                   |  |                   |      |          |  |        |           |          |  |   |      |  |  |   |           |  |  |   |      | 

The following table summarizes information about
fixed employee stock options outstanding at December 27,
2003:

|                        |  |             |           |                  |  |                |     |             |  |                |       |  |  |  |           |  |  |   |       | 
|----------------------- |  | ----------- | --------- | ---------------- |  | -------------- | --- | ----------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                        |  |             |           | Weighted         |  |                |     | Options     |  |               
|                        |  |             |           | Average          |  | Weighted       |     | Exercisable |  | Weighted      
|                        |  | Options     |           | Remaining        |  | Average        |     | At December |  | Average       
|Range of Exercise Price |  | Outstanding |           | Contractual Life |  | Exercise Price |     | 27, 2003    |  | Exercise Price
|                        |  |             |           |                  |  |                |     |             |  |               
|$ .35  $  .77          |  |             | 2,027,670 |                  |  |                | 8.7 |             |  | $              | 0.50  |  |  |  | 309,040   |  |  | $ | .77   | 
|$ .78  $ 2.00          |  |             | 471,265   |                  |  |                | 7.0 |             |  | $              | 1.29  |  |  |  | 246,857   |  |  | $ | 1.36  | 
|$2.01  $ 5.40          |  |             | 583,957   |                  |  |                | 3.4 |             |  | $              | 3.51  |  |  |  | 558,010   |  |  | $ | 3.49  | 
|$5.41  $ 8.75          |  |             | 289,823   |                  |  |                | 2.8 |             |  | $              | 7.32  |  |  |  | 289,065   |  |  | $ | 7.32  | 
|$8.76  $18.75          |  |             | 15,040    |                  |  |                | 3.5 |             |  | $              | 15.71 |  |  |  | 15,040    |  |  | $ | 15.07 | 
|                        |  |             |           |                  |  |                |     |             |  |                |       |  |  |  |           |  |  |   |       | 
|                        |  |             | 3,387,755 |                  |  |                |     |             |  |                |       |  |  |  | 1,418,012 |  |  |   |       | 
|                        |  |             |           |                  |  |                |     |             |  |                |       |  |  |  |           |  |  |   |       | 

The stock options are exercisable in the
following years:

|     |  |  |           | 
|---- |  |  | --------- | 
|2004 |  |  | 1,982,222 | 
|2005 |  |  | 538,305   | 
|2006 |  |  | 437,673   | 
|2007 |  |  | 429,555   | 
|     |  |  |           | 
|     |  |  | 3,387,755 | 
|     |  |  |           | 

54



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


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. The plan has now
terminated in accordance with its terms and no additional grants
may be made under the plan. This in no way affects options still
outstanding under the plan. 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 27, 2003, three directors
hold options as follows: 3,000 shares at $3.40, 4,500 at $4.00,
4,500 shares at $5.00, 13,500 at $7.50, and 4,500 shares at
prices ranging from $12.50 to $58.75 per share.

C. Non-Employee Director Non-Plan
Grant

On April 1, 2003 options to purchase 125,000
shares of common stock were granted to the Board of Directors,
at an exercise price of $0.35, which was equal to the quoted
closing price of the Common Stock of the shares on the grant
date. The options vest after one year and have a ten-year life.

D. 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 seven senior management personnel eligible to
participate. No shares were issued in 2003, 2002, or 2001.

11.     Major
Customers and Suppliers

During 2003, 2002 and 2001, the Company did not
have sales totaling 10% or more of the total net sales to a
single customer.

During 2003, 2002 and 2001, the Company purchased
approximately 91.3%, 90.9% and 94.9%, of all hearing aids sold
by the Company from Siemens. As described in Note 6, 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.

12.     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, 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 2003, 2002 and 2001 approximately

55



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


$3,361,000, $1,682,000 and $1,943,000 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 now
employed as the Companys California division manager.
Certain consideration included a note payable of $325,000. (See
Note 5  Business Acquisitions)

As mentioned in Note 18 Discontinued
Operations, on July 15, 2003, the Company sold its three
Quebec subsidiaries to Forget & Sauve,
Audioprothesistes, S.E.N.C. (Forget &
Sauve) and 6068065 Canada Inc., private entities owned and
controlled by Steve Forget, a former Helix officer and director.
Mr. Forget served as an officer of HearUSA until October
2002 and as a director until May 2003. Prior to the disposition,
the Quebec subsidiaries provided 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. 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 included
inventory purchasing and management, office service support,
general administration and patient management software and
related training. The aforementioned services were 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 27, 2003 and December 28, 2002 revenues of
approximately $2,559,000 and $2,363,000, respectively, were
earned from services to Le Groupe Forget. These revenues
were presented, net of related expenses, under Discontinued
Operations in the Consolidated Statements of Operations. At
December 27, 2003 and December 27, 2002, approximately
$0 and $1,029,000, respectively, of accounts receivable
resulting from these transactions were included in Assets of
discontinued operations on the Consolidated Balance Sheet.

In November 2003, the Company entered into a
purchase agreement with an individual who is now employed as one
of the Companys regional managers. Certain consideration
included a note payable of $100,000. (See
Note 5  Business Acquisitions).

13.     Income
Taxes

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

|                                                             |  |      |            |      |  |      |            |   |  |   |            |  
|------------------------------------------------------------ |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                             |  | 2003 |            | 2002 |  | 2001
|                                                             |  |      |            |      |  |     
|Domestic                                                     |  | $    | (1,095,000 | )    |  | $    | (6,086,000 | ) |  | $ | (8,630,000 | )
|Foreign                                                      |  |      | 187,000    |      |  |      | (6,000     | ) |  |   |           |  
|                                                             |  |      |            |      |  |      |            |   |  |   |            |  
|Total loss before equity in losses of affiliated
    company |  | $    | (908,000   | )    |  | $    | (6,092,000 | ) |  | $ | (8,630,000 | )
|                                                             |  |      |            |      |  |      |            |   |  |   |            |  

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.

56



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


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

|                                 |  |      |             |      |  |   |             |  
|-------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | -
|                                 |  | 2003 |             | 2002
|                                 |  |      |             |     
|Depreciation                     |  | $    | 1,082,000   |      |  | $ | 557,000     |  
|Allowance for doubtful accounts  |  |      | 164,000     |      |  |   | 505,000     |  
|Joint Venture                    |  |      | (1,045,000  | )    |  |   | (1,482,000  | )
|Other                            |  |      | 106,000     |      |  |   | 221,000     |  
|Net operating loss carryforwards |  |      | 31,487,000  |      |  |   | 31,613,000  |  
|                                 |  |      |             |      |  |   |             |  
|                                 |  |      | 31,794,000  |      |  |   | 31,414,000  |  
|Less valuation allowance         |  |      | (31,794,000 | )    |  |   | (31,414,000 | )
|                                 |  |      |             |      |  |   |             |  
|Net deferred tax asset           |  | $    |            |      |  | $ |            |  
|                                 |  |      |             |      |  |   |             |  

At December 27, 2003 the Company had net
operating loss carryforwards of approximately $85,000,000 for
U.S. Federal tax purposes, and approximately $4,500,000 of
operating loss carryforwards in Canada. Included in the
U.S. Federal tax net operating loss carryforwards are
approximately $8,300,000 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 on loss from
continuing operations differs from the amount computed using the
Federal statutory income tax rate as follows:

|                                                         |  |      |          |      |  |      |            |   |  |   |            |  
|-------------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                         |  | 2003 |          | 2002 |  | 2001
|                                                         |  |      |          |      |  |     
|Provision at Federal statutory rate                      |  | $    | (309,000 | )    |  | $    | (2,286,000 | ) |  | $ | (2,934,000 | )
|State income taxes, net of Federal income tax
    effect |  |      | (40,000  | )    |  |      | (236,000   | ) |  |   | (313,000   | )
|Nondeductible expenses                                   |  |      | 23,000   |      |  |      | 22,000     |   |  |   | 18,000     |  
|Effect of foreign operation                              |  |      |         |      |  |      | 2,000      |   |  |   |           |  
|Increase in valuation allowance                          |  |      | 380,000  |      |  |      | 2,566,000  |   |  |   | 2,944,000  |  
|Other                                                    |  |      | (54,000  | )    |  |      | (68,000    | ) |  |   | 285,000    |  
|                                                         |  |      |          |      |  |      |            |   |  |   |            |  
|Income tax provision                                     |  | $    |         |      |  | $    |           |   |  | $ |           |  
|                                                         |  |      |          |      |  |      |            |   |  |   |            |  

No income tax provision is applicable to the loss
from discontinued operations. 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 27, 2003.

14.     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

57



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


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
$44,800, $44,200 and $45,800 for the years ended
December 27, 2003, December 28, 2002 and
December 29, 2001, 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. These contracts were renewed on
May 12, 2003 for an additional five year term.

15.     Quarterly
Financial Data (Unaudited)

|                                                        |  |            |            |         |  |         |            |            |  |   |            |   |  |  |            |  
|------------------------------------------------------- |  | ---------- | ---------- | ------- |  | ------- | ---------- | ---------- |  | - | ---------- | - |  |  | ---------- | -
|Year Ended                                              |  | First      |            | Second  |  | Third   |            | Fourth    
|December 27, 2003                                       |  | Quarter(a) |            | Quarter |  | Quarter |            | Quarter(c)
|                                                        |  |            |            |         |  |         |            |           
|Net revenues                                            |  | $          | 17,411,728 |         |  | $       | 18,976,378 |            |  | $ | 17,276,558 |   |  |  | 16,880,490 |  
|Operating costs and expenses                            |  |            | 16,586,987 |         |  |         | 17,511,018 |            |  |   | 17,031,184 |   |  |  | 17,516,327 |  
|                                                        |  |            |            |         |  |         |            |            |  |   |            |   |  |  |            |  
|Income (loss) from operations                           |  |            | 824,741    |         |  |         | 1,465,360  |            |  |   | 245,374    |   |  |  | (635,837   | )
|                                                        |  |            |            |         |  |         |            |            |  |   |            |   |  |  |            |  
|Net income (loss) applicable to Common
    stockholders |  |            | 201,228    |         |  |         | 490,165    |            |  |   | (389,442   | ) |  |  | (2,038,296 | )
|                                                        |  |            |            |         |  |         |            |            |  |   |            |   |  |  |            |  
|Net income (loss) per share  basic                     |  |            | .01        |         |  |         | .02        |            |  |   | (.01       | ) |  |  | (.07       | )
|                                                        |  |            |            |         |  |         |            |            |  |   |            |   |  |  |            |  
|Net income (loss) per share 
    diluted               |  |            | .01        |         |  |         | .02        |            |  |   | (.01       | ) |  |  | (.07       | )
|                                                        |  |            |            |         |  |         |            |            |  |   |            |   |  |  |            |  

|                                           |  |         |            |         |  |         |            |         |  |   |            |   |  |   |            |  
|------------------------------------------ |  | ------- | ---------- | ------- |  | ------- | ---------- | ------- |  | - | ---------- | - |  | - | ---------- | -
|Year Ended                                 |  | First   |            | Second  |  | Third   |            | Fourth 
|December 28, 2002                          |  | Quarter |            | Quarter |  | Quarter |            | Quarter
|                                           |  |         |            |         |  |         |            |        
|Net revenues                               |  | $       | 12,010,016 |         |  | $       | 12,661,032 |         |  | $ | 15,882,602 |   |  | $ | 16,676,478 |  
|Operating costs and expenses               |  |         | 13,075,183 |         |  |         | 13,064,845 |         |  |   | 18,331,477 |   |  |   | 17,241,795 |  
|                                           |  |         |            |         |  |         |            |         |  |   |            |   |  |   |            |  
|Loss from operations                       |  |         | (1,065,167 | )       |  |         | (403,813   | )       |  |   | (2,448,875 | ) |  |   | (565,317   | )
|                                           |  |         |            |         |  |         |            |         |  |   |            |   |  |   |            |  
|Net loss applicable to Common stockholders |  |         | (1,563,485 | )       |  |         | (1,377,874 | )       |  |   | (3,463,784 | ) |  |   | (1,171,867 | )
|                                           |  |         |            |         |  |         |            |         |  |   |            |   |  |   |            |  
|Net loss per share  basic                 |  |         | (.11       | )       |  |         | (.09       | )       |  |   | (.12       | ) |  |   | (.06       | )
|                                           |  |         |            |         |  |         |            |         |  |   |            |   |  |   |            |  
|Net loss per share  diluted               |  |         | (.11       | )       |  |         | (.09       | )       |  |   | (.12       | ) |  |   | (.06       | )
|                                           |  |         |            |         |  |         |            |         |  |   |            |   |  |   |            |  



---



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | On July 15, 2003, the Company sold 100% of
    the shares of the Companys three subsidiaries and selected
    assets associated with the management of the centers located in
    the Canadian Province of Quebec, to Forget & Sauve,
    Audioprothesistes, S.E.N.C. (Forget &
    Sauve) and 6068065 Canada Inc., private entities owned and
    controlled by Steve Forget, a former Helix officer and director.
    The three subsidiaries and selected assets have been presented
    as a discontinued operation and the consolidated financial
    statements have been reclassified to segregate the assets,
    liabilities and operating results of these subsidiaries for all
    periods presented. (See Note 18  Discontinued
    Operations).

58



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)




| |    |                                                                                                                                                                                                                        
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | The following reconciles the Quarterly Financial
    Data previously reported by quarter, which included the
    operating results of discontinued operations, to the Quarterly
    Financial Data currently presented.

|                                             |  |            |            |              |  |           |           |   |  |   |            | 
|-------------------------------------------- |  | ---------- | ---------- | ------------ |  | --------- | --------- | - |  | - | ---------- | 
|Quarter Ended                                |  | Previously |            | Discontinued |  | Presently
|March 29 , 2003                              |  | Reported   |            | Operations   |  | Reported 
|                                             |  |            |            |              |  |          
|Net revenues                                 |  | $          | 18,580,271 |              |  | $         | 1,168,543 |   |  | $ | 17,411,728 | 
|Operating costs and expenses                 |  |            | 17,708,100 |              |  |           | 1,121,113 |   |  |   | 16,586,987 | 
|                                             |  |            |            |              |  |           |           |   |  |   |            | 
|Income (loss) from operations                |  |            | 872,171    |              |  |           | (47,430   | ) |  |   | 824,741    | 
|                                             |  |            |            |              |  |           |           |   |  |   |            | 
|Net income applicable to Common stockholders |  |            | 201,228    |              |  |           |          |   |  |   | 201,228    | 
|                                             |  |            |            |              |  |           |           |   |  |   |            | 
|Net income per share  basic                 |  |            | .01        |              |  |           | .00       |   |  |   | .01        | 
|                                             |  |            |            |              |  |           |           |   |  |   |            | 
|Net income per share  diluted               |  |            | .01        |              |  |           | .00       |   |  |   | .01        | 
|                                             |  |            |            |              |  |           |           |   |  |   |            | 



---



| |    |                                                                                                                                                                      
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c) | In the 4th quarter of 2003 an adjustment of
    approximately $277,000 was made to record insurance discounts
    which reduced accounts receivable and net revenues.

16.     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 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 for the fixed rate
debts approximate those liabilities fair value, as current
borrowing rates approximate the actual fixed interest rates of
these liabilities. The carrying amounts reporting in the
consolidated

59



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


balance sheet for the variable rate debts
approximate those liabilities fair value, as their rates vary
according to market.

Convertible subordinated
notes the carrying amounts
reported in the consolidated balance sheet approximate those
liabilities fair value, as current borrowing rates,
approximate the actual fixed interest rates of these liabilities.

Manditorily redeemable convertible preferred
stock the carrying amount
reported in the consolidated balance sheet approximates this
instruments fair value, as current borrowing rates,
approximate the actual fixed premium rate of this instrument.

17.     Recent
Accounting Pronouncements

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. As of the
Companys adoption of SFAS No. 146 on January 1,
2003, all exit and disposal activities are accounted for and
disclosed in accordance with SFAS No. 146.

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 was not material.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities(FIN 46), which provided
guidance on how to identify variable interest entities
(VIEs) and determine when the assets, liabilities,
noncontrolling interests, and results of operations of VIEs need
to be included in a companys consolidated financial
statements. FIN 46 was applicable to VIEs created
after January 31, 2003. In the original provisions of
FIN 46, VIEs created prior to February 1, 2003,
were to be consolidated effective December 31, 2003.
Disclosures were required currently if the Company expects to
consolidate any VIEs. In December 2003, the FASB
redeliberated certain proposed modifications and revised
FIN 46 to FIN 46R. The revised provisions are
applicable no later than the first reporting period ending after
March 15, 2004. FIN 46R did not have a material effect
on the Companys consolidated financial statements.

Effective July 1, 2003, the Company adopted
EITF Issue No. 00-21 (EITF 00-21),
Accounting For Revenue Arrangements with Multiple
Deliverables,which establishes criteria for whether
revenue on a deliverable can be recognized separately from other
deliverables in a multiple deliverable arrangement. The criteria
considers whether the delivered item has stand-alone value to
the customer, whether the fair value of each of the
undeliverable items can be reliably determined and the
customers right of return for the delivered items. The
Companys adoption of EITF 00-21 did not have an
effect on its consolidated financial statements.

60



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


18.     Discontinued
Operations

On July 15, 2003, the Company sold 100% of
the shares of the Companys three subsidiaries and selected
assets associated with the management of the centers located in
the Canadian Province of Quebec, to Forget & Sauve,
Audioprothesistes, S.E.N.C. (Forget &
Sauve) and 6068065 Canada Inc., private entities owned and
controlled by Steve Forget, a former Helix officer and director.
Mr. Forget served as an officer of HearUSA until October
2002 and as a director until May 2003. The sale agreement
provided for total payments to the Company of approximately
$1.7 million, representing, in part, payment of
pre-existing debt owed the Company by Forget & Sauve of
approximately $1.6 million. The Company received an initial
cash payment of $700,000 at closing and $1 million over the
five following months. At December 27, 2003, Forget and
Sauve owed the Company approximately $102,000, which was
received by the Company early in January 2004.

The three Quebec subsidiaries and selected assets
have been presented as a discontinued operation and the
consolidated financial statements have been reclassified to
segregate the assets, liabilities and operating results of these
subsidiaries for all periods presented, including $318,454 of
property and equipment and $167,168 of debt as of
December 28, 2002. The assets of this operation are
reported under the center segment. Assets and liabilities of
discontinued operations were recorded at the lower of their
carrying amount or fair value less the cost to sell. The sale
resulted in a loss on disposal of approximately $105,000. Net
revenues of the discontinued operations for the years ended
December 27, 2003 and December 28, 2002 were
approximately $2.6 million and $2.4 million respectively.
Pre-tax net losses of the discontinued operation were
approximately $96,000 and $158,000, for the 2003 period through
disposal, and for the 2002 period from June 30, 2002, the
effective date of the Helix combination through
December 28, 2002, respectively.

19.     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 centers offer people
afflicted with hearing loss a complete range of services and
products, including diagnostic audiological testing, the latest
technology in hearing aids and listening devices to improve
their quality of life. The network, unlike the Company-owned
centers, is comprised of hearing care practices owned by
independent audiologists. The network revenues are mainly
derived from administrative fees paid by employer groups, health
insurers and benefit sponsors to administer their benefit
programs as well as maintaining an affiliated provider network.
E-commerce offers on-line product sales of hearing aid related
products, such as batteries, hearing aid accessories and
assistive listening devices. The Companys business units
are located in the United States and Canada.

61



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##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


|                              |  |         |            |            |  |         |         |           |  |       |           |  |  |  |             |   |  |   |            |  
|----------------------------- |  | ------- | ---------- | ---------- |  | ------- | ------- | --------- |  | ----- | --------- |  |  |  | ----------- | - |  | - | ---------- | -
|                              |  | Centers |            | E-commerce |  | Network |         | Corporate |  | Total
|                              |  |         |            |            |  |         |         |           |  |      
|Net revenues                  |  |         |            |            |  |         |         |           |  |       |           |  |  |  |             |   |  |   |            |  
|Year 2003                     |  | $       | 69,423,000 |            |  | $       | 69,000  |           |  | $     | 1,053,000 |  |  |  |            |   |  | $ | 70,545,000 |  
|Year 2002                     |  |         | 56,572,000 |            |  |         | 27,000  |           |  |       | 631,000   |  |  |  |            |   |  |   | 57,230,000 |  
|Year 2001                     |  |         | 48,796,000 |            |  |         |        |           |  |       |          |  |  |  |            |   |  |   | 48,796,000 |  
|Income (loss) from operations |  |         |            |            |  |         |         |           |  |       |           |  |  |  |             |   |  |   |            |  
|Year 2003                     |  |         | 12,695,000 |            |  |         | (49,000 | )         |  |       | 504,000   |  |  |  | (11,250,000 | ) |  |   | 1,900,000  |  
|Year 2002                     |  |         | 8,113,000  |            |  |         | (27,000 | )         |  |       | 223,000   |  |  |  | (12,792,000 | ) |  |   | (4,483,000 | )
|Year 2001                     |  |         | 1,320,000  |            |  |         |        |           |  |       |          |  |  |  | (9,519,000  | ) |  |   | (8,199,000 | )
|Year 2003                     |  |         |            |            |  |         |         |           |  |       |           |  |  |  |             |   |  |   |            |  
|Depreciation and amortization |  |         | 2,235,000  |            |  |         |         |           |  |       | 3,000     |  |  |  | 779,000     |   |  |   | 3,017,000  |  
|Total assets                  |  |         | 44,100,000 |            |  |         |         |           |  |       | 1,149,000 |  |  |  | 20,934,000  |   |  |   | 66,183,000 |  
|Capital expenditures          |  |         | 175,000    |            |  |         |         |           |  |       |           |  |  |  | 487,000     |   |  |   | 662,000    |  
|Year 2002                     |  |         |            |            |  |         |         |           |  |       |           |  |  |  |             |   |  |   |            |  
|Depreciation and amortization |  |         | 1,526,000  |            |  |         |        |           |  |       | 1,000     |  |  |  | 995,000     |   |  |   | 2,522,000  |  
|Total assets                  |  |         | 45,304,000 |            |  |         |        |           |  |       | 2,308,000 |  |  |  | 17,385,000  |   |  |   | 64,997,000 |  
|Capital expenditures          |  |         | 229,000    |            |  |         |        |           |  |       | 1,000     |  |  |  | 541,000     |   |  |   | 771,000    |  
|Year 2001                     |  |         |            |            |  |         |         |           |  |       |           |  |  |  |             |   |  |   |            |  
|Depreciation and amortization |  |         | 1,666,000  |            |  |         |        |           |  |       |          |  |  |  | 744,000     |   |  |   | 2,410,000  |  
|Total assets                  |  |         | 6,172,000  |            |  |         |        |           |  |       |          |  |  |  | 15,170,000  |   |  |   | 21,342,000 |  
|Capital expenditures          |  |         | 870,000    |            |  |         |        |           |  |       |          |  |  |  | 770,000     |   |  |   | 1,640,000  |  

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

Information concerning geographic areas:

As of and for the Years Ended December 27,
2003 and December 28, 2002

|                  |  |               |            |        |  |               |           |        |  |  |            |  |  |  |           | 
|----------------- |  | ------------- | ---------- | ------ |  | ------------- | --------- | ------ |  |  | ---------- |  |  |  | --------- | 
|                  |  | United States |            | Canada |  | United States |           | Canada
|                  |  | 2003          |            | 2003   |  | 2002          |           | 2002  
|                  |  | $             |            | $      |  | $             |           | $     
|                  |  |               |            |        |  |               |           |       
|Net revenues      |  |               | 65,359,000 |        |  |               | 5,186,000 |        |  |  | 54,983,000 |  |  |  | 2,247,000 | 
|Long-lived assets |  |               | 40,137,000 |        |  |               | 9,632,000 |        |  |  | 42,220,000 |  |  |  | 9,129,000 | 

Net revenues by geographic area are allocated
based on the location of the subsidiary operations.

20.     Liquidity

During 2003, working capital increased
$7.5 million to a negative $2.3 million as of
December 27, 2003 from a negative $10.2 million as of
December 28, 2002. This is mainly the result of the
additional $3.5 million financing the Company received from
Siemens in March 2003 and the $7.5 million of new
convertible subordinated notes issued on December 19, 2003,
offset by an increase of $2.4 million of current maturities
of long term debt mainly related to the current portion of

62



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial
Statements  (Continued)


the Siemens Tranche D. The working capital
of negative $2.3 million includes approximately
$2.9 million representing the current portion of the
long-term debt to Siemens for Tranche A, B and C, which may
be repaid through preferred pricing reductions. In 2003, the
Company generated income from operations of approximately
$1.9 million compared to a loss of $4.5 million in
2002 and cash and cash equivalents as of December 27, 2003
was approximately $6.7 million.

The Company believes that current cash and cash
equivalents and cash flow 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 the Siemens loan covenants, that net revenue levels will
remain at or higher than current levels or that unexpected cash
needs will not arise for which the cash, cash equivalents and
cash flow from operations will be sufficient. In the event of a
shortfall in cash, the Company might consider short-term debt,
or additional equity or debt offerings. There can be no
assurance however, that such financing will be available to the
Company on favorable terms or at all. The Company also is
continuing its aggressive cost controls and sales and gross
margin improvements.

63



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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 27, 2003 |                                 |            |   |           |  |            |   |            |     |  |   |          |      |  |   |        
|                  | Allowance for doubtful accounts |            | $ | 578,323   |  |            | $ | 801,303    |     |  | $ | (888,745 | )    |  | $ | 490,881 | 
|                  | Allowance for sales returns     |            | $ | 789,539   |  |            | $ | 32,830     |     |  | $ | (377,222 | )    |  | $ | 445,147 | 
|                 
|December 28, 2002 |                                 |            |   |           |  |            |   |            |     |  |   |          |      |  |   |        
|                  | Allowance for doubtful accounts |            | $ | 185,814   |  |            | $ | 796,523    |     |  | $ | (404,014 | )(1) |  | $ | 578,323 | 
|                  | Allowance for sales returns     |            | $ | 500,780   |  |            | $ | 309,519    | (2) |  | $ | (20,760  | )    |  | $ | 789,539 | 
|                 
|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 | 
|                 



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

64



---



##### 





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

None.



|         |                                      
|-------- | -------------------------------------
|Item 9A. | Disclosure Control and
    Procedures

The Companys management, with the
participation of the Companys chief executive officer and
chief financial officer, evaluated the effectiveness of the
Companys disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act) as of December 27, 2003. Based on this evaluation, the
Companys chief executive officer and chief financial
officer concluded that , as of December 27, 2003, the
Companys disclosure controls and procedures were
(1) designed to ensure that material information relating
to the Company, including its consolidated subsidiaries, is made
known to the Companys chief executive officer and chief
financial officer by others within those entities, particularly
during the period in which this report was being prepared and
(2) effective, in that they provide reasonable assurance
that information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange
Act is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms.

No change in the Companys internal control
over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended December 27, 2003 that has materially
affected, or is reasonably likely to change to materially
affect, the Companys internal control over financial
reporting.

65



---



##### 



PART III



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

The information required by this Item for
directors is set forth in the Companys 2004 Proxy
Statement under the headings Item No. 1 
Election of Directors, Board of Directors and
Committees of the Board  Audit Committee and
 Code of Ethics, and Executive
Compensation  Section 16(a) Beneficial Ownership
Reporting Compliance 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 2004 Proxy Statement under the
headings Executive Compensation and Common
Stock Performance 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 2004 Proxy Statement under the
heading Security Ownership of Certain Beneficial Owners
and Management and is incorporated herein by this
reference as if set forth in full.

66



---



##### 



The following table sets forth certain
information regarding the Companys equity compensation
plans as of December 27, 2003:

|                             |  |                      |           |                      |  |                       |      |  |  |  |           |    
|---------------------------- |  | -------------------- | --------- | -------------------- |  | --------------------- | ---- |  |  |  | --------- | ---
|                            
|                            
|                             |  | 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 |  |                      | 2,874,509 |                      |  | $                     | 1.74 |  |  |  | 1,493,018 | (1)
|                            
|                            
|Equity compensation plans    |  |                      |           |                      |  |                       |      |  |  |  |           |    
|not approved by security     |  |                      |           |                      |  |                       |      |  |  |  |           |    
|holders for employees        |  |                      | 513,246   | (2)                  |  | $                     | 2.06 |  |  |  |          |    
|                            
|                            
|Total equity compensation    |  |                      |           |                      |  |                       |      |  |  |  |           |    
|plans approved and not       |  |                      |           |                      |  |                       |      |  |  |  |           |    
|approved by security holders |  |                      |           |                      |  |                       |      |  |  |  |           |    
|for employees                |  |                      | 3,387,755 |                      |  | $                     | 1.78 |  |  |  | 1,493,018 |    
|                            
|                            
|Equity compensation plans    |  |                      |           |                      |  |                       |      |  |  |  |           |    
|approved and not approved    |  |                      |           |                      |  |                       |      |  |  |  |           |    
|by security holders for      |  |                      |           |                      |  |                       |      |  |  |  |           |    
|non employees                |  |                      | 231,700   | (2)                  |  | $                     | 3.34 |  |  |  |          |    
|                            



| |     |                                                                                                                                                                                                                                                                                                                                       | 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (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, 2001 and 2003 and
    non-employee director options granted under the Non-Employee
    Director Plan (see Note 10B) and outside of the Non
    Employee Director Plan in 2003. | 

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 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.

67



---



##### 



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.

2003 Non-plan Option Grant:

An option to purchase 125,000 shares of common
stock was granted to the Board of Directors, at an exercise
price of $0.35, which was equal to the closing price of the
Common Stock as reported on the American Stock Exchange of the
shares on the grant date. The options vest after one year 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 2004 Proxy Statement under the
heading Certain Relationships and Related
Transactions and is incorporated herein by this reference
as if set forth in full.



|         |                                            
|-------- | -------------------------------------------
|Item 14. | Principal Accountants Fees and
    Services

The information required by this Item is set
forth under the heading Independent Auditors
Services and Fees in the Companys 2004 Proxy
Statement, which section is incorporated herein by reference.

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 27, 2003 and December 28, 2002.



| |      |                                                                                                                              
| | ---- | -----------------------------------------------------------------------------------------------------------------------------
| | (ii) | Consolidated Statements of Operations for the
    years ended December 27, 2003, December 28, 2002 and
    December 29, 2001.



| |       |                                                                                                                                                   
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------
| | (iii) | Consolidated Statements of Changes in
    Stockholders Equity for the years ended December 27,
    2003, December 28, 2002 and December 29, 2001.



| |      |                                                                                                                              
| | ---- | -----------------------------------------------------------------------------------------------------------------------------
| | (iv) | Consolidated Statements of Cash Flows for the
    years ended December 27, 2003, December 28, 2002 and
    December 29, 2001.



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



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | (2) The following financial statement
    schedule is filed as part of this report and contained on
    page 64.

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

68



---



##### 





| |              
| | -------------
| | (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 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)).                                         
| | 3.6 |  |  | 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)).                                                                   
| | 3.7 |  |  | 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)).                                
| | 3.8 |  |  | Certificate of Designations, Preferences and
    Rights of the Companys 1998-E Convertible Preferred Stock
    (incorporated herein by reference as Exhibit 4.1 to the
    Companys Current Report on Form 8-K, filed
    August 28, 2003 (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 (Registration 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 , filed August 27, 1998 (Registration
    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
    (Registration 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 (Registration
    No. 001-11655)).                      
| | 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 (Registration
    No. 001-11655)).                    

69



---



##### 



| |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ---- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 (Registration
    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 (Registration
    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 (Registration 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 (Registration
    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 (Registration 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
    (Registration 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)).                                                                                                                                                                     
| | 4.14 |  |  | 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).                                                                                                                                                       
| | 4.15 |  |  | Form of Investor Warrant to purchase Common Stock
    issued in connection with October 1, 2003 private placement.                                                                                                                                                                                                                                                                                              
| | 4.16 |  |  | Form of 2003 Convertible Subordinated Note due
    November 30, 2008 (incorporated herein by reference as
    Exhibit 4.1 to the Companys Current Report on
    Form 8-K, filed December 31, 2003).                                                                                                                                                                                                            
| | 4.17 |  |  | Form of Five-Year Warrant to purchase Common
    Stock (incorporated herein by reference as Exhibit 4.2 to
    the Companys Current Report on Form 8-K, filed
    December 31, 2003).                                                                                                                                                                                                                          
| | 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)#                                                                                                                                                                                                                                                                                
| | 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)#                                                                                                                                                                                               
| | 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)#                                                                                                                                                                                           

70



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##### 



| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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)                                                                                                                                                                            
| | 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)                                                                                                                                                                                
| | 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)                                                                                                                                                                                  
| | 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).                                                                                                                                              
| | 10.10 |  |  | 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)#                                                                                                                                                                                                                        
| | 10.11 |  |  | 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)).                                                                                                                                                
| | 10.12 |  |  | 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)).                                                                                                  
| | 10.13 |  |  | 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)).
| | 10.14 |  |  | 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)).                                                                                                  
| | 10.15 |  |  | Amendment to Security Agreement, dated
    March 12, 2003 between HearUSA, Inc. and Siemens Hearing
    Instruments, Inc. (incorporated herein by reference as
    Exhibit 10.2 to the Companys Form 10Q for the
    period ended March 29, 2003).                                                                                                                                                                
| | 10.16 |  |  | Amendment to Credit Agreement, dated
    March 12, 2003 between HearUSA, Inc. and Siemens Hearing
    Instruments, Inc. (incorporated herein by reference as
    Exhibit 10.1 to the Companys Form 10-Q for the
    period ended March 29, 2003).                                                                                                                                                                 
| | 10.17 |  |  | Asset Purchase and Sale Agreement dated
    July 15, 2003 between Helix Hearing Care of America Corp.,
    Forget & Sauve, Audioprothesistes, S.E.N.C. and 6068065
    Canada Inc. (incorporated by reference as Exhibit 10.1 to
    the Companys Current Report on Form 8-K, filed
    July 24, 2003).                                                                                                           
| | 10.18 |  |  | Exchange Agreement by and between HearUSA, Inc.,
    Zanett Lombardier Master Fund, LLC and The San Miguel Trust
    dated as of August 26, 2003 (incorporated herein by
    reference as Exhibit 4.1 to the Companys Current
    Report on Form 8-K, filed August 28, 2003 (File
    No. 001-11655)).                                                                                                            
| | 10.19 |  |  | Form of securities purchase letter agreement
    dated October 1, 2003, between HearUSA, Inc. and each of
    the subscriber signatories thereto.                                                                                                                                                                                                                                                                  
| | 10.20 |  |  | Purchase Agreement dated December 12, 2003
    and December 18, 2003 by and among HearUSA, Inc. and the
    purchasers named therein (incorporated by reference to the
    Companys Current Report on Form 8-K, filed
    December 31, 2003).                                                                                                                                                                     
| | 10.21 |  |  | Form of Registration Rights Agreement by and
    among HearUSA, Inc. and the purchasers named in the Purchase
    Agreement dated December 12, 2003 and December 18,
    2003 (incorporated by reference to the Companys Current
    Report on Form 8-K, filed December 31, 2003).                                                                                                                                
| | 14    |  |  | Code of Ethics                                                                                                                                                                                                                                                                                                                                                                                                     
| | 21    |  |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                               
| | 23    |  |  | Consent of Certified of Independent Public
    Accountants                                                                                                                                                                                                                                                                                                                                                         
| | 31.1  |  |  | CEO Certification, pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                   

71



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##### 



| |      |  |  |                                                                                         
| | ---- |  |  | ----------------------------------------------------------------------------------------
| | 31.2 |  |  | CFO Certification, pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002        
| | 32.1 |  |  | CEO and 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 :

Current Report on Form 8-K (Items 7 and 12)
filed October 9, 2003.

Current Report on Form 8-K (Items 7 and 12)
filed November 7, 2003.

72



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##### 



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 26, 2004 |  | 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 26, 2004
|                                                  
|/s/ STEPHEN J. HANSBROUGHStephen J. Hansbrough     |  | Chief Executive Officer and Director |  | March 26, 2004
|                                                  
|/s/ GINO CHOUINARDGino Chouinard                   |  | Chief Financial Officer              |  | March 26, 2004
|                                                  
|/s/ DAVID J. MCLACHLANDavid J. McLachlan           |  | Director                             |  | March 26, 3004
|                                                  
|/s/ THOMAS W. ARCHIBALDThomas W. Archibald         |  | Director                             |  | March 26, 2004
|                                                  
|/s/ JOSEPH L. GITTERMAN IIIJoseph L. Gitterman III |  | Director                             |  | March 26, 2004
|                                                  
|/s/ MICHEL LABADIEMichel Labadie                   |  | Director                             |  | March 26, 2004
|                                                  
|/s/ PIERRE BOURGIEPierre Bourgie                   |  | Director                             |  | March 26, 2004

73