##### 









United States


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


ANNUAL REPORT


PURSUANT TO SECTIONS 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 31, 2005                                                 
|          
|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 001-11655





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 $0.10 per share |  | American Stock Exchange                  

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


None


o þ


o þ


þ o


S-K 10-K 10-K. o


12b-2


|                          |  |                     |  |                        
|------------------------- |  | ------------------- |  | -----------------------
|Large accelerated filer o |  | Accelerated filer o |  | Non-accelerated filer þ

12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE












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##### 



PART I


Item 1.     Business










Products




day-to




Acquisition Program




1



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##### 







Managed Care, Institutional Contracts and Benefit
Providers






90-days




2



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##### 



Sales Development




Marketing






| |   |                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
    conducts direct mailings and offers free seminars in its markets
    on hearing aids 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. During
    2005, the Company implemented a predictive dialer system in
    order to improve the call center productivity and increase the
    number of qualified appointments in its centers.

Facilities and Services








| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | Comprehensive hearing testing using standardized practice
    guidelines
|
| |  | Interactive hearing aid selection and fitting processes                 
|
| |  | Aural rehabilitation and follow up care                                 
|
| |  | Standardized reporting and physician communications                     





3



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##### 



Revenues




Segments


e-commerce


















e-commerce


4



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##### 





Distinguishing Features










point-of






Competition




5



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##### 









Reliance on Manufacturers






Regulation




30-day


6



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##### 

















7



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8



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##### 















Product and Professional Liability




Seasonality




9



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##### 



Employees




Where to Find More Information


10-K, 10-Q 8-K




|         |             
|-------- | ------------
|Item 1A. | Risk Factors

This Annual Report on
Form 10-K,
including the management discussion and analysis set out below,
contains or incorporates 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 Exchange 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 as well as the risk
factors set forth below. The statements are not guarantees of
future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. The risks and
uncertainties described below are not the only ones facing us.
Additional risks and uncertainties that we are unaware of may
become important factors that affect us. If any of the following
risks occur, our business, financial condition and results of
operations could be materially and adversely affected.


HearUSA has a history of operating losses and may never be
profitable.






| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | Timing of product sales;                                                              
|
| |  | Level of consumer demand for our products;                                            
|
| |  | Timing and success of new centers and acquired centers;                               
|
| |  | Timing and amounts of payments by health insurance and managed
    care organizations.



We may not effectively compete in the hearing care
industry.




10



---



##### 



We are dependent on manufacturers who may not
perform.




We rely on qualified audiologists, without whom our
business may be adversely affected.




We may not be able to maintain existing agreements or
enter into new agreements with health insurance and managed care
organizations, which may result in reduced revenues.


per-patient -per-month


We depend on our joint venture for our California
operations and may not be able to attract sufficient patients to
our California centers without it.




We rely on the efforts and success of managed care
companies that may not be achieved or sustained.




11



---



##### 





We may not be able to maintain JCAHO accreditation, and
our revenues may suffer.




We are exposed to potential product and professional
liability that could adversely affect us if a successful claim
is made in excess of insurance policy limits.




Risks Relating to HearUSA Common Stock


The price of our common stock is volatile and could
decline.






| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | the amount of our cash resources and ability to obtain
    additional funding;            
|
| |  | economic conditions in markets we are targeting;                                          
|
| |  | fluctuations in operating results;                                                        
|
| |  | changes in government regulation of the healthcare industry;                              
|
| |  | failure to meet estimates or expectations of the market; and                              
|
| |  | rate of acceptance of hearing aid products in the geographic
    markets we are targeting.



12



---



##### 



HearUSA might fail to maintain a listing for its common
stock on the American Stock Exchange, making it more difficult
for stockholders to dispose of or to obtain accurate quotations
as to the value of their HearUSA stock.






| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the company fails to maintain stockholders equity of at
    least $2,000,000 if the company has sustained losses from
    continuing operations or net losses in two of its three most
    recent fiscal years;
|
| |  | the company fails to maintain stockholders equity of
    $4,000,000 if the company has sustained losses from continuing
    operations or net losses in three of its four most recent fiscal
    years; or     
|
| |  | the company has sustained losses from continuing operations or
    net losses in its five most recent fiscal years.                                                                                             

over-the


If penny stock regulations apply to HearUSA
common stock, you may not be able to sell or dispose of your
shares.


over-the


Conversion of outstanding HearUSA convertible subordinated
notes and exercise of outstanding HearUSA options and warrants
could cause substantial dilution.






| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $7.5 million in convertible subordinated notes, convertible
    into approximately 4,285,715 shares of common stock,
    assuming any interest is paid in cash;
|
| |  | Warrants to purchase approximately 5,114,853 shares of
    common stock and                                                                                    
|
| |  | Options to purchase approximately 5,511,070 shares of
    common stock.                                                                                        



13



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##### 



Future sales of shares may depress the price of HearUSA
common stock.




Because of the HearUSA rights agreement and the related
rights plan for the exchangeable shares, a third party may be
discouraged from making a takeover offer which could be
beneficial to HearUSA and its stockholders.




Because HearUSA stockholders do not receive dividends,
stockholders must rely on stock appreciation for any return on
their investment in HearUSA.




Other Risks Relating to the Business of HearUSA


We may not be able to access funds under our credit
facility with Siemens if we cannot maintain compliance with the
restrictive covenants contained therein and in our supply
agreement with Siemens.




14



---



##### 



We may not be able to obtain additional capital on
reasonable terms, or at all, to fund our operations.




Future acquisitions or investments could negatively affect
our operations and financial results or dilute the ownership
percentage of our stockholders.








| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | issue additional stock that would further dilute our current
    stockholders percentage ownership;                                                                       
|
| |  | incur debt;                                                                                                                                                                
|
| |  | assume unknown or contingent liabilities; or                                                                                                                               
|
| |  | experience negative effects on reported operating results from
    acquisition-related charges and amortization of acquired
    technology, goodwill and other intangibles.





| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | potential loss of key employees of acquired organizations;                                      
|
| |  | problems integrating the acquired business, including its
    information systems and personnel;
|
| |  | unanticipated costs that may harm operating results;                                            
|
| |  | diversion of managements attention from business
    concerns; and                             
|
| |  | adverse effects on existing business relationships with
    customers.                          



Increased exposure to currency fluctuations could have
adverse effects on our reported earnings.




15



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##### 



Item 1B.     Unresolved
Staff Comments




Item 2.     Properties


e-commerce


Item 3.     Legal
Proceedings




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




EXECUTIVE OFFICERS OF THE COMPANY


5-year 3-year


|                                                     |  |     |    |              |                      |  |      | 
|---------------------------------------------------- |  | --- | -- | ------------ | -------------------- |  | ---- | 
|                                                     |  |     |    | First Served |                     
|Name and Position                                    |  | Age |    |              | as Executive Officer | 
|                                                     |  |     |    |              |                      | 
|                                                    
|                                                    
|                                                    
|                                                    
|Paul A. Brown, M.D. 
    Chairman of the Board       |  |     | 67 |              |                      |  | 1986 | 
|                                                    
|                                                    
|                                                    
|                                                    
|Stephen J. Hansbrough                                |  |     | 58 |              |                      |  | 1993 | 
|President/ Chief Executive Officer
    Director      |  |     |    |              |                      |  |      | 
|                                                    
|                                                    
|                                                    
|                                                    
|Gino Chouinard                                       |  |     | 37 |              |                      |  | 2002 | 
|Executive Vice President
    Chief Financial Officer |  |     |    |              |                      |  |      | 
|                                                    
|                                                    
|                                                    
|                                                    
|Kenneth Schofield                                    |  |     | 41 |              |                      |  | 2004 | 
|Chief Operating Officer                              |  |     |    |              |                      |  |      | 





16



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##### 





start-up






PART II




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



|               |  |              |      |  |     |   |      | 
|-------------- |  | ------------ | ---- |  | --- | - | ---- | 
|               |  | Common Stock |     
|               |  |              |     
|Fiscal Quarter |  | High         |      |  | Low |  
|               |  |              |      |  |     |  
|2005           |  |              |      |  |     |   |      | 
|              
|              
|              
|              
|First          |  | $            | 2.09 |  |     | $ | 1.49 | 
|              
|              
|              
|              
|Second         |  | $            | 2.00 |  |     | $ | 1.45 | 
|              
|              
|              
|              
|Third          |  | $            | 1.79 |  |     | $ | 1.50 | 
|              
|              
|              
|              
|Fourth         |  | $            | 1.76 |  |     | $ | 1.13 | 
|              
|              
|              
|              
|2004           |  |              |      |  |     |   |      | 
|              
|              
|              
|              
|First          |  | $            | 2.90 |  |     | $ | 2.08 | 
|              
|              
|              
|              
|Second         |  | $            | 2.10 |  |     | $ | 1.53 | 
|              
|              
|              
|              
|Third          |  | $            | 1.77 |  |     | $ | 1.05 | 
|              
|              
|              
|              
|Fourth         |  | $            | 1.61 |  |     | $ | 1.15 | 

17



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##### 





Dividend Policy






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



CONSOLIDATED STATEMENT OF OPERATIONS DATA:


|                                                                                                                                                       |  |             |            |   |             |   |            |             |  |   |             |   |  |             |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | ---------- | - | ----------- | - | ---------- | ----------- |  | - | ----------- | - |  | ----------- | ---------- | - |  | - | ---------- | -
|                                                                                                                                                       |  | Year Ended  |           
|                                                                                                                                                       |  |             |           
|                                                                                                                                                       |  | December 31 |            |   | December 25 |   |            | December 27 |  |   | December 28 |   |  | December 29 |           
|                                                                                                                                                       |  | 2005        |            |   | 2004        |   |            | 2003        |  |   | 2002(1)     |   |  | 2001        |           
|                                                                                                                                                       |  |             |            |   |             |   |            |             |  |   |             |   |  |             |           
|Net revenues                                                                                                                                           |  | $           | 76,672,003 |   |             | $ | 68,749,542 |             |  | $ | 67,080,108  |   |  | $           | 55,038,793 |   |  | $ | 48,796,110 |  
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Total operating costs and expenses                                                                                                                     |  |             | 72,957,087 |   |             |   | 66,411,162 |             |  |   | 64,812,179  |   |  |             | 59,350,819 |   |  |   | 56,995,460 |  
|                                                                                                                                                       |  |             |            |   |             |   |            |             |  |   |             |   |  |             |           
|Income (loss) from operations                                                                                                                          |  |             | 3,714,916  |   |             |   | 2,338,380  |             |  |   | 2,267,929   |   |  |             | (4,312,026 | ) |  |   | (8,199,350 | )
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Non-operating income (expenses):                                                                                                                       |  |             |            |   |             |   |            |             |  |   |             |   |  |             |            |   |  |   |            |  
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Gain from insurance settlement(2)                                                                                                                      |  |             | 430,122    |   |             |   |           |             |  |   |            |   |  |             |           |   |  |   |           |  
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Interest income                                                                                                                                        |  |             | 53,921     |   |             |   | 17,543     |             |  |   | 20,836      |   |  |             | 114,152    |   |  |   | 222,349    |  
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Interest expense (including approximately $2,540,000, $2,127,000
    and $517,000, in 2005, 2004 and 2003, of non-cash debt discount
    amortization) |  |             | (5,162,701 | ) |             |   | (4,563,729 | )           |  |   | (2,828,327  | ) |  |             | (1,722,990 | ) |  |   | (652,530   | )
|                                                                                                                                                       |  |             |            |   |             |   |            |             |  |   |             |   |  |             |           
|Loss before equity in loss of affiliated company and loss from
    discontinued operations                                                             |  |             | (963,742   | ) |             |   | (2,207,806 | )           |  |   | (539,562    | ) |  |             | (5,920,864 | ) |  |   | (8,629,531 | )
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Equity in loss of affiliated company                                                                                                                   |  |             |           |   |             |   |           |             |  |   |            |   |  |             | (630,801   | ) |  |   |           |  
|                                                                                                                                                       |  |             |            |   |             |   |            |             |  |   |             |   |  |             |           
|Loss from continuing operations before income taxes                                                                                                    |  |             | (963,742   | ) |             |   | (2,207,806 | )           |  |   | (539,562    | ) |  |             | (6,551,665 | ) |  |   | (8,629,531 | )
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Income taxes                                                                                                                                           |  |             | (78,000    | ) |             |   |           |             |  |   |            |   |  |             |           |   |  |   |           |  
|                                                                                                                                                       |  |             |            |   |             |   |            |             |  |   |             |   |  |             |           
|Net loss from continuing operations                                                                                                                    |  |             | (1,041,742 | ) |             |   | (2,207,806 | )           |  |   | (539,562    | ) |  |             | (6,551,665 | ) |  |   | (8,629,531 | )
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Loss from discontinued operations                                                                                                                      |  |             | (63,553    | ) |             |   | (550,696   | )           |  |   | (569,827    | ) |  |             | (328,804   | ) |  |   |           |  
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Dividends on preferred stock                                                                                                                           |  |             | (700,675   | ) |             |   | (708,159   | )           |  |   | (626,956    | ) |  |             | (696,541   | ) |  |   | (812,205   | )
|                                                                                                                                                       |  |             |            |   |             |   |            |             |  |   |             |   |  |             |           
|Net loss applicable to common stockholders                                                                                                             |  | $           | (1,805,970 | ) |             | $ | (3,466,661 | )           |  | $ | (1,736,345  | ) |  | $           | (7,577,010 | ) |  | $ | (9,441,736 | )
|                                                                                                                                                       |  |             |            |   |             |   |            |             |  |   |             |   |  |             |           
|Loss per common share                                                                                                                                  |  |             |            |   |             |   |            |             |  |   |             |   |  |             |            |   |  |   |            |  
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Basic and diluted, loss from continuing operations, including
    dividends on preferred stock                                                         |  | $           | (0.06      | ) |             | $ | (0.10      | )           |  | $ | (0.04       | ) |  | $           | (0.32      | ) |  | $ | (0.72      | )
|                                                                                                                                                       |  |             |            |   |             |   |            |             |  |   |             |   |  |             |           

18



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##### 



|                                                              |  |             |            |   |             |   |            |             |  |   |             |   |  |             |            |   |  |   |            |  
|------------------------------------------------------------- |  | ----------- | ---------- | - | ----------- | - | ---------- | ----------- |  | - | ----------- | - |  | ----------- | ---------- | - |  | - | ---------- | -
|                                                              |  | Year Ended  |           
|                                                              |  |             |           
|                                                              |  | December 31 |            |   | December 25 |   |            | December 27 |  |   | December 28 |   |  | December 29 |           
|                                                              |  | 2005        |            |   | 2004        |   |            | 2003        |  |   | 2002(1)     |   |  | 2001        |           
|                                                              |  |             |            |   |             |   |            |             |  |   |             |   |  |             |           
|Basis and diluted, net loss applicable to common stockholders |  | $           | (0.06      | ) |             | $ | (0.11      | )           |  | $ | (0.06       | ) |  | $           | (0.34      | ) |  | $ | (0.72      | )
|                                                              |  |             |            |   |             |   |            |             |  |   |             |   |  |             |           
|Weighted average number of common shares outstanding          |  |             | 31,610,793 |   |             |   | 30,426,829 |             |  |   | 30,424,262  |   |  |             | 22,534,393 |   |  |   | 13,120,137 |  
|                                                              |  |             |            |   |             |   |            |             |  |   |             |   |  |             |           
|Cash dividends per common share                               |  |             | None       |   |             |   | None       |             |  |   | None        |   |  |             | None       |   |  |   | None       |  
|                                                              |  |             |            |   |             |   |            |             |  |   |             |   |  |             |           






|    |                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As discussed in Note 5  Business Acquisitions
    Notes to the Consolidated Financial Statements included herein,
    effective June 30, 2002; the Company completed its business
    combination with Helix.
|   
|(2) | The gain from insurance settlement is from insurance proceeds
    and final payment resulting from 2004 hurricane damages and
    business interruption claims sustained in Florida hearing care
    centers. 

BALANCE SHEET DATA:


|                                                   |                                                                                                                          |             |            |            |             |   |            |             |  |   |             |            |  |             |             |            |     |   |            |           | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ----------- | ---------- | ---------- | ----------- | - | ---------- | ----------- |  | - | ----------- | ---------- |  | ----------- | ----------- | ---------- | --- | - | ---------- | --------- | 
|                                                   |                                                                                                                          | As of       |           
|                                                   |                                                                                                                          |             |           
|                                                   |                                                                                                                          | December 31 |            |            | December 25 |   |            | December 27 |  |   | December 28 |            |  | December 29 |            
|                                                   |                                                                                                                          | 2005        |            |            | 2004        |   |            | 2003        |  |   | 2002(1)     |            |  | 2001        |            
|                                                   |                                                                                                                          |             |            |            |             |   |            |             |  |   |             |            |  |             |            
|Total assets                                       |                                                                                                                          | $           | 68,981,545 |            |             | $ | 59,422,361 |             |  | $ | 66,183,350  |            |  | $           | 64,996,870  |            |     | $ | 21,341,522 |          
|                                                  
|                                                  
|                                                  
|                                                  
|Working capital deficit                            |                                                                                                                          |             | (3,118,353 | )          |             |   | (4,898,459 | )           |  |   | (2,330,035  | )          |  |             | (10,231,372 | )          |     |   | (738,562   | )        
|                                                  
|                                                  
|                                                  
|                                                  
|Long-term debt:                                    |                                                                                                                          |             |            |            |             |   |            |             |  |   |             |            |  |             |             |            |     |   |            |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Long-term debt, net of current maturities                                                                                |             |            | 19,970,099 |             |   |            | 17,296,125  |  |   |             | 20,579,977 |  |             |             | 22,082,389 | (2) |   |            | 8,750,999 | 
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Convertible subordinated notes and subordinated notes, net of
    debt discount of $2,077,537, $5,443,879 and $7,423,596 |             |            | 6,222,463  |             |   |            | 2,056,121   |  |   |             | 76,404     |  |             |             |           |     |   |            |          | 
|                                                  
|                                                  
|                                                  
|                                                  
|Mandatorily redeemable convertible preferred stock |                                                                                                                          |             |           |            |             |   | 4,709,921  |             |  |   | 4,600,107   |            |  |             |            |            |     |   |           |          






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

19



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##### 





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

GENERAL










RESULTS OF OPERATIONS




| |                      
| | ---------------------
| | 2005 compared to 2004





20



---



##### 















21



---



##### 











| |                      
| | ---------------------
| | 2004 Compared to 2003









22



---



##### 









LIQUIDITY AND CAPITAL RESOURCES








23



---



##### 





,










24



---



##### 





Payments due by period (000s)


|                                                         |  |       |        |             |      |   |        |       |  |       |        |  |           |         |        |  |  |   |       | 
|-------------------------------------------------------- |  | ----- | ------ | ----------- | ---- | - | ------ | ----- |  | ----- | ------ |  | --------- | ------- | ------ |  |  | - | ----- | 
|Contractual                                              |  |       |        | Less than 1 |      |   | 1  3  |       |  | 4  5 |        |  | More than |        
|Obligations                                              |  | Total |        |             | Year |   |        | Years |  |       | Years  |  |           | 5 Years |       
|                                                         |  |       |        |             |      |   |        |       |  |       |        |  |           |         |       
|Long-term debt(1)                                        |  | $     | 25,162 |             |      | $ | 5,192  |       |  | $     | 9,353  |  |           | $       | 9,362  |  |  | $ | 1,255 | 
|                                                        
|                                                        
|                                                        
|                                                        
|Convertible subordinated notes(3)                        |  |       | 7,500  |             |      |   | 2,500  |       |  |       | 5,000  |  |           |         |       |  |  |   |      | 
|                                                        
|                                                        
|                                                        
|                                                        
|Subordinated notes                                       |  |       | 5,060  |             |      |   | 1,760  |       |  |       | 3,300  |  |           |         |       |  |  |   |      | 
|                                                         |  |       |        |             |      |   |        |       |  |       |        |  |           |         |       
|Subtotal of obligations recorded on balance sheet        |  |       | 37,722 |             |      |   | 9,452  |       |  |       | 17,653 |  |           |         | 9,362  |  |  |   | 1,255 | 
|                                                        
|                                                        
|                                                        
|                                                        
|Interest to be paid on long-term debt(2)                 |  |       | 3,419  |             |      |   | 1,175  |       |  |       | 1,546  |  |           |         | 680    |  |  |   | 18    | 
|                                                        
|                                                        
|                                                        
|                                                        
|Interest to be paid on convertible subordinated notes(3) |  |       | 928    |             |      |   | 512    |       |  |       | 416    |  |           |         |       |  |  |   |      | 
|                                                        
|                                                        
|                                                        
|                                                        
|Interest to be paid on subordinated notes                |  |       | 519    |             |      |   | 300    |       |  |       | 219    |  |           |         |       |  |  |   |      | 
|                                                        
|                                                        
|                                                        
|                                                        
|Operating leases                                         |  |       | 18,935 |             |      |   | 5,368  |       |  |       | 10,759 |  |           |         | 2,070  |  |  |   | 738   | 
|                                                        
|                                                        
|                                                        
|                                                        
|Employment agreements                                    |  |       | 3,903  |             |      |   | 1,135  |       |  |       | 1,868  |  |           |         | 900    |  |  |   |      | 
|                                                        
|                                                        
|                                                        
|                                                        
|Purchase obligations                                     |  |       | 1,356  |             |      |   | 756    |       |  |       | 600    |  |           |         |       |  |  |   |      | 
|                                                         |  |       |        |             |      |   |        |       |  |       |        |  |           |         |       
|Total contractual cash obligations                       |  | $     | 66,782 |             |      | $ | 18,698 |       |  | $     | 33,061 |  |           | $       | 13,012 |  |  | $ | 2,011 | 
|                                                         |  |       |        |             |      |   |        |       |  |       |        |  |           |         |       






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Approximately $16.5 million can be repaid through preferred
    pricing reductions from Siemens, including $3.0 million in
    less than 1 year and $5.8 in years 1-3, $5.8 in years 4-5
    and $1.7 in more than 5 years.                                                                                                                                                                                                              
|   
|(2) | Interest on long-term debt excludes the interest on the new
    Tranches A, B and C that can be repaid through preferred pricing
    reductions from Siemens pursuant to the February 10, 2006
    amended and restated credit agreement with them. Interest repaid
    through preferred pricing reductions was $389,000 in 2005. (See
    Note 6a  Long-Term Debt, Note to the
    Consolidated Financial Statements included herein).
|   
|(3) | When due these notes and corresponding interest can be repaid at
    the option of the Company in common stock                                                                                                                                                                                                                                                                                                                           

RECENT DEVELOPMENTS






25



---



##### 









CRITICAL ACCOUNTING POLICIES




Goodwill


e-commerce.


26



---



##### 



Revenue recognition






Allowance for doubtful accounts






Sales returns




RECENT ACCOUNTING PRONOUNCEMENT


Share-Based Payment, Accounting for Stock Based
Compensation Accounting for Stock Issued to Employees.


27



---



##### 



Accounting Changes and Error Corrections  A
Replacement of APB Opinion No. 20 and FASB Statement
No. 3




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



|                     |  |               |         |   |             |  |        |              |  |   |            |   |   |         |        |   |         |  |        |   |  |  |         |  
|-------------------- |  | ------------- | ------- | - | ----------- |  | ------ | ------------ |  | - | ---------- | - | - | ------- | ------ | - | ------- |  | ------ | - |  |  | ------- | -
|                     |  | Variable Rate |         |   | Fixed Rate  |  |        |             
|                     |  |               |         |   |             |  |        |             
|                     |  | Prime+1%      |         |   | 10% note    |  |        | 8%           |  |   | 7%         |   |   |         |        |  
|                     |  | due January   |         |   | due January |  |        | due November |  |   | due August |   |   |         |        |  
|                     |  | 2011          |         |   | 2011        |  |        | 2008         |  |   | 2008       |   |   | Other   |        |   | Total   | 
|                     |  |               |         |   |             |  |        |              |  |   |            |   |   |         |        |   |         | 
|                     |  | $             |         |   |             |  | $      |              |  | $ |            |   | $ |         |        | $ |        
|                     |  | (000s)       |         |   | (000s)     |  |        | (000s)      |  |   | (000s)    |   |   | (000s) |        |   | (000s) | 
|                    
|                    
|                    
|                    
|2006                 |  |               | (2,081  | ) |             |  | (2,240 | )            |  |   | (2,500     | ) |   |         | (1,760 | ) |         |  | (871   | ) |  |  | (9,452  | )
|                    
|                    
|                    
|                    
|2007                 |  |               | (4,067  | ) |             |  |       |              |  |   | (2,500     | ) |   |         | (1,760 | ) |         |  | (753   | ) |  |  | (9,080  | )
|                    
|                    
|                    
|                    
|2008                 |  |               | (4,166  | ) |             |  |       |              |  |   | (2,500     | ) |   |         | (1,540 | ) |         |  | (367   | ) |  |  | (8,573  | )
|                    
|                    
|                    
|                    
|2009                 |  |               | (4,264  | ) |             |  |       |              |  |   |           |   |   |         |       |   |         |  | (56    | ) |  |  | (4,320  | )
|                    
|                    
|                    
|                    
|2010                 |  |               | (5,042  | ) |             |  |       |              |  |   |           |   |   |         |       |   |         |  |       |   |  |  | (5,042  | )
|                    
|                    
|                    
|                    
|2011                 |  |               | (1,255  | ) |             |  |       |              |  |   |           |   |   |         |       |   |         |  |       |   |  |  | (1,255  | )
|                     |  |               |         |   |             |  |        |              |  |   |            |   |   |         |        |   |         | 
|Total                |  |               | (20,875 | ) |             |  | (2,240 | )            |  |   | (7,500     | ) |   |         | (5,060 | ) |         |  | (2,047 | ) |  |  | (37,722 | )
|                     |  |               |         |   |             |  |        |              |  |   |            |   |   |         |        |   |         | 
|Estimated fair value |  |               | (20,875 | ) |             |  | (2,220 | )            |  |   | (7,273     | ) |   |         | (4,943 | ) |         |  | (1,879 | ) |  |  | (37,190 | )
|                     |  |               |         |   |             |  |        |              |  |   |            |   |   |         |        |   |         | 

28



---



##### 





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

|                                                                                                                             |                                                                                                                                                   |      |    |    | 
|---------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | -- | -- | 
|                                                                                                                             |                                                                                                                                                   | Page |   
|                                                                                                                             |                                                                                                                                                   |      |   
|Index to Financial Statements                                                                                                |                                                                                                                                                   |      |    |   
|Financial Statements:                                                                                                        |                                                                                                                                                   |      |    |   
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                             | Report of Independent Registered Public Accounting Firm                                                                                           |      |    | 30 | 
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                             | Consolidated Balance Sheets at December 31, 2005 and
    December 25, 2004                                                                        |      |    | 31 | 
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                             | Consolidated Statements of Operations for the years ended
    December 31, 2005, December 25, 2004, and
    December 27, 2003                     |      |    | 32 | 
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                             | Consolidated Statements of Changes in Stockholders Equity
    for the years ended December 31, 2005, December 25,
    2004 and December 27, 2003 |      |    | 33 | 
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                             | Consolidated Statements of Cash Flows for the years ended
    December 31, 2005, December 25, 2004, and
    December 27, 2003                     |      |    | 35 | 
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                             | Notes to Consolidated Financial Statements                                                                                                        |      |    | 37 | 
|Financial Statement Schedule:                                                                                                |                                                                                                                                                   |      |    |   
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|II Valuation and Qualifying Accounts  For the years
    ended December 31, 2005 December 25, 2004 and
    December 27, 2003 |                                                                                                                                                   |      | 64 |   

29



---



##### 



Report of Independent Registered Public Accounting Firm






















30



---



##### 



HearUSA, Inc.


Consolidated Balance Sheets


|                                                                                                                                   |                                                                                                       |                                                  |                             |              |              |            |            |              |     |            | 
|---------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------------------------------------ | --------------------------- | ------------ | ------------ | ---------- | ---------- | ------------ | --- | ---------- | 
|                                                                                                                                   |                                                                                                       | December 31,                                     |                             |              | December 25, |           
|                                                                                                                                   |                                                                                                       | 2005                                             |                             |              | 2004         |           
|                                                                                                                                   |                                                                                                       |                                                  |                             |              |              |           
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|ASSETS (Note 6)                                                                                                                   
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Current assets                                                                                                                     |                                                                                                       |                                                  |                             |              |              |            |            |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Cash and cash equivalents                                                                                                          |                                                                                                       | $                                                | 6,706,944                   |              |              | $          | 2,615,379  |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Restricted cash and cash equivalents (Note 2)                                                                                      |                                                                                                       |                                                  | 431,000                     |              |              |            | 435,000    |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Accounts and notes receivable, less allowance for doubtful
    accounts of $413,386 and $373,583                                   |                                                                                                       |                                                  | 6,715,933                   |              |              |            | 5,997,245  |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Inventories                                                                                                                        |                                                                                                       |                                                  | 1,604,943                   |              |              |            | 801,234    |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Prepaid expenses and other                                                                                                         |                                                                                                       |                                                  | 1,627,407                   |              |              |            | 557,435    |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Current assets held for sale                                                                                                       |                                                                                                       |                                                  |                            |              |              |            | 77,458     |             
|                                                                                                                                   |                                                                                                       |                                                  |                             |              |              |           
|                                                                                                                                   |                                                                                                       |                                                  | Total current assets        |              |              | 17,086,227 |            |              |     | 10,483,751 | 
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Property and equipment, net (Notes 3 and 6)                                                                                        |                                                                                                       |                                                  | 3,474,381                   |              |              |            | 3,346,788  |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Goodwill (Notes 4 and 5)                                                                                                           |                                                                                                       |                                                  | 36,394,959                  |              |              |            | 33,210,380 |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Intangible assets, net (Notes 4 and 5)                                                                                             |                                                                                                       |                                                  | 11,440,345                  |              |              |            | 11,094,169 |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Deposits and other                                                                                                                 |                                                                                                       |                                                  | 585,633                     |              |              |            | 551,148    |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Long-term assets held for sale (Note 19)                                                                                           |                                                                                                       |                                                  |                            |              |              |            | 736,125    |             
|                                                                                                                                   |                                                                                                       |                                                  |                             |              |              |           
|                                                                                                                                   |                                                                                                       | $                                                | 68,981,545                  |              |              | $          | 59,422,361 |             
|                                                                                                                                   |                                                                                                       |                                                  |                             |              |              |           
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                              
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Current liabilities                                                                                                                |                                                                                                       |                                                  |                             |              |              |            |            |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                   | Accounts payable                                                                                      |                                                  | $                           | 8,499,812    |              |            | $          | 6,644,600    |    
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                   | Accrued expenses                                                                                      |                                                  |                             | 2,344,419    |              |            |            | 2,424,147    |    
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                   | Accrued salaries and other compensation                                                               |                                                  |                             | 2,589,877    |              |            |            | 1,982,559    |    
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                   | Current maturities of long-term debt (Note 6)                                                         |                                                  |                             | 5,192,108    |              |            |            | 4,152,908    |    
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                   | Current maturities of convertible subordinated notes, net of
    debt discount of $1,847,853 (Note 7) |                                                  |                             | 652,147      |              |            |            |             |    
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                   | Current maturities of subordinated notes, net of debt discount
    of $868,345 (Note 8)               |                                                  |                             | 891,655      |              |            |            |             |    
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                   | Dividends payable (Notes 9 and 10C)                                                                   |                                                  |                             | 34,562       |              |            |            | 177,996      |    
|                                                                                                                                   |                                                                                                       |                                                  |                             |              |              |           
|                                                                                                                                   |                                                                                                       |                                                  | Total current liabilities   |              |              | 20,204,580 |            |              |     | 15,382,210 | 
|                                                                                                                                   |                                                                                                       |                                                  |                             |              |              |           
|Long-term debt (Note 6)                                                                                                            |                                                                                                       |                                                  | 19,970,099                  |              |              |            | 17,296,125 |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Convertible subordinated notes, net of debt discount of
    $1,565,187 and $5,443,879 (Note 7)                                     |                                                                                                       |                                                  | 3,434,813                   |              |              |            | 2,056,121  |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Subordinated notes, net of debt discount of $512,350
    (Note 8)                                                                  |                                                                                                       |                                                  | 2,787,650                   |              |              |            |           |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Warrant liability (Note 8)                                                                                                         |                                                                                                       |                                                  | 1,869,360                   |              |              |            |           |             
|                                                                                                                                   |                                                                                                       |                                                  |                             |              |              |           
|                                                                                                                                   |                                                                                                       |                                                  | Total long-term liabilities |              |              | 28,061,922 |            |              |     | 19,352,246 | 
|                                                                                                                                   |                                                                                                       |                                                  |                             |              |              |           
|Commitments and contingencies (Notes 3,6,7,9,11 and
    15)                                                                        |                                                                                                       |                                                  |                            |              |              |            |           |             
|                                                                                                                                   |                                                                                                       |                                                  |                             |              |              |           
|Mandatorily redeemable convertible preferred stock
    (Note 9)                                                                    |                                                                                                       |                                                  |                            |              |              |            | 4,709,921  |             
|                                                                                                                                   |                                                                                                       |                                                  |                             |              |              |           
|Stockholders equity                                                                                                               |                                                                                                       |                                                  |                             |              |              |            |            |             
|Preferred stock (aggregate liquidation preference $2,330,000 and
    $2,330,000, $1 par, 7,500,000 shares authorized
    (Note 10) |                                                                                                       |                                                  |                             |              |              |            |            |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                   |                                                                                                       | Series H Junior Participating (none outstanding) |                             |              |             |            |            |              |    |           
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                   |                                                                                                       | Series J (233 shares outstanding) (Note 10C)     |                             |              | 233          |            |            |              | 233 |           
|                                                                                                                                   |                                                                                                       |                                                  |                             |              |              |           
|                                                                                                                                   |                                                                                                       |                                                  | Total preferred stock       |              |              | 233        |            |              |     | 233        | 
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Common stock: $0.10 par; 75,000,000 shares authorized:
    31,893,200 and 30,060,690 shares issued
    (Notes 4,5,7,9,10 and 11)   |                                                                                                       |                                                  | 3,189,320                   |              |              |            | 3,006,069  |             
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                   | Stock subscription (Note 10B)                                                                         |                                                  |                             | (412,500     | )            |            |            | (412,500     | )  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                   | Additional paid-in capital                                                                            |                                                  |                             | 121,934,658  |              |            |            | 120,197,937  |    
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                   | Accumulated deficit                                                                                   |                                                  |                             | (103,774,422 | )            |            |            | (101,968,452 | )  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                   | Accumulated other comprehensive income                                                                |                                                  |                             | 2,262,895    |              |            |            | 1,639,838    |    
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                   | Treasury stock, at cost: 523,662 common shares                                                        |                                                  |                             | (2,485,141   | )            |            |            | (2,485,141   | )  
|                                                                                                                                   |                                                                                                       |                                                  |                             |              |              |           
|                                                                                                                                   |                                                                                                       |                                                  | Total stockholders equity  |              |              | 20,715,043 |            |              |     | 19,977,984 | 
|                                                                                                                                   |                                                                                                       |                                                  |                             |              |              |           
|                                                                                                                                   |                                                                                                       | $                                                | 68,981,545                  |              |              | $          | 59,422,361 |             
|                                                                                                                                   |                                                                                                       |                                                  |                             |              |              |           

See accompanying notes to consolidated financial
statements


31



---



##### 



HearUSA, Inc.


Consolidated Statements of Operations


|                                                                                                                                                       |                                          |              |            |            |              |   |            |              |  |   |            |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------- | ------------ | ---------- | ---------- | ------------ | - | ---------- | ------------ |  | - | ---------- | ---------- | 
|                                                                                                                                                       |                                          | Year Ended   |           
|                                                                                                                                                       |                                          |              |           
|                                                                                                                                                       |                                          | December 31, |            |            | December 25, |   |            | December 27, | 
|                                                                                                                                                       |                                          | 2005         |            |            | 2004         |   |            | 2003         | 
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 
|Net revenues                                                                                                                                           |                                          |              |            |            |              |   |            |              |  |   |            |           
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Hearing aids and other products                                                                                                                        |                                          | $            | 71,445,381 |            |              | $ | 63,227,775 |              |  | $ | 60,927,044 |           
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Services                                                                                                                                               |                                          |              | 5,226,622  |            |              |   | 5,521,767  |              |  |   | 6,153,064  |           
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 
|                                                                                                                                                       | Total net revenues                       |              |            | 76,672,003 |              |   |            | 68,749,542   |  |   |            | 67,080,108 | 
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 
|Operating costs and expenses                                                                                                                           |                                          |              |            |            |              |   |            |              |  |   |            |           
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Hearing aids and other products                                                                                                                        |                                          |              | 20,972,635 |            |              |   | 17,511,405 |              |  |   | 18,836,929 |           
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Services                                                                                                                                               |                                          |              | 1,793,944  |            |              |   | 1,718,287  |              |  |   | 128,759    |           
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 
|                                                                                                                                                       | Total cost of products sold and services |              |            | 22,766,579 |              |   |            | 19,229,692   |  |   |            | 18,965,688 | 
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Center operating expenses                                                                                                                              |                                          |              | 36,555,590 |            |              |   | 34,890,950 |              |  |   | 32,591,897 |           
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|General and administrative expenses                                                                                                                    |                                          |              | 11,660,725 |            |              |   | 10,218,283 |              |  |   | 10,470,717 |           
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Depreciation and amortization                                                                                                                          |                                          |              | 1,974,193  |            |              |   | 2,072,237  |              |  |   | 2,783,877  |           
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 
|                                                                                                                                                       | Total operating costs and expenses       |              |            | 72,957,087 |              |   |            | 66,411,162   |  |   |            | 64,812,179 | 
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 
|Income from operations                                                                                                                                 |                                          |              | 3,714,916  |            |              |   | 2,338,380  |              |  |   | 2,267,929  |           
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Non-operating income (expense):                                                                                                                        |                                          |              |            |            |              |   |            |              |  |   |            |           
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Gain from insurance settlement                                                                                                                         |                                          |              | 430,122    |            |              |   |           |              |  |   |           |           
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Interest income                                                                                                                                        |                                          |              | 53,921     |            |              |   | 17,543     |              |  |   | 20,836     |           
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Interest expense (including approximately $2,540,000, $2,127,000
    and $517,000, in 2005, 2004 and 2003, of non-cash debt discount
    amortization) |                                          |              | (5,162,701 | )          |              |   | (4,563,729 | )            |  |   | (2,828,327 | )         
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 
|Loss from continuing operations before income taxes                                                                                                    |                                          |              | (963,742   | )          |              |   | (2,207,806 | )            |  |   | (539,562   | )         
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Income taxes                                                                                                                                           |                                          |              | (78,000    | )          |              |   |           |              |  |   |           |           
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 
|Net loss from continuing operations                                                                                                                    |                                          |              | (1,041,742 | )          |              |   | (2,207,806 | )            |  |   | (539,562   | )         
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 
|Discontinued operations (Note 19)                                                                                                                      |                                          |              |            |            |              |   |            |              |  |   |            |           
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Gain on disposition of assets                                                                                                                          |                                          |              | 332,470    |            |              |   |           |              |  |   |           |           
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Loss from discontinued operations                                                                                                                      |                                          |              | (396,023   | )          |              |   | (550,696   | )            |  |   | (569,827   | )         
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 
|Net loss from discontinued operations                                                                                                                  |                                          |              | (63,553    | )          |              |   | (550,696   | )            |  |   | (569,827   | )         
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 
|Net loss                                                                                                                                               |                                          |              | (1,105,295 | )          |              |   | (2,758,502 | )            |  |   | (1,109,389 | )         
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|                                                                                                                                                      
|Dividends on preferred stock (Notes 9 and 10C)                                                                                                         |                                          |              | (700,675   | )          |              |   | (708,159   | )            |  |   | (626,956   | )         
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 
|Net loss applicable to common stockholders                                                                                                             |                                          | $            | (1,805,970 | )          |              | $ | (3,466,661 | )            |  | $ | (1,736,345 | )         
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 
|Net loss from continuing operations, including dividends on
    preferred stock, applicable to common stockholders-basic and
    diluted               |                                          | $            | (0.06      | )          |              | $ | (0.10      | )            |  | $ | (0.04      | )         
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 
|Net loss applicable to common stockholders per common
    share  basic and diluted (Note 1)                                                           |                                          | $            | (0.06      | )          |              | $ | (0.11      | )            |  | $ | (0.06      | )         
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 
|Weighted average number of shares of common stock
    outstanding  (Notes 1, 10 and 11)                                                               |                                          |              | 31,610,793 |            |              |   | 30,426,829 |              |  |   | 30,424,262 |           
|                                                                                                                                                       |                                          |              |            |            |              |   |            |              | 

See accompanying notes to consolidated financial
statements


32



---



##### 



HearUSA, Inc.


Consolidated Statements of Changes in Stockholders
Equity


|                            |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |   |  |            |           |   |   |             |            |  
|--------------------------- | -------------------------- | ---------------------------------------------------------------------------------------------------------- |  | ---------- | ----------------- |  | - | ----------------- | --------- | - | ------ | ---------- | ------- | ------ | - | ----------- | ------- | - |  | ---------- | --------- | - | - | ----------- | ---------- | -
|                            |                            | Year Ended                                                                                                 |  |            | Year Ended        |  |   | Year Ended        |          
|                            |                            | December 31, 2005                                                                                          |  |            | December 25, 2004 |  |   | December 27, 2003 |          
|                            |                            |                                                                                                            |  |            |                   |  |   |                   |          
|                            |                            | Shares                                                                                                     |  |            | Amount            |  |   | Shares            |           |   | Amount |            |         | Shares |   |             | Amount  |  
|                            |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |  
|Preferred stock             |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |   |  |            |           |   |   |            
|                           
|                           
|                           
|                           
|                            | Balance, beginning of year |                                                                                                            |  | 233        |                   |  | $ | 233               |           |   |        | 233        |         |        | $ | 233         |         |   |  | 4,796      |           |   | $ | 4,796       |           
|                           
|                           
|                           
|                           
|                            |                            | Exchange/redemption of preferred stock                                                                     |  |            |                  |  |   |                   |          |   |        |            |        |        |   |             |        |   |  |            | (4,563    | ) |   |             | (4,563     | )
|                            |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |  
|                            | Balance, end of year       |                                                                                                            |  | 233        |                   |  | $ | 233               |           |   |        | 233        |         |        | $ | 233         |         |   |  | 233        |           |   | $ | 233         |           
|                            |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |  
|Common stock                |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |   |  |            |           |   |   |            
|                           
|                           
|                           
|                           
|                            | Balance, beginning of year |                                                                                                            |  | 30,060,676 |                   |  | $ | 3,006,068         |           |   |        | 29,528,450 |         |        | $ | 2,952,845   |         |   |  | 24,457,055 |           |   | $ | 2,445,705   |           
|                           
|                           
|                           
|                           
|                            |                            | Exercise of employee stock options                                                                         |  |            | 130,000           |  |   |                   | 13,000    |   |        |            | 6,250   |        |   |             | 625     |   |  |            | 20        |   |   |             | 2          |  
|                           
|                           
|                           
|                           
|                            |                            | Issuance of common stock for exchangeable shares                                                           |  |            | 102,524           |  |   |                   | 10,252    |   |        |            | 525,976 |        |   |             | 52,598  |   |  |            | 5,071,375 |   |   |             | 507,138    |  
|                           
|                           
|                           
|                           
|                            |                            | Warrant exercise                                                                                           |  |            | 1,600,000         |  |   |                   | 160,000   |   |        |            |        |        |   |             |        |   |  |            |           |   |   |             |            |  
|                            |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |  
|                            | Balance, end of year       |                                                                                                            |  | 31,893,200 |                   |  | $ | 3,189,320         |           |   |        | 30,060,676 |         |        | $ | 3,006,068   |         |   |  | 29,528,450 |           |   | $ | 2,952,845   |           
|                            |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |  
|Treasury stock              |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |   |  |            |           |   |   |            
|                           
|                           
|                           
|                           
|                            | Balance, beginning of year |                                                                                                            |  | 523,662    |                   |  | $ | (2,485,141        | )         |   |        | 523,662    |         |        | $ | (2,485,141  | )       |   |  | 518,660    |           |   | $ | (2,483,441  | )         
|                           
|                           
|                           
|                           
|                            |                            | Purchase of treasury stock                                                                                 |  |            |                  |  |   |                   |          |   |        |            |        |        |   |             |        |   |  |            | 5,002     |   |   |             | (1,700     | )
|                            |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |  
|                            | Balance, end of year       |                                                                                                            |  | 523,662    |                   |  | $ | (2,485,141        | )         |   |        | 523,662    |         |        | $ | (2,485,141  | )       |   |  | 523,662    |           |   | $ | (2,485,141  | )         
|                            |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |  
|Stock subscription          |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |   |  |            |           |   |   |            
|                           
|                           
|                           
|                           
|                            | Balance, beginning of year |                                                                                                            |  |            |                   |  | $ | (412,500          | )         |   |        |            |         |        | $ | (412,500    | )       |   |  |            |           |   | $ | (412,500    | )         
|                            |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |  
|                            | Balance, end of Year       |                                                                                                            |  |            |                   |  | $ | (412,500          | )         |   |        |            |         |        | $ | (412,500    | )       |   |  |            |           |   | $ | (412,500    | )         
|                            |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |  
|Additional paid-in capital: |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |   |  |            |           |   |   |            
|                           
|                           
|                           
|                           
|                            | Balance, beginning of year |                                                                                                            |  |            |                   |  | $ | 120,197,937       |           |   |        |            |         |        | $ | 120,226,050 |         |   |  |            |           |   | $ | 117,314,681 |           
|                           
|                           
|                           
|                           
|                            |                            | Exchange/redemption of preferred stock, including issuance costs                                           |  |            |                   |  |   |                   |          |   |        |            |         |        |   |             |        |   |  |            |           |   |   |             | (4,759,324 | )
|                           
|                           
|                           
|                           
|                            |                            | Value of warrants and beneficial conversion feature issued with
    convertible subordinated notes payable |  |            |                   |  |   |                   |          |   |        |            |         |        |   |             |        |   |  |            |           |   |   |             | 7,708,229  |  
|                           
|                           
|                           
|                           
|                            |                            | Value of warrants issued with debt                                                                         |  |            |                   |  |   |                   |          |   |        |            |         |        |   |             |        |   |  |            |           |   |   |             | 429,339    |  
|                           
|                           
|                           
|                           
|                            |                            | Exercise of employee stock options                                                                         |  |            |                   |  |   |                   | 55,000    |   |        |            |         |        |   |             | 3,563   |   |  |            |           |   |   |             | 13         |  
|                           
|                           
|                           
|                           
|                            |                            | Issuance of common stock for exchangeable shares                                                           |  |            |                   |  |   |                   | (10,252   | ) |        |            |         |        |   |             | (52,598 | ) |  |            |           |   |   |             | (507,138   | )
|                           
|                           
|                           
|                           
|                            |                            | Proceeds of Board of Directors stock                                                                      |  |            |                   |  |   |                   |          |   |        |            |         |        |   |             |        |   |  |            |           |   |   |             | 40,250     |  
|                           
|                           
|                           
|                           
|                            |                            | Exercise of warrants                                                                                       |  |            |                   |  |   |                   | 1,665,000 |   |        |            |         |        |   |             |        |   |  |            |           |   |   |             |           |  
|                           
|                           
|                           
|                           
|                            |                            | Consulting expense                                                                                         |  |            |                   |  |   |                   | 26,973    |   |        |            |         |        |   |             | 12,672  |   |  |            |           |   |   |             |            |  
|                           
|                           
|                           
|                           
|                            |                            | Compensation expense                                                                                       |  |            |                   |  |   |                   |          |   |        |            |         |        |   |             | 8,250   |   |  |            |           |   |   |             |           |  
|                            |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |  
|                            | Balance, end of year       |                                                                                                            |  |            |                   |  | $ | 121,934,658       |           |   |        |            |         |        | $ | 120,197,937 |         |   |  |            |           |   | $ | 120,226,050 |           
|                            |                            |                                                                                                            |  |            |                   |  |   |                   |           |   |        |            |         |        |   |             |         |  

See accompanying notes to consolidated financial
statements


33



---



##### 



HearUSA, Inc.


Consolidated Statements of Changes in Stockholders
Equity


|                                        |                            |                                         |            |              |                   |   |            |                   |            |   |            |             |            |  
|--------------------------------------- | -------------------------- | --------------------------------------- | ---------- | ------------ | ----------------- | - | ---------- | ----------------- | ---------- | - | ---------- | ----------- | ---------- | -
|                                        |                            | Year Ended                              |           
|                                        |                            |                                         |           
|                                        |                            | December 31, 2005                       |            |              | December 25, 2004 |   |            | December 27, 2003 |           
|                                        |                            |                                         |            |              |                   |   |            |                   |           
|                                        |                            | Amount                                  |            |              | Amount            |   |            | Amount            |           
|                                        |                            |                                         |            |              |                   |   |            |                   |           
|Accumulated deficit:                    |                            |                                         |            |              |                   |   |            |                   |            |   |            |            
|                                       
|                                       
|                                       
|                                       
|                                        | Balance, beginning of year |                                         | $          | (101,968,452 | )                 |   | $          | (98,501,791       | )          |   | $          | (96,765,446 | )         
|                                       
|                                       
|                                       
|                                       
|                                        |                            | Net loss                                |            |              | (1,105,295        | ) |            |                   | (2,758,502 | ) |            |             | (1,109,389 | )
|                                       
|                                       
|                                       
|                                       
|                                        |                            | Dividends on preferred stock            |            |              | (700,675          | ) |            |                   | (708,159   | ) |            |             | (626,956   | )
|                                        |                            |                                         |            |              |                   |   |            |                   |           
|                                        | Balance, end of year       |                                         | $          | (103,774,422 | )                 |   | $          | (101,968,452      | )          |   | $          | (98,501,791 | )         
|                                        |                            |                                         |            |              |                   |   |            |                   |           
|Accumulated other comprehensive income: |                            |                                         |            |              |                   |   |            |                   |            |   |            |            
|                                       
|                                       
|                                       
|                                       
|                                        | Balance, beginning of year |                                         | $          | 1,639,838    |                   |   | $          | 1,033,616         |            |   | $          | 462,825     |           
|                                       
|                                       
|                                       
|                                       
|                                        |                            | Foreign currency translation adjustment |            |              | 623,057           |   |            |                   | 606,222    |   |            |             | 570,791    |  
|                                        |                            |                                         |            |              |                   |   |            |                   |           
|                                        | Balance, end of year       |                                         | $          | 2,262,895    |                   |   | $          | 1,639,838         |            |   | $          | 1,033,616   |           
|                                        |                            |                                         |            |              |                   |   |            |                   |           
|Comprehensive income (loss):            |                            |                                         |            |              |                   |   |            |                   |            |   |            |            
|                                       
|                                       
|                                       
|                                       
|Net loss                                |                            | $                                       | (1,105,295 | )            |                   | $ | (2,758,502 | )                 |            | $ | (1,109,389 | )          
|                                       
|                                       
|                                       
|                                       
|Foreign currency translation adjustment |                            |                                         | 623,057    |              |                   |   | 606,222    |                   |            |   | 570,791    |            
|                                        |                            |                                         |            |              |                   |   |            |                   |           
|Comprehensive loss                      |                            | $                                       | (482,238   | )            |                   | $ | (2,152,280 | )                 |            | $ | (538,598   | )          
|                                        |                            |                                         |            |              |                   |   |            |                   |           

See accompanying notes to consolidated financial
statements


34



---



##### 



HearUSA, Inc.


Consolidated Statements of Cash Flows


|                                                                                              |                                                                                    |                                         |            |            |              |   |            |              |          |   |            |            |            |  
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------------- | ---------- | ---------- | ------------ | - | ---------- | ------------ | -------- | - | ---------- | ---------- | ---------- | -
|                                                                                              |                                                                                    | Year Ended                              |           
|                                                                                              |                                                                                    |                                         |           
|                                                                                              |                                                                                    | December 31,                            |            |            | December 25, |   |            | December 27, |         
|                                                                                              |                                                                                    | 2005                                    |            |            | 2004         |   |            | 2003         |         
|                                                                                              |                                                                                    |                                         |            |            |              |   |            |              |         
|Cash flows from operating activities                                                          |                                                                                    |                                         |            |            |              |   |            |              |          |   |            |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Net loss                                                                                      |                                                                                    | $                                       | (1,105,295 | )          |              | $ | (2,758,502 | )            |          | $ | (1,109,389 | )         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities: |                                                                                    |                                         |            |            |              |   |            |              |          |   |            |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Debt discount amortization                                                         |                                         |            | 2,540,120  |              |   |            | 2,127,054    |          |   |            | 516,992    |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Depreciation and amortization                                                      |                                         |            | 1,974,193  |              |   |            | 2,072,237    |          |   |            | 2,783,877  |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Interest on Siemens Tranche D                                                      |                                         |            | 964,361    |              |   |            | 655,568      |          |   |            | 710,027    |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Provision for doubtful accounts                                                    |                                         |            | 354,107    |              |   |            | 430,454      |          |   |            | 801,303    |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Loss from discontinued operations                                                  |                                         |            | 63,553     |              |   |            | 550,696      |          |   |            | 569,827    |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Consulting expense                                                                 |                                         |            | 26,969     |              |   |            | 12,672       |          |   |            |           |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Principal payments on long-term debt made through preferred
    pricing reductions |                                         |            | (2,922,537 | )            |   |            | (2,920,804   | )        |   |            | (2,920,804 | )         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | (Gain) loss on disposition of equipment                                            |                                         |            | (50,650    | )            |   |            | 53,836       |          |   |            | 648        |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Executive compensation expense                                                     |                                         |            |           |              |   |            | 8,250        |          |   |            |           |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | (Increase) decrease in:                                                            |                                         |            |            |              |   |            |              |          |   |            |            |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |                                                                                    | Accounts and notes receivable           |            |            | (982,851     | ) |            |              | (467,068 | ) |            |            | (842,031   | )
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |                                                                                    | Inventories                             |            |            | (862,815     | ) |            |              | 99,475   |   |            |            | (6,532     | )
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |                                                                                    | Prepaid expenses and other              |            |            | (606,766     | ) |            |              | 636,835  |   |            |            | 124,212    |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Increase (decrease) in:                                                            |                                         |            |            |              |   |            |              |          |   |            |            |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |                                                                                    | Accounts payable and accrued expenses   |            |            | 1,641,564    |   |            |              | (361,241 | ) |            |            | (4,671,611 | )
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |                                                                                    | Accrued salaries and other compensation |            |            | 595,860      |   |            |              | 261,810  |   |            |            | (123,107   | )
|                                                                                              |                                                                                    |                                         |            |            |              |   |            |              |         
|Net cash provided by (used in) continuing activities                                          |                                                                                    |                                         | 1,629,813  |            |              |   | 401,272    |              |          |   | (4,166,588 | )         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Net cash provided by (used in) discontinued operations                                        |                                                                                    |                                         | (113,457   | )          |              |   | (356,598   | )            |          |   | (666,013   | )         
|                                                                                              |                                                                                    |                                         |            |            |              |   |            |              |         
|Net cash provided by (used in) operating activities                                           |                                                                                    |                                         | 1,516,356  |            |              |   | 44,674     |              |          |   | (4,832,601 | )         
|                                                                                              |                                                                                    |                                         |            |            |              |   |            |              |         
|Cash flows from investing activities                                                          |                                                                                    |                                         |            |            |              |   |            |              |          |   |            |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Purchase of property and equipment                                                 |                                         |            | (1,184,400 | )            |   |            | (342,767     | )        |   |            | (221,854   | )         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Capital expenditures from discontinued operations                                  |                                         |            | (13,332    | )            |   |            | (39,906      | )        |   |            | (46,025    | )         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Proceeds from sale of discontinued operations                                      |                                         |            | 1,101,385  |              |   |            | 104,628      |          |   |            | 1,880,244  |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Business acquisitions                                                              |                                         |            | (1,589,411 | )            |   |            |             |          |   |            | (251,533   | )         
|                                                                                              |                                                                                    |                                         |            |            |              |   |            |              |         
|                                                                                              | Net cash provided by (used in) investing activities                                |                                         |            | (1,685,758 | )            |   |            | (278,045     | )        |   |            | 1,360,832  |           
|                                                                                              |                                                                                    |                                         |            |            |              |   |            |              |         
|Cash flows from financing activities                                                          |                                                                                    |                                         |            |            |              |   |            |              |          |   |            |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Proceeds from issuance of long-term debt                                           |                                         |            | 5,000,000  |              |   |            |             |          |   |            | 3,500,000  |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Proceeds from subordinated notes, net of issuing cost of $330,000                  |                                         |            | 5,170,000  |              |   |            |             |          |   |            |           |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Proceeds from convertible notes, net of issuing costs of $266,000                  |                                         |            |           |              |   |            | 500,000      |          |   |            | 8,734,000  |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Payments on long-term debt from discontinued operations                            |                                         |            |           |              |   |            |             |          |   |            | (29,822    | )         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Principal payments on long-term debt                                               |                                         |            | (1,708,256 | )            |   |            | (3,310,477   | )        |   |            | (1,160,696 | )         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Principal payments on subordinated notes                                           |                                         |            | (440,000   | )            |   |            |             |          |   |            |           |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Principal payments on convertible subordinated notes                               |                                         |            |           |              |   |            |             |          |   |            | (2,000,000 | )         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Acquisition of treasury stock                                                      |                                         |            |           |              |   |            |             |          |   |            | (1,700     | )         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Exchange and redemption of capital stock                                           |                                         |            | (4,928,041 | )            |   |            |             |          |   |            | (200,877   | )         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Proceeds from exercise of employee stock options                                   |                                         |            | 68,000     |              |   |            | 4,189        |          |   |            | 15         |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Proceeds from Board of Director sale of stock                                      |                                         |            |           |              |   |            |             |          |   |            | 40,250     |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Proceeds from the exercise of warrants                                             |                                         |            | 1,825,000  |              |   |            |             |          |   |            |           |           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Dividends on preferred stock                                                       |                                         |            | (770,196   | )            |   |            | (1,149,048   | )        |   |            | (1,076,317 | )         
|                                                                                              |                                                                                    |                                         |            |            |              |   |            |              |         
|                                                                                              | Net cash provided by (used in) financing activities                                |                                         |            | 4,216,507  |              |   |            | (3,955,336   | )        |   |            | 7,804,853  |           
|                                                                                              |                                                                                    |                                         |            |            |              |   |            |              |         

See accompanying notes to consolidated financial
statements


35



---



##### 



HearUSA, Inc.


Consolidated Statements of Cash Flows


|                                                                                                  |  |              |           |  |              |   |            |              |  |   |           |  
|------------------------------------------------------------------------------------------------- |  | ------------ | --------- |  | ------------ | - | ---------- | ------------ |  | - | --------- | -
|                                                                                                  |  | Year Ended   |          
|                                                                                                  |  |              |          
|                                                                                                  |  | December 31, |           |  | December 25, |   |            | December 27, | 
|                                                                                                  |  | 2005         |           |  | 2004         |   |            | 2003         | 
|                                                                                                  |  |              |           |  |              |   |            |              | 
|Effects of exchange rate changes on cash                                                          |  |              | 44,460    |  |              |   | 89,205     |              |  |   | (28,226   | )
|                                                                                                  |  |              |           |  |              |   |            |              | 
|Net increase (decrease) in cash and cash equivalents                                              |  |              | 4,091,565 |  |              |   | (4,099,502 | )            |  |   | 4,304,858 |  
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Cash and cash equivalents at beginning of year                                                    |  |              | 2,615,379 |  |              |   | 6,714,881  |              |  |   | 2,410,023 |  
|                                                                                                  |  |              |           |  |              |   |            |              | 
|Cash and cash equivalents at end of year                                                          |  | $            | 6,706,944 |  |              | $ | 2,615,379  |              |  | $ | 6,714,881 |  
|                                                                                                  |  |              |           |  |              |   |            |              | 
|Supplemental disclosure of cash flow information:                                                 |  |              |           |  |              |   |            |              |  |   |           |  
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Cash paid for interest                                                                            |  | $            | 1,244,049 |  |              | $ | 1,263,473  |              |  | $ | 424,337   |  
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Supplemental schedule of non-cash investing and financing
    activities:                         |  |              |           |  |              |   |            |              |  |   |           |  
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Principal payments on long-term debt through preferred pricing
    reductions                     |  | $            | 2,922,537 |  |              | $ | 2,920,804  |              |  | $ | 2,920,804 |  
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Issuance of note payable and assumption of accounts payable in
    exchange business acquisitions |  | $            | 2,250,000 |  |              | $ |           |              |  | $ | 100,492   |  
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Issuance of capital lease in exchange for property and equipment                                  |  | $            | 141,913   |  |              | $ |           |              |  | $ | 401,883   |  
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Purchase of equipment with volume discount credit                                                 |  | $            |          |  |              | $ | 158,800    |              |  | $ |          |  

See accompanying notes to consolidated financial
statements


36



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements




|   |                                                                              
|-- | -----------------------------------------------------------------------------
|1. | Description of the Company and Summary of Significant
    Accounting Policies

The Company




Basis of Consolidation






Revenue Recognition






Foreign Currency Translation




37



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)


Comprehensive Income (Loss)




Fiscal year


13-week


Concentration of credit risk




Allowance for doubtful accounts




Inventories


(first-in,


Property and equipment




Goodwill and other intangible assets




38



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)


Pre-opening costs




Long-lived assets  impairments and disposals




Convertible Instruments, Warrants, Amortization of Debt
Discount and Fair Value Determination


98-5 00-27 98-5


Subordinated Notes, Warrants, Amortization of Debt Discount
and Fair Value Determination


00-19,


Advertising Costs




Sales return policy




39



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)


Warranties




Income taxes




Net loss per common share






Stock-based compensation




40



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




|                                       |                                                                                                                                             |              |   |            |              |  |   |              |   |  |   |            |  
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | - | ---------- | ------------ |  | - | ------------ | - |  | - | ---------- | -
|                                       |                                                                                                                                             | December 31, |   |            | December 25, |  |   | December 27, |  
|                                       |                                                                                                                                             | 2005         |   |            | 2004         |  |   | 2003         |  
|                                       |                                                                                                                                             |              |   |            |              |  |   |              |  
|Loss applicable to common stockholders |                                                                                                                                             |              |   |            |              |  |   |              |   |  |   |           
|                                      
|                                      
|                                      
|                                      
|                                       | As reported                                                                                                                                 |              | $ | (1,805,970 | )            |  | $ | (3,466,661   | ) |  | $ | (1,736,345 | )
|                                      
|                                      
|                                      
|                                      
|                                       | Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    tax effects |              |   | (1,529,000 | )            |  |   | (887,000     | ) |  |   | (447,000   | )
|                                       |                                                                                                                                             |              |   |            |              |  |   |              |  
|                                       | Pro forma, net loss                                                                                                                         |              | $ | (3,334,970 | )            |  | $ | (4,353,661   | ) |  | $ | (2,183,345 | )
|                                       |                                                                                                                                             |              |   |            |              |  |   |              |  
|Loss per share                         |                                                                                                                                             |              |   |            |              |  |   |              |   |  |   |           
|                                      
|                                      
|                                      
|                                      
|                                       | Net loss applicable to common stockholders per common
    share  basic and diluted                                                         |              | $ | (0.06      | )            |  | $ | (0.11        | ) |  | $ | (.06       | )
|                                       |                                                                                                                                             |              |   |            |              |  |   |              |  
|                                       | Net loss applicable to common stockholders per common
    share  basic and diluted  pro forma                                             |              | $ | (0.11      | )            |  | $ | (0.14        | ) |  | $ | (.07       | )
|                                       |                                                                                                                                             |              |   |            |              |  |   |              |  



|                        |  |      |      |   |      |  |      |      |  |  |      |  
|----------------------- |  | ---- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                        |  | 2005 |      |   | 2004 |  |      | 2003 | 
|                        |  |      |      |   |      |  |      |      | 
|Risk free interest rate |  |      | 4.39 | % |      |  | 4.16 | %    |  |  | 2.90 | %
|                       
|                       
|                       
|                       
|Expected life, in years |  |      | 5-10 |   |      |  | 5-10 |      |  |  | 5-10 |  
|                       
|                       
|                       
|                       
|Expected volatility     |  |      | 96   | % |      |  | 92   | %    |  |  | 98   | %

Statements of Cash Flows




Estimates




Reclassifications




41



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)


2. Restricted Cash and Cash Equivalents






3. Property and Equipment and Leases




|                                               |  |              |            |  |              |   |            |              |  |   |            | 
|---------------------------------------------- |  | ------------ | ---------- |  | ------------ | - | ---------- | ------------ |  | - | ---------- | 
|                                               |  | Range of     |            |  | December 31, |   |            | December 25, | 
|                                               |  | Useful Lives |            |  | 2005         |   |            | 2004         | 
|                                               |  |              |            |  |              |   |            |              | 
|Equipment, furniture and fixtures              |  |              | 5-10 years |  |              | $ | 10,868,588 |              |  | $ | 10,305,606 | 
|                                              
|                                              
|                                              
|                                              
|Leasehold Improvements                         |  |              | 5-10 years |  |              |   | 7,665,710  |              |  |   | 7,391,414  | 
|                                              
|                                              
|                                              
|                                              
|Computer systems                               |  |              | 3 years    |  |              |   | 4,806,302  |              |  |   | 4,435,117  | 
|                                              
|                                              
|                                              
|                                              
|Construction in progress                       |  |              | N/A        |  |              |   | 34,583     |              |  |   | 23,498     | 
|                                               |  |              |            |  |              |   |            |              | 
|                                               |  |              |            |  |              |   | 23,375,183 |              |  |   | 22,155,635 | 
|                                              
|                                              
|                                              
|                                              
|Less accumulated depreciation and amortization |  |              |            |  |              |   | 19,900,802 |              |  |   | 18,808,847 | 
|                                               |  |              |            |  |              |   |            |              | 
|                                               |  |              |            |  |              | $ | 3,474,381  |              |  | $ | 3,346,788  | 
|                                               |  |              |            |  |              |   |            |              | 



|           |  |        |           | 
|---------- |  | ------ | --------- | 
|           |  | Amount |          
|           |  |        |          
|2006       |  | $      | 1,095,000 | 
|          
|          
|          
|          
|2007       |  |        | 779,000   | 
|          
|          
|          
|          
|2008       |  |        | 583,000   | 
|          
|          
|          
|          
|2009       |  |        | 334,000   | 
|          
|          
|          
|          
|2010       |  |        | 227,000   | 
|          
|          
|          
|          
|Thereafter |  |        | 134,000   | 



42



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




|           |  |        |           | 
|---------- |  | ------ | --------- | 
|           |  | Amount |          
|           |  |        |          
|2006       |  | $      | 5,368,000 | 
|          
|          
|          
|          
|2007       |  |        | 4,592,000 | 
|          
|          
|          
|          
|2008       |  |        | 3,709,000 | 
|          
|          
|          
|          
|2009       |  |        | 2,458,000 | 
|          
|          
|          
|          
|2010       |  |        | 1,722,000 | 
|          
|          
|          
|          
|Thereafter |  |        | 1,086,000 | 



|   |                               
|-- | ------------------------------
|4. | Goodwill and Intangible Assets



|        |  |              |            |  |             |   |           |             |  |   |              |  |  |   |            | 
|------- |  | ------------ | ---------- |  | ----------- | - | --------- | ----------- |  | - | ------------ |  |  | - | ---------- | 
|        |  | December 25, |            |  | Additions & |   |           | Currency    |  |   | December 31, | 
|        |  | 2004         |            |  | Adjustments |   |           | Translation |  |   | 2005         | 
|        |  |              |            |  |             |   |           |             |  |   |              | 
|Centers |  | $            | 32,330,000 |  |             | $ | 2,806,000 |             |  | $ | 379,000      |  |  | $ | 35,515,000 | 
|       
|       
|       
|       
|Network |  |              | 880,000    |  |             |   |          |             |  |   |             |  |  |   | 880,000    | 
|        |  |              |            |  |             |   |           |             |  |   |              | 
|        |  | $            | 33,210,000 |  |             | $ | 2,806,000 |             |  | $ | 379,000      |  |  | $ | 36,395,000 | 
|        |  |              |            |  |             |   |           |             |  |   |              | 

|        |  |              |            |  |             |   |             |  |  |              |         |  |  |   |            | 
|------- |  | ------------ | ---------- |  | ----------- | - | ----------- |  |  | ------------ | ------- |  |  | - | ---------- | 
|        |  | December 27, |            |  | Additions & |   | Currency    |  |  | December 25, |        
|        |  | 2003         |            |  | Adjustments |   | Translation |  |  | 2004         |        
|        |  |              |            |  |             |   |             |  |  |              |        
|Centers |  | $            | 31,901,000 |  |             | $ |            |  |  | $            | 429,000 |  |  | $ | 32,330,000 | 
|       
|       
|       
|       
|Network |  |              | 880,000    |  |             |   |            |  |  |              |        |  |  |   | 880,000    | 
|        |  |              |            |  |             |   |             |  |  |              |         | 
|        |  | $            | 32,781,000 |  |             | $ |            |  |  | $            | 429,000 |  |  | $ | 33,210,000 | 
|        |  |              |            |  |             |   |             |  |  |              |         | 



|                                   |  |              |            |   |              |   |            |  
|---------------------------------- |  | ------------ | ---------- | - | ------------ | - | ---------- | -
|                                   |  | December 31, |            |   | December 25, |  
|                                   |  | 2005         |            |   | 2004         |  
|                                   |  |              |            |   |              |  
|Amortizable intangible assets:     |  |              |            |   |              |   |            |  
|                                  
|                                  
|                                  
|                                  
|Patient files and customer lists   |  | $            | 6,370,000  |   |              | $ | 5,505,000  |  
|                                  
|                                  
|                                  
|                                  
|Accumulated amortization           |  |              | (2,340,000 | ) |              |   | (1,766,000 | )
|                                   |  |              |            |   |              |  
|Amortizable intangible assets, net |  |              | 4,030,000  |   |              |   | 3,739,000  |  
|                                  
|                                  
|                                  
|                                  
|Trademark and trade names          |  |              | 7,410,000  |   |              |   | 7,355,000  |  
|                                   |  |              |            |   |              |  
|                                   |  | $            | 11,440,000 |   |              | $ | 11,094,000 |  
|                                   |  |              |            |   |              |  



|                     |  |      |         |  |      |   |         |      |  |   |         | 
|-------------------- |  | ---- | ------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                     |  | 2005 |         |  | 2004 |   |         | 2003 | 
|                     |  |      |         |  |      |   |         |      | 
|                    
|                    
|                    
|                    
|Amortization expense |  | $    | 623,000 |  |      | $ | 478,000 |      |  | $ | 430,000 | 

43



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




|           |  |        |           | 
|---------- |  | ------ | --------- | 
|           |  | Amount |          
|           |  |        |          
|2006       |  | $      | 718,000   | 
|          
|          
|          
|          
|2007       |  |        | 484,000   | 
|          
|          
|          
|          
|2008       |  |        | 466,000   | 
|          
|          
|          
|          
|2009       |  |        | 436,000   | 
|          
|          
|          
|          
|2010       |  |        | 409,000   | 
|          
|          
|          
|          
|Thereafter |  |        | 1,495,000 | 



|   |                      
|-- | ---------------------
|5. | Business Acquisitions





44



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




|   |                                        
|-- | ---------------------------------------
|6. | Long-term Debt (Also see Notes 7 and 8)



|                                           |                                                                         |              |            |            |              |   |            |              |  |   |            |            | 
|------------------------------------------ | ----------------------------------------------------------------------- | ------------ | ---------- | ---------- | ------------ | - | ---------- | ------------ |  | - | ---------- | ---------- | 
|                                           |                                                                         | Before       |            |            | After        |   |            |             
|                                           |                                                                         | December 31, |            |            | December 31, |   |            | December 25, | 
|                                           |                                                                         | 2005         |            |            | 2005         |   |            | 2004         | 
|                                           |                                                                         |              |            |            |              |   |            |              | 
|Notes payable to a Siemens  see(a) below: |                                                                         |              |            |            |              |   |            |              |  |   |            |           
|                                          
|                                          
|                                          
|                                          
|                                           | Tranche A                                                               |              | $          | 1,299,984  |              |   | $          | 2,239,851    |  |   | $          | 3,599,988  | 
|                                          
|                                          
|                                          
|                                          
|                                           | Tranche B                                                               |              |            | 39,867     |              |   |            |             |  |   |            | 62,400     | 
|                                          
|                                          
|                                          
|                                          
|                                           | Tranche C                                                               |              |            | 900,000    |              |   |            | 20,875,256   |  |   |            | 1,500,000  | 
|                                          
|                                          
|                                          
|                                          
|                                           | Tranche D (including accrued interest of $1,298,865 and
    $1,813,971) |              |            | 14,298,865 |              |   |            |             |  |   |            | 13,590,284 | 
|                                          
|                                          
|                                          
|                                          
|                                           | Tranche E                                                               |              |            | 1,576,391  |              |   |            |             |  |   |            | 2,171,329  | 
|                                          
|                                          
|                                          
|                                          
|                                           | Tranche F                                                               |              |            | 5,000,000  |              |   |            |             |  |   |            |           | 
|                                          
|                                          
|                                          
|                                          
|                                           | Other                                                                   |              |            |           |              |   |            |             |  |   |            | 91,685     | 
|                                           |                                                                         |              |            |            |              |   |            |              | 
|Total notes payable to Siemens             |                                                                         |              | 23,115,107 |            |              |   | 23,115,107 |              |  |   | 21,015,686 |           
|                                          
|                                          
|                                          
|                                          
|Notes payable to others                    |                                                                         |              | 2,047,100  |            |              |   | 2,047,100  |              |  |   | 433,347    |           
|                                           |                                                                         |              |            |            |              |   |            |              | 
|                                           |                                                                         |              | 25,162,207 |            |              |   | 25,162,207 |              |  |   | 21,449,033 |           
|                                          
|                                          
|                                          
|                                          
|Less current maturities                    |                                                                         |              | 5,192,108  |            |              |   | 5,392,253  |              |  |   | 4,152,908  |           
|                                           |                                                                         |              |            |            |              |   |            |              | 
|                                           |                                                                         | $            | 19,970,099 |            |              | $ | 19,769,954 |              |  | $ | 17,296,125 |           
|                                           |                                                                         |              |            |            |              |   |            |              | 



|           |  |        |           | 
|---------- |  | ------ | --------- | 
|           |  | Amount |          
|           |  |        |          
|2006       |  | $      | 5,192,000 | 
|          
|          
|          
|          
|2007       |  |        | 4,820,000 | 
|          
|          
|          
|          
|2008       |  |        | 4,533,000 | 
|          
|          
|          
|          
|2009       |  |        | 4,320,000 | 
|          
|          
|          
|          
|2010       |  |        | 5,042,000 | 
|          
|          
|          
|          
|Thereafter |  |        | 1,255,000 | 



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | 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). 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. On December 28, 2005, the Company obtained an
    additional $5,000,000, bearing interest at prime plus 1% and
    having a five-year term (the Tranche F Loan). The
    Tranche F loan was obtained pursuant to a term sheet signed
    on December 28, 2005, which indicates the intention of both
    parties to extend their relationship and amend and restate the
    existing credit,

45



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | supply and security agreements for an additional five years. At
    December 31, 2005 $1,299,984, $39,867, $900,000,
    $14,298,865, $1,576,391 and $5,000,000, representing principal
    on the Tranche A, Tranche B, Tranche C,
    Tranche D, Tranche E and Tranche F Loans,
    respectively, were outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | On February 10, 2006, HearUSA, Inc. (the
    Company) entered into an Amended and Restated Credit
    Agreement (the Amended Credit Agreement), Amended
    and Restated Supply Agreement (the Amended Supply
    Agreement) and an Amended and Restated Security Agreement
    with Siemens Hearing Instruments, Inc. (Siemens).
    Pursuant to the amended agreements, the parties will continue
    their strategic relationship for an additional five-year term.
    The parties have restructured the outstanding $23.1 million
    indebtedness of the Company to Siemens under the original credit
    agreement. The new facility is for a total of $26 million,
    including the currently outstanding $23.1 million, and is
    structured in three tranches.                                                                                                              
|
| |  | The new Tranche A, with a principal balance of
    approximately $2.2 million and interest of 10% per
    annum, is payable in three quarterly installments commencing
    with the first quarter of 2006, which quarterly payments are
    subject to rebate credits as described below. This note is a
    consolidation of the old Tranches A, B and C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | The new Tranche B is a revolving credit line established to
    accommodate funding for certain acquisitions by the Company.
    Pursuant to the Amended Credit Agreement, the Company may borrow
    under Tranche B up to the $26 million limit, less any
    amounts then outstanding under Tranche A and Tranche C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The new Tranche C, which is a consolidation of the old
    Tranches D, E and F, has a principal balance on the closing date
    of approximately $20.9 million, an interest rate of prime
    plus 1% per annum, and is payable in monthly installments
    of principal and interest of $130,000 commencing February 2006.
    In addition, the Company must make quarterly installment
    payments on Tranche C of $730,000 plus interest thereon
    commencing with the fourth quarter of 2006, which quarterly
    payments are also subject to rebate credits as described below.
    Additional loans may be made to the Company under Tranche C
    for certain acquisitions. The monthly installment payments are
    intended to repay approximately $6.6 million of the
    Tranche C principal balance.                                                                            
|
| |  | The remaining principal balance of Tranche C, as well as
    Tranche A and Tranche B, with interest, will continue
    to be eligible for repayment utilizing rebates on purchases of
    hearing aids from Siemens, provided that the Company purchases
    under the Amended Supply Agreement certain percentages of
    hearing aids it sold. The Amended Credit Agreement also
    contemplates that the Company will reduce the Tranche C
    loan balance by making annual payments in an amount equal to 20%
    of Excess Cash Flow (as that term is defined in the Amended
    Credit Agreement), and by paying Siemens 25% of proceeds from
    equity offerings the Company may complete. During 2005, the
    Company made $267,000 in payments to Siemens pursuant to its
    2004 excess cash flow. The estimated payment for 2006 based on
    2005 excess cash flow is $237,000.
|
| |  | Substantially all of the Companys assets to collateralize
    repayment of the Siemens notes payable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

46



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




| |  |                                                                                                                                                                                                                                                                          
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 during each of the
    years:

|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                  |  | 2005 |            |   | 2004 |   |            | 2003 | 
|                                                                                  |  |      |            |   |      |   |            |      | 
|Preferred pricing reductions recorded as a reduction of cost of
    products sold |  | $    | 3,311,000  |   |      | $ | 3,641,000  |      |  | $ | 3,947,000  |  
|                                                                                  |  |      |            |   |      |   |            |      | 
|Portion applied against quarterly principal payments                              |  | $    | (2,922,000 | ) |      | $ | (2,921,000 | )    |  | $ | (2,921,000 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Portion applied against quarterly interest payments                               |  |      | (389,000   | ) |      |   | (720,000   | )    |  |   | (1,026,000 | )
|                                                                                  |  |      |            |   |      |   |            |      | 
|                                                                                  |  | $    | (3,311,000 | ) |      | $ | (3,641,000 | )    |  | $ | (3,947,000 | )
|                                                                                  |  |      |            |   |      |   |            |      | 



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In connection with the Amended Credit Agreement, HearUSA and
    Siemens entered into the Amended Supply Agreement, pursuant to
    which HearUSA agreed to purchase from Siemens certain minimum
    percentages of HearUSA company-owned centers hearing aid
    purchases for a period of five years at specified prices. If the
    Company fails to purchase the required minimum under the Amended
    Supply Agreement, Siemens could declare a breach of the Amended
    Credit Agreement and Siemens would have the right to declare all
    amounts outstanding under the credit facility immediately due
    and payable.
|
| |  | 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.                                                                                                                                                                                                                                                                                                      



|   |                               
|-- | ------------------------------
|7. | Convertible Subordinated Notes





47



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)










|   |                                         
|-- | ----------------------------------------
|8. | Subordinated Notes and Warrant Liability







48



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)










|   |                                                   
|-- | --------------------------------------------------
|9. | Mandatorily Redeemable Convertible Preferred Stock







|    |                     
|--- | --------------------
|10. | Stockholders Equity



|   |                  
|-- | -----------------
|A. | Private Placement





|   |                   
|-- | ------------------
|B. | Stock Subscription



49



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)






|   |                         
|-- | ------------------------
|C. | Series J Preferred Stock









S-3


50



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




|   |                        
|-- | -----------------------
|D. | Shareholder Rights Plan









|   |                                              
|-- | ---------------------------------------------
|E. | Series H Junior Participating Preferred Stock





|   |                         
|-- | ------------------------
|F. | Exchangeable Rights Plan



51



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)






|   |         
|-- | --------
|G. | Warrants





|            |           |  |            |  |      |          |  |  |      | 
|----------- | --------- |  | ---------- |  | ---- | -------- |  |  | ---- | 
|Outstanding |           |  | Expiration |  |      | Exercise | 
|Warrants    |           |  | Date       |  |      | Price    | 
|            |           |  |            |  |      |          | 
|            | 2,759,893 |  |            |  | 2008 |          |  |  | 1.75 | 
|           
|           
|           
|           
|            | 240,000   |  |            |  | 2010 |          |  |  | 1.25 | 
|           
|           
|           
|           
|            | 560,000   |  |            |  | 2010 |          |  |  | 1.31 | 
|           
|           
|           
|           
|            | 1,554,960 |  |            |  | 2010 |          |  |  | 2.00 | 
|            |           |  |            |  |      |          | 
|            | 5,114,853 |  |            |  |      |          |  |  |      | 
|            |           |  |            |  |      |          | 



|   |                                                       
|-- | ------------------------------------------------------
|H. | Aggregate and Per Share Cumulative Preferred Dividends





|   |                    
|-- | -------------------
|I. | Exchangeable Shares

winding-up


52



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




|    |            
|--- | -----------
|11. | Stock Plans





|   |                            
|-- | ---------------------------
|A. | Employee Stock Option Plans









53



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




|                                                           |  |                   |           |          |                   |   |      |                   |          |   |           |  |  |          |      |  |       |   |           |  |  |   |      | 
|---------------------------------------------------------- |  | ----------------- | --------- | -------- | ----------------- | - | ---- | ----------------- | -------- | - | --------- |  |  | -------- | ---- |  | ----- | - | --------- |  |  | - | ---- | 
|                                                           |  | Year Ended        |          
|                                                           |  |                   |          
|                                                           |  | December 31, 2005 |           |          | December 25, 2004 |   |      | December 27, 2003 |         
|                                                           |  |                   |           |          |                   |   |      |                   |         
|                                                           |  |                   |           | Weighted |                   |   |      |                   | Weighted |   |           |  |  | Weighted |     
|                                                           |  |                   |           | Average  |                   |   |      |                   | Average  |   |           |  |  | Average  |     
|                                                           |  |                   |           | Exercise |                   |   |      |                   | Exercise |   |           |  |  | Exercise |     
|                                                           |  | Shares            |           |          | Price             |   |      | Shares            |          |   | Price     |  |  | Shares   |      |  | Price |  
|                                                           |  |                   |           |          |                   |   |      |                   |          |   |           |  |  |          |      |  |       |  
|Outstanding at beginning of year                           |  |                   | 5,296,987 |          |                   | $ | 1.49 |                   |          |   | 3,387,755 |  |  | $        | 1.78 |  |       |   | 2,168,290 |  |  | $ | 3.04 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Granted                                                    |  |                   | 360,000   |          |                   | $ | 1.63 |                   |          |   | 2,495,000 |  |  | $        | 1.36 |  |       |   | 1,785,000 |  |  | $ | 0.46 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Exercised                                                  |  |                   | 130,000   |          |                   | $ | .52  |                   |          |   | 6,250     |  |  | $        | .67  |  |       |   | 20        |  |  | $ | 0.77 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Forfeited                                                  |  |                   | 268,217   |          |                   | $ | 4.66 |                   |          |   | 592,018   |  |  | $        | 2.69 |  |       |   | 565,515   |  |  | $ | 2.47 | 
|                                                           |  |                   |           |          |                   |   |      |                   |          |   |           |  |  |          |      |  |       |  
|Outstanding at end of year                                 |  |                   | 5,258,770 |          |                   | $ | 1.36 |                   |          |   | 5,296,987 |  |  | $        | 1.49 |  |       |   | 3,387,755 |  |  | $ | 1.78 | 
|                                                           |  |                   |           |          |                   |   |      |                   |          |   |           |  |  |          |      |  |       |  
|Exercisable at end of year                                 |  |                   | 2,265,944 |          |                   |   |      |                   |          |   | 1,538,540 |  |  |          |      |  |       |   | 1,418,012 |  |  |   |      | 
|                                                           |  |                   |           |          |                   |   |      |                   |          |   |           |  |  |          |      |  |       |  
|Weighted average fair value of options granted during year |  | $                 | 1.35      |          |                   |   |      |                   |          | $ | 1.20      |  |  |          |      |  |       | $ | 0.37      |  |  |   |      | 
|                                                           |  |                   |           |          |                   |   |      |                   |          |   |           |  |  |          |      |  |       |  



|                        |  |             |           |          |                  |  |          |                |         |             |             |  |          |                |           |  |  |   |       | 
|----------------------- |  | ----------- | --------- | -------- | ---------------- |  | -------- | -------------- | ------- | ----------- | ----------- |  | -------- | -------------- | --------- |  |  | - | ----- | 
|                        |  |             |           | Weighted |                  |  |          |                | Options |             |             | 
|                        |  |             |           | Average  |                  |  | Weighted |                |         | Exercisable |             |  | Weighted |               
|                        |  | Options     |           |          | Remaining        |  |          | Average        |         |             | At December |  |          | Average        |          
|Range of Exercise Price |  | Outstanding |           |          | Contractual Life |  |          | Exercise Price |         |             | 31, 2005    |  |          | Exercise Price |          
|                        |  |             |           |          |                  |  |          |                |         |             |             |  |          |                |          
|$ .35  $  .77          |  |             | 1,762,900 |          |                  |  | 6.2      |                |         | $           | 0.50        |  |          |                | 996,023   |  |  | $ | .55   | 
|$ .78  $ 2.00          |  |             | 3,046,730 |          |                  |  | 8.5      |                |         | $           | 1.36        |  |          |                | 877,031   |  |  | $ | 1.30  | 
|$2.01  $ 5.40          |  |             | 294,511   |          |                  |  | 5.2      |                |         | $           | 3.14        |  |          |                | 238,261   |  |  | $ | 3.34  | 
|$5.41  $ 8.75          |  |             | 141,269   |          |                  |  | 1.3      |                |         | $           | 7.20        |  |          |                | 141,269   |  |  | $ | 7.21  | 
|$8.76  $18.75          |  |             | 13,360    |          |                  |  | 1.3      |                |         | $           | 15.90       |  |          |                | 13,360    |  |  | $ | 15.91 | 
|                        |  |             |           |          |                  |  |          |                |         |             |             |  |          |                |          
|                        |  |             | 5,258,770 |          |                  |  |          |                |         |             |             |  |          |                | 2,265,944 |  |  |   |       | 
|                        |  |             |           |          |                  |  |          |                |         |             |             |  |          |                |          



|     |  |  |           | 
|---- |  |  | --------- | 
|    
|    
|    
|    
|2006 |  |  | 3,366,770 | 
|    
|    
|    
|    
|2007 |  |  | 1,093,750 | 
|    
|    
|    
|    
|2008 |  |  | 708,250   | 
|    
|    
|    
|    
|2009 |  |  | 90,000    | 
|     |  |  |          
|     |  |  | 5,258,770 | 
|     |  |  |          



|   |                           
|-- | --------------------------
|B. | Non-Employee Director Plan





54



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




|   |                                     
|-- | ------------------------------------
|C. | Non-Employee Director Non-Plan Grant





|    |                              
|--- | -----------------------------
|12. | Major Customers and Suppliers







|    |                           
|--- | --------------------------
|13. | Related Party Transactions





55



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




|    |             
|--- | ------------
|14. | Income Taxes



|                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | -------- | -
|                                                  |  | 2005 |            |   | 2004 |   |            | 2003 | 
|                                                  |  |      |            |   |      |   |            |      | 
|Domestic                                          |  | $    | (1,947,000 | ) |      | $ | (3,142,000 | )    |  | $ | (727,000 | )
|                                                 
|                                                 
|                                                 
|                                                 
|Foreign                                           |  |      | 905,000    |   |      |   | 934,000    |      |  |   | 187,000  |  
|                                                  |  |      |            |   |      |   |            |      | 
|Total loss before loss of discontinued operations |  | $    | (1,042,000 | ) |      | $ | (2,208,000 | )    |  | $ | (540,000 | )
|                                                  |  |      |            |   |      |   |            |      | 





|                                 |  |      |             |   |      |   |             |  
|-------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                 |  | 2005 |             |   | 2004 |  
|                                 |  |      |             |   |      |  
|Depreciation                     |  | $    | 1,367,000   |   |      | $ | 1,285,000   |  
|                                
|                                
|                                
|                                
|Allowance for doubtful accounts  |  |      | 142,000     |   |      |   | 129,000     |  
|                                
|                                
|                                
|                                
|Joint Venture                    |  |      | (881,000    | ) |      |   | (985,000    | )
|                                
|                                
|                                
|                                
|Beneficial conversion feature    |  |      | (775,000    | ) |      |   | (1,236,000  | )
|                                
|                                
|                                
|                                
|Amortization                     |  |      | (1,321,000  | ) |      |   | (184,000    | )
|                                
|                                
|                                
|                                
|Other                            |  |      | 364,000     |   |      |   | 279,000     |  
|                                
|                                
|                                
|                                
|Net operating loss carryforwards |  |      | 28,452,000  |   |      |   | 28,441,000  |  
|                                 |  |      |             |   |      |  
|                                 |  |      | 27,348,000  |   |      |   | 27,729,000  |  
|                                
|                                
|                                
|                                
|Less valuation allowance         |  |      | (27,348,000 | ) |      |   | (27,729,000 | )
|                                 |  |      |             |   |      |  
|Net deferred tax asset           |  | $    |            |   |      | $ |            |  
|                                 |  |      |             |   |      |  





56



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




|                                                     |  |      |          |   |      |   |          |      |  |   |          |  
|---------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                     |  | 2005 |          |   | 2004 |   |          | 2003 | 
|                                                     |  |      |          |   |      |   |          |      | 
|Provision at Federal statutory rate                  |  | $    | (328,000 | ) |      | $ | (751,000 | )    |  | $ | (183,000 | )
|                                                    
|                                                    
|                                                    
|                                                    
|State income taxes, net of Federal income tax effect |  |      | (35,000  | ) |      |   | (80,000  | )    |  |   | (20,000  | )
|                                                    
|                                                    
|                                                    
|                                                    
|Nondeductible expenses                               |  |      | 32,000   |   |      |   | 29,000   |      |  |   | 23,000   |  
|                                                    
|                                                    
|                                                    
|                                                    
|Change in valuation allowance                        |  |      | 381,000  |   |      |   | 802,000  |      |  |   | 256,000  |  
|                                                    
|                                                    
|                                                    
|                                                    
|Other                                                |  |      | 28,000   |   |      |   |         |      |  |   | (76,000  | )
|                                                     |  |      |          |   |      |   |          |      | 
|Income tax provision                                 |  | $    | 78,000   |   |      | $ |         |      |  | $ |         |  
|                                                     |  |      |          |   |      |   |          |      | 





|    |                              
|--- | -----------------------------
|15. | Commitments and Contingencies







57



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




|    |                                     
|--- | ------------------------------------
|16. | Quarterly Financial Data (Unaudited)

|                                                                                                                                           |  |               |            |        |         |   |            |               |        |   |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ---------- | ------ | ------- | - | ---------- | ------------- | ------ | - | ---------- | - |  | - | ---------- | -
|Year Ended                                                                                                                                 |  |               |            | Second |         |   |            |               | Fourth |  
|December 31, 2005                                                                                                                          |  | First Quarter |            |        | Quarter |   |            | Third Quarter |        |   | Quarter    |  
|                                                                                                                                           |  |               |            |        |         |   |            |               |        |   |            |  
|Net revenues                                                                                                                               |  | $             | 19,030,585 |        |         | $ | 19,058,460 |               |        | $ | 19,615,555 |   |  | $ | 18,967,403 |  
|                                                                                                                                          
|                                                                                                                                          
|                                                                                                                                          
|                                                                                                                                          
|Operating costs and expenses                                                                                                               |  |               | 18,015,611 |        |         |   | 17,863,348 |               |        |   | 18,353,874 |   |  |   | 18,724,254 |  
|                                                                                                                                           |  |               |            |        |         |   |            |               |        |   |            |  
|Income (loss) from operations                                                                                                              |  |               | 1,014,974  |        |         |   | 1,195,112  |               |        |   | 1,261,681  |   |  |   | 243,149    |  
|                                                                                                                                           |  |               |            |        |         |   |            |               |        |   |            |  
|Net income (loss) applicable to common stockholders                                                                                        |  | $             | (445,068   | )      |         | $ | 154,076    |               |        | $ | (88,571    | ) |  | $ | (1,426,407 | )
|                                                                                                                                           |  |               |            |        |         |   |            |               |        |   |            |  
|Net loss from continuing operations, including dividends on
    preferred stock, applicable to common stockholders 
    basic and diluted |  | $             | (0.01      | )      |         | $ | 0.00       |               |        | $ | 0.00       |   |  | $ | (0.05      | )
|                                                                                                                                           |  |               |            |        |         |   |            |               |        |   |            |  
|Net loss applicable to common stockholders per common
    share  basic and diluted (Note 1)                                               |  | $             | (0.01      | )      |         | $ | 0.00       |               |        | $ | 0.00       |   |  | $ | (0.05      | )
|                                                                                                                                           |  |               |            |        |         |   |            |               |        |   |            |  

|                                                                                                                                           |  |               |            |        |         |   |            |               |        |   |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ---------- | ------ | ------- | - | ---------- | ------------- | ------ | - | ---------- | - |  | - | ---------- | -
|Year Ended                                                                                                                                 |  |               |            | Second |         |   |            |               | Fourth |  
|December 25, 2004                                                                                                                          |  | First Quarter |            |        | Quarter |   |            | Third Quarter |        |   | Quarter    |  
|                                                                                                                                           |  |               |            |        |         |   |            |               |        |   |            |  
|Net revenues                                                                                                                               |  | $             | 16,048,307 |        |         | $ | 17,190,923 |               |        | $ | 17,535,395 |   |  | $ | 17,974,917 |  
|                                                                                                                                          
|                                                                                                                                          
|                                                                                                                                          
|                                                                                                                                          
|Operating costs and expenses                                                                                                               |  |               | 16,228,093 |        |         |   | 16,713,585 |               |        |   | 16,316,981 |   |  |   | 17,152,503 |  
|                                                                                                                                           |  |               |            |        |         |   |            |               |        |   |            |  
|Income (loss) from operations                                                                                                              |  |               | (179,786   | )      |         |   | 477,338    |               |        |   | 1,218,414  |   |  |   | 822,414    |  
|                                                                                                                                           |  |               |            |        |         |   |            |               |        |   |            |  
|Net income (loss) applicable to common stockholders                                                                                        |  | $             | (1,615,869 | )      |         | $ | (948,008   | )             |        | $ | (233,413   | ) |  | $ | (669,371   | )
|                                                                                                                                           |  |               |            |        |         |   |            |               |        |   |            |  
|Net loss from continuing operations, including dividends on
    preferred stock, applicable to common stockholders 
    basic and diluted |  | $             | (0.05      | )      |         | $ | (0.03      | )             |        | $ | (0.01      | ) |  | $ | (0.02      | )
|                                                                                                                                           |  |               |            |        |         |   |            |               |        |   |            |  
|Net loss applicable to common stockholders per common
    share  basic and diluted (Note 1)                                               |  | $             | (0.05      | )      |         | $ | (0.03      | )             |        | $ | (0.01      | ) |  | $ | (0.02      | )
|                                                                                                                                           |  |               |            |        |         |   |            |               |        |   |            |  



|    |                                    
|--- | -----------------------------------
|17. | Fair Value of Financial Instruments



58



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




|                                                                |  |                   |            |  |                   |   |            |            |  |   |            |  |  |   |            | 
|--------------------------------------------------------------- |  | ----------------- | ---------- |  | ----------------- | - | ---------- | ---------- |  | - | ---------- |  |  | - | ---------- | 
|                                                                |  | December 31, 2005 |            |  | December 25, 2004 |  
|                                                                |  |                   |            |  |                   |  
|                                                                |  | Book Value        |            |  | Fair Value        |   |            | Book Value |  |   | Fair Value | 
|                                                                |  |                   |            |  |                   |   |            |            |  |   |            | 
|Long-term debt                                                  |  | $                 | 25,162,000 |  |                   | $ | 24,974,000 |            |  | $ | 21,449,000 |  |  | $ | 21,449,000 | 
|                                                               
|                                                               
|                                                               
|                                                               
|Convertible subordinated notes                                  |  | $                 | 7,500,000  |  |                   | $ | 7,273,000  |            |  | $ | 7,500,000  |  |  | $ | 7,500,000  | 
|                                                               
|                                                               
|                                                               
|                                                               
|Subordinated notes                                              |  | $                 | 5,060,000  |  |                   | $ | 4,943,000  |            |  | $ |           |  |  | $ |           | 
|                                                               
|                                                               
|                                                               
|                                                               
|Mandatorily subordinated redeemable convertible preferred stock |  | $                 |           |  |                   | $ |           |            |  | $ | 4,710,000  |  |  | $ | 4,710,000  | 



|    |                                 
|--- | --------------------------------
|18. | Recent Accounting Pronouncements

Share-Based Payment, Accounting for Stock Based
Compensation Accounting for Stock Issued to Employees.


Accounting Changes and Error Corrections  A
Replacement of APB Opinion No. 20 and FASB Statement
No. 3




|    |                        
|--- | -----------------------
|19. | Discontinued Operations



59



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)












|                                                                                                       |  |      |           |  |      |   |           |      |  |   |           |  
|------------------------------------------------------------------------------------------------------ |  | ---- | --------- |  | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                                       |  | 2005 |           |  | 2004 |   |           | 2003 | 
|                                                                                                       |  |      |           |  |      |   |           |      | 
|Net revenues of discontinued operations:                                                               |  |      |           |  |      |   |           |      |  |   |           |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Quebec discontinued operations                                                                         |  | $    |          |  |      | $ |          |      |  | $ | 2,600,000 |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Minnesota, Washington and Wisconsin discontinued operations                                            |  |      | 1,825,000 |  |      |   | 3,551,000 |      |  |   | 3,465,000 |  
|                                                                                                       |  |      |           |  |      |   |           |      | 
|Combined net revenues                                                                                  |  | $    | 1,825,000 |  |      | $ | 3,551,000 |      |  | $ | 6,065,000 |  
|                                                                                                       |  |      |           |  |      |   |           |      | 
|Pre-tax net losses of discontinued operations:                                                         |  |      |           |  |      |   |           |      |  |   |           |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Quebec discontinued operations                                                                         |  | $    |          |  |      | $ |          |      |  | $ | 202,000   |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Minnesota, Washington and Wisconsin discontinued operations                                            |  |      | 396,000   |  |      |   | 551,000   |      |  |   | 368,000   |  
|                                                                                                       |  |      |           |  |      |   |           |      | 
|Combined pre-tax net losses                                                                            |  | $    | 396,000   |  |      | $ | 551,000   |      |  | $ | 570,000   |  
|                                                                                                       |  |      |           |  |      |   |           |      | 
|Net loss from discontinued operations applicable to common
    stockholders-basis and diluted:         |  |      |           |  |      |   |           |      |  |   |           |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Quebec discontinued operations                                                                         |  | $    |          |  |      | $ |          |      |  | $ | (0.01     | )
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Minnesota, Washington and Wisconsin discontinued operations                                            |  |      | 0.00      |  |      |   | (0.01     | )    |  |   | (0.01     | )
|                                                                                                       |  |      |           |  |      |   |           |      | 
|Combined net loss from discontinued operations applicable to
    common stockholders-basic and diluted |  | $    | 0.00      |  |      | $ | (0.01     | )    |  | $ | (0.02     | )
|                                                                                                       |  |      |           |  |      |   |           |      | 

60



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




|    |         
|--- | --------
|20. | Segments

e-commerce E-commerce


|                                         |  |         |            |  |            |   |          |         |  |   |           |  |  |       |             |   |  |   |            | 
|---------------------------------------- |  | ------- | ---------- |  | ---------- | - | -------- | ------- |  | - | --------- |  |  | ----- | ----------- | - |  | - | ---------- | 
|                                         |  | Centers |            |  | E-commerce |   |          | Network |  |   | Corporate |  |  | Total |            
|                                         |  |         |            |  |            |   |          |         |  |   |           |  |  |       |            
|                                        
|                                        
|                                        
|                                        
|Hearing aids and other products revenues
|                                        
|                                        
|                                        
|                                        
|2005                                     |  | $       | 71,365,000 |  |            | $ | 80,000   |         |  |   |          |  |  |       |            |   |  | $ | 71,445,000 | 
|                                        
|                                        
|                                        
|                                        
|2004                                     |  | $       | 63,149,000 |  |            | $ | 79,000   |         |  |   |          |  |  |       |            |   |  | $ | 63,228,000 | 
|                                        
|                                        
|                                        
|                                        
|2003                                     |  | $       | 60,858,000 |  |            | $ | 69,000   |         |  |   |          |  |  |       |            |   |  | $ | 60,927,000 | 
|                                        
|                                        
|                                        
|                                        
|Service revenues                        
|                                        
|                                        
|                                        
|                                        
|2005                                     |  | $       | 3,805,000  |  |            |   |         |         |  | $ | 1,422,000 |  |  |       |            |   |  | $ | 5,227,000  | 
|                                        
|                                        
|                                        
|                                        
|2004                                     |  | $       | 4,413,000  |  |            |   |         |         |  | $ | 1,109,000 |  |  |       |            |   |  | $ | 5,522,000  | 
|                                        
|                                        
|                                        
|                                        
|2003                                     |  | $       | 5,100,000  |  |            |   |         |         |  | $ | 1,053,000 |  |  |       |            |   |  | $ | 6,153,000  | 
|                                        
|                                        
|                                        
|                                        
|Income (loss) from operations           
|                                        
|                                        
|                                        
|                                        
|2005                                     |  |         | 15,137,000 |  |            |   | (105,000 | )       |  |   | 549,000   |  |  |       | (11,866,000 | ) |  |   | 3,715,000  | 
|                                        
|                                        
|                                        
|                                        
|2004                                     |  |         | 12,310,000 |  |            |   | (27,000  | )       |  |   | 447,000   |  |  |       | (10,392,000 | ) |  |   | 2,338,000  | 
|                                        
|                                        
|                                        
|                                        
|2003                                     |  |         | 13,063,000 |  |            |   | (49,000  | )       |  |   | 504,000   |  |  |       | (11,250,000 | ) |  |   | 2,268,000  | 
|                                        
|                                        
|                                        
|                                        
|                                        
|2005                                     |  |         |            |  |            |   |          |         |  |   |           |  |  |       |             |   |  |   |            | 
|                                        
|                                        
|                                        
|                                        
|Depreciation and amortization            |  |         | 1,764,000  |  |            |   |         |         |  |   | 5,000     |  |  |       | 205,000     |   |  |   | 1,974,000  | 
|                                        
|                                        
|                                        
|                                        
|Total assets                             |  |         | 50,119,000 |  |            |   |         |         |  |   | 1,131,000 |  |  |       | 17,732,000  |   |  |   | 68,982,000 | 
|                                        
|                                        
|                                        
|                                        
|Capital expenditures                     |  |         | 970,000    |  |            |   |         |         |  |   |          |  |  |       | 228,000     |   |  |   | 1,198,000  | 
|                                        
|                                        
|                                        
|                                        
|                                        
|2004                                     |  |         |            |  |            |   |          |         |  |   |           |  |  |       |             |   |  |   |            | 
|                                        
|                                        
|                                        
|                                        
|Depreciation and amortization            |  |         | 1,893,000  |  |            |   |         |         |  |   | 5,000     |  |  |       | 174,000     |   |  |   | 2,072,000  | 
|                                        
|                                        
|                                        
|                                        
|Total assets                             |  |         | 47,241,000 |  |            |   |         |         |  |   | 1,722,000 |  |  |       | 10,459,000  |   |  |   | 59,422,000 | 
|                                        
|                                        
|                                        
|                                        
|Capital expenditures                     |  |         | 318,000    |  |            |   |         |         |  |   | 3,000     |  |  |       | 62,000      |   |  |   | 383,000    | 
|                                        
|                                        
|                                        
|                                        
|                                        
|2003                                     |  |         |            |  |            |   |          |         |  |   |           |  |  |       |             |   |  |   |            | 
|                                        
|                                        
|                                        
|                                        
|Depreciation and amortization            |  |         | 2,002,000  |  |            |   |         |         |  |   | 3,000     |  |  |       | 779,000     |   |  |   | 2,784,000  | 
|                                        
|                                        
|                                        
|                                        
|Total assets                             |  |         | 44,100,000 |  |            |   |         |         |  |   | 1,149,000 |  |  |       | 20,934,000  |   |  |   | 66,183,000 | 
|                                        
|                                        
|                                        
|                                        
|Capital expenditures                     |  |         | 174,000    |  |            |   |         |         |  |   |          |  |  |       | 94,000      |   |  |   | 268,000    | 

61



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




|                        |  |      |      |   |      |  |      |      |  |  |      |  
|----------------------- |  | ---- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                        |  | 2005 |      |   | 2004 |  |      | 2003 | 
|                        |  |      |      |   |      |  |      |      | 
|                       
|                       
|                       
|                       
|Hearing aid revenues    |  |      | 95.5 | % |      |  | 94.6 | %    |  |  | 96.8 | %
|                       
|                       
|                       
|                       
|Other products revenues |  |      | 4.5  | % |      |  | 5.4  | %    |  |  | 3.2  | %



|                         |  |      |      |   |      |  |      |      |  |  |      |  
|------------------------ |  | ---- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                         |  | 2005 |      |   | 2004 |  |      | 2003 | 
|                         |  |      |      |   |      |  |      |      | 
|                        
|                        
|                        
|                        
|Hearing aid repairs      |  |      | 53.4 | % |      |  | 50.1 | %    |  |  | 60.5 | %
|                        
|                        
|                        
|                        
|Testing and other income |  |      | 46.6 | % |      |  | 49.9 | %    |  |  | 39.5 | %



|                                   |  |      |            |  |      |   |            |      |  |   |            | 
|---------------------------------- |  | ---- | ---------- |  | ---- | - | ---------- | ---- |  | - | ---------- | 
|                                   |  | 2005 |            |  | 2004 |   |            | 2003 | 
|                                   |  |      |            |  |      |   |            |      | 
|General and administrative expense |  | $    | 11,661,000 |  |      | $ | 10,218,000 |      |  | $ | 10,471,000 | 
|                                  
|                                  
|                                  
|                                  
|Deprecation and amortization       |  | $    | 205,000    |  |      | $ | 174,000    |      |  | $ | 779,000    | 
|                                  
|                                  
|                                  
|                                  
|Corporate loss from operations   |  | $    | 11,866,000 |  |      | $ | 10,392,000 |      |  | $ | 11,250,000 | 





|                                       |  |               |            |  |             |  |               |      |  |  |             |  |  |  |            | 
|-------------------------------------- |  | ------------- | ---------- |  | ----------- |  | ------------- | ---- |  |  | ----------- |  |  |  | ---------- | 
|                                       |  | United States |            |  |             |  | United States |      |  | 
|                                       |  | 2005          |            |  | Canada 2005 |  |               | 2004 |  |  | Canada 2004 | 
|                                       |  | $             |            |  | $           |  |               | $    |  |  | $           | 
|                                       |  |               |            |  |             |  |               |      |  |  |             | 
|Hearing aid and other product revenues |  |               | 63,500,000 |  |             |  | 7,945,000     |      |  |  | 56,743,000  |  |  |  | 6,485,000  | 
|                                      
|                                      
|                                      
|                                      
|Service revenues                       |  |               | 4,835,000  |  |             |  | 392,000       |      |  |  | 5,212,000   |  |  |  | 310,000    | 
|                                      
|                                      
|                                      
|                                      
|Long-lived assets                      |  |               | 41,587,000 |  |             |  | 10,308,000    |      |  |  | 39,235,000  |  |  |  | 9,704,000  | 
|                                      
|                                      
|                                      
|                                      
|Total assets                           |  |               | 55,771,000 |  |             |  | 13,211,000    |      |  |  | 47,658,000  |  |  |  | 11,764,000 | 





|    |          
|--- | ---------
|21. | Liquidity



62



---



##### 



HearUSA, Inc.


Notes to Consolidated Financial Statements 
(Continued)




63



---



##### 



HearUSA Inc.


Schedule II  Valuation and Qualifying
Accounts


|                  |                                 |            |   |            |  |            |   |            |  |  |   |          |   |  |   |            | 
|----------------- | ------------------------------- | ---------- | - | ---------- |  | ---------- | - | ---------- |  |  | - | -------- | - |  | - | ---------- | 
|                  |                                 | Balance at |   |            |  |            |   | Balance at
|                  |                                 | Beginning  |   |            |  |            |   | End Of    
|                  |                                 | Of Period  |   | Additions  |  | Deductions |   | Period    
|                 
|December 31, 2005 |                                 |            |   |            |  |            |   |            |  |  |   |          |   |  |   |           
|                 
|                 
|                 
|                 
|                  | Allowance for doubtful accounts |            | $ | 373,583    |  |            | $ | 354,107    |  |  | $ | (314,304 | ) |  | $ | 413,386    | 
|                 
|                 
|                 
|                 
|                  | Allowance for sales returns(1)  |            | $ | 425,116    |  |            | $ | 17,287     |  |  | $ | (1,818   | ) |  | $ | 440,585    | 
|                 
|                 
|                 
|                 
|                  | Valuation allowance             |            | $ | 27,729,000 |  |            | $ |           |  |  | $ | (381,000 | ) |  | $ | 27,348,000 | 
|                 
|December 25, 2004 |                                 |            |   |            |  |            |   |            |  |  |   |          |   |  |   |           
|                 
|                 
|                 
|                 
|                  | Allowance for doubtful accounts |            | $ | 490,881    |  |            | $ | 430,454    |  |  | $ | (547,752 | ) |  | $ | 373,583    | 
|                 
|                 
|                 
|                 
|                  | Allowance for sales returns     |            | $ | 445,147    |  |            | $ | 71,061     |  |  | $ | (91,092  | ) |  | $ | 425,116    | 
|                 
|                 
|                 
|                 
|                  | Valuation allowance             |            | $ | 28,531,000 |  |            | $ |           |  |  | $ | (802,000 | ) |  | $ | 27,729,000 | 
|                 
|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    | 
|                 
|                 
|                 
|                 
|                  | Valuation allowance             |            | $ | 28,787,000 |  |            | $ |           |  |  | $ | (256,000 | ) |  | $ | 28,531,000 | 
|                 



|    |                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------
|(1) | Allowance for sales returns is included in accounts payable on
    the Consolidated Balance Sheets.

64



---



##### 





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





|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

13a-15(e) 15d-15(e)


13a-15(f) 15d-15(f)




|         |                  
|-------- | -----------------
|Item 9B. | Other Information



65



---



##### 



PART III




|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant







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





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





Equity Compensation Plan Information


|                             |  |                      |           |     |                      |   |                     |                       |  |  |         |    
|---------------------------- |  | -------------------- | --------- | --- | -------------------- | - | ------------------- | --------------------- |  |  | ------- | ---
|                             | 
|                             |  | 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))                  | 
|                             | 
|Equity compensation plans    |  |                      |           |     |                      |   |                     |                       |  |  |         |    
|                            
|approved by security holders |  |                      | 4,981,270 |     |                      | $ | 1.44                |                       |  |  | 360,830 | (1)
|                            
|Equity compensation plans    |  |                      |           |     |                      |   |                     |                       |  |  |         |    
|                            
|not approved by security     |  |                      |           |     |                      |   |                     |                       |  |  |         |    
|                            
|holders                      |  |                      | 529,800   | (2) |                      | $ | 0.90                |                       |  |  |        |    
|                            
|Total equity compensation    |  |                      |           |     |                      |   |                     |                       |  |  |         |    
|                            
|plans approved and not       |  |                      |           |     |                      |   |                     |                       |  |  |         |    
|                            
|approved by security holders |  |                      | 5,511,070 |     |                      | $ | 1.41                |                       |  |  | 360,830 | (1)
|                            



| |     |                                                                                                                                                                                                                                                                                                                           | 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (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 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. | 

66



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##### 



















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





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



PART IV




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







| |     |                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) | Consolidated Balance Sheets as of December 31, 2005 and
    December 25, 2004. Consolidated Statements of Operations
    for the years ended December 31, 2005, December 25,
    2004 and December 27, 2003.



| |      |                                                                                                                                                   
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii) | Consolidated Statements of Changes in Stockholders Equity
    for the years ended December 31, 2005, December 25,
    2004 and December 27, 2003.



| |       |                                                                                                                              
| | ----- | -----------------------------------------------------------------------------------------------------------------------------
| | (iii) | Consolidated Statements of Cash Flows for the years ended
    December 31, 2005, December 25, 2004 and
    December 27, 2003.



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



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

67



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##### 





| |    |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2  | .1  |  | Plan of Arrangement, including exchangeable share provisions
    (incorporated herein by reference to 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 to 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 to 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 to 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 to 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 to 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 to 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 to
    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 to Exhibit 4.1 to the Companys
    Current Report on Form 8-K, filed August 28, 2003
    (File No. 001-11655)).                                                                                                                                             
| | 3  | .9  |  | Amendment of Restated Certificate of Incorporation (increasing
    authorized capital) (incorporated herein by reference to
    Exhibit 3.9 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended June 26, 2004).                                                                                                                                                                           
| | 3  | .10 |  | Amended and Restated By-Laws of HearUSA, Inc. (effective
    May 9, 2005) (incorporated herein by reference to
    Exhibit 3.1 to the Companys Current Report on
    Form 8-K, filed May 13, 2005).                                                                                                                                                                                                           
| | 4  | .1  |  | 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 to
    Exhibit 4.9.1 to the Companys Joint Proxy/Prospectus
    on Form S-4 (Reg. No. 333-73022)).
| | 4  | .2  |  | Form of Support Agreement among HEARx Ltd., HEARx Canada, Inc.
    and HEARx Acquisition ULC (incorporated herein by reference to
    Exhibit 99.3 to the Companys Joint Proxy Statement/
    Prospectus on Form S-4 (Reg No. 333-73022)).                                                                                                                                                                    
| | 4  | .3  |  | Form of 2003 Convertible Subordinated Note due November 30,
    2008 (incorporated herein by reference to Exhibit 4.1 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 to
    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 to Exhibit 10.11 to the Companys
    Registration Statement of Form S-18 (Reg.
    No. 33-17041-NY))#                                                                                                                                                                                                                                 

68



---



##### 



| |    |     |  |                                                                                                                                                                                                                                                                                   
| | -- | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .2  |  | HEARx Ltd. Stock Option Plan for Non-Employee Directors and Form
    of Option Agreement (incorporated herein by reference to
    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 to Exhibit 4 to the Companys 1995 Proxy
    Statement)#                                                                                                                                                  
| | 10 | .4  |  | Employment Agreement, dated August 31, 2005 with
    Dr. Paul A. Brown (incorporated herein by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q, for the quarter ended October 1, 2005.)#                                                         
| | 10 | .5  |  | Employment Agreement, dated August 31, 2005 with Stephen J.
    Hansbrough (incorporated herein by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q, for the quarter ended October 1, 2005.)#                                                     
| | 10 | .6  |  | Employment Agreement, dated August 31, 2005 with Gino
    Chouinard (incorporated herein by reference to Exhibit 10.3
    to the Companys Quarterly Report on Form 10-Q, for
    the quarter ended October 1, 2005.)#                                                            
| | 10 | .7  |  | Employment Agreement, dated August 31, 2005 with Ken
    Schofield (incorporated herein by reference to Exhibit 10.4
    to the Companys Quarterly Report on Form 10-Q, for
    the quarter ended October 1, 2005.)#                                                             
| | 10 | .8  |  | Form of Change in Control Agreement (incorporated herein by
    reference to Exhibit 10.5 to the Companys Quarterly
    Report on Form 10-Q for the quarter ended October 1,
    2005.)#                                                                                         
| | 10 | .9  |  | Credit Agreement, dated December 7, 2001 between HEARx Ltd
    and Siemens Hearing Instruments, Inc (incorporated herein by
    reference to Exhibit 10.1 to the Companys Current
    Report on Form 8-K, filed December 26, 2001)                                               
| | 10 | .10 |  | Security Agreement, dated December 7, 2001 between HEARx
    Ltd and Siemens Hearing Instruments, Inc (incorporated herein by
    reference to Exhibit 10.2 to the Companys Current
    Report on Form 8-K, December 26, 2001)                                                   
| | 10 | .11 |  | Supply Agreement, dated December 7, 2001 between HEARx Ltd
    and Siemens Hearing Instruments, Inc (incorporated herein by
    reference to Exhibit 10.3 to the Companys Current
    Report on Form 8-K, December 26, 2001)                                                     
| | 10 | .12 |  | HearUSA 2002 Flexible Stock Plan (incorporated herein by
    reference to Exhibit 10.9 to the Companys Joint Proxy
    Statement/ Prospectus on Form S-4 (Reg. No. 333-73022)#                                                                                                   
| | 10 | .13 |  | Amendment to Security Agreement, dated March 12, 2003
    between HearUSA, Inc. and Siemens Hearing Instruments, Inc.
    (incorporated herein by reference to Exhibit 10.2 to the
    Companys Form 10Q for the period ended March 29,
    2003).                               
| | 10 | .14 |  | Amendment to Credit Agreement, dated March 12, 2003 between
    HearUSA, Inc. and Siemens Hearing Instruments, Inc.
    (incorporated herein by reference to Exhibit 10.1 to the
    Companys Form 10-Q for the period ended
    March 29, 2003).                                
| | 10 | .15 |  | Purchase Agreement dated August 19, 2005 by and among
    HearUSA, Inc. and the purchasers named therein (incorporated by
    reference to Exhibit 10.1 to the Companys
    Registration Statement on Form S-3/A filed October 7,
    2005).                                     
| | 10 | .16 |  | Form of Registration Rights Agreement by and among HearUSA, Inc.
    and the purchasers named in the Purchase Agreement dated
    August 19, 2005 (incorporated by reference to
    Exhibit 10.2 to the Companys Registration Statement
    on Form S-3/A filed October 7, 2005).
| | 10 | .17 |  | Asset Purchase Agreement dated June 15, 2005, between
    HearUSA, Inc. and Sonus-USA, Inc. (incorporated herein by
    reference to Exhibit 10.5 to the Companys Quarterly
    Report on Form 10-Q for the quarter ended July 2,
    2005).                                     
| | 21 |     |  | List of Subsidiaries                                                                                                                                                                                                                                                              
| | 23 |     |  | Consent of the Independent Public Accountants                                                                                                                                                                                                                                     
| | 31 | .1  |  | CEO Certification, pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                  
| | 31 | .2  |  | CFO Certification, pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                  
| | 32 |     |  | 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.

69



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##### 



SIGNATURES






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

|                     |  |     |  |                                                                                  
|-------------------- |  | --- |  | ---------------------------------------------------------------------------------
|Date: March 31, 2006 |  | By: |  | /s/ Paul A. Brown, M.D.     Paul A.
    Brown, M.D.     Chairman of
    the Board



|                                                       |  |                                      |  |               
|------------------------------------------------------ |  | ------------------------------------ |  | --------------
|Signature                                              |  | Title                                |  | Date          
|                                                       |  |                                      |  |               
|/s/ Paul A. BrownPaul A. Brown M.D.                    |  | Chairman of the Board and Director   |  | March 31, 2006
|                                                      
|/s/ Stephen J.
    HansbroughStephen J. Hansbrough     |  | Chief Executive Officer and Director |  | March 31, 2006
|                                                      
|/s/ Gino ChouinardGino Chouinard                       |  | Chief Financial Officer              |  | March 31, 2006
|                                                      
|/s/ David J. McLachlanDavid J. McLachlan               |  | Director                             |  | March 31, 2006
|                                                      
|/s/ Thomas W. ArchibaldThomas W. Archibald             |  | Director                             |  | March 31, 2006
|                                                      
|/s/ Joseph L.
    Gitterman IIIJoseph L. Gitterman III |  | Director                             |  | March 31, 2006
|                                                      
|/s/ Michel LabadieMichel Labadie                       |  | Director                             |  | March 31, 2006
|                                                      
|/s/ Bruce BagniBruce Bagni                             |  | Director                             |  | March 31, 2006

70