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 endedDECEMBER 27, 2008
 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
    
    (I.R.S.EmployerIncorporation or Organization)
    
    Identification No.)1250 Northpoint Parkway, West Palm Beach, Florida
    
    33407(Address of Principal Executive Offices)
    
    (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 registeredCommon Stock, par value $0.10 per share
    
    NYSE Amex
 Securities registered pursuant to Section 12(g) of the Act: None
 Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
 Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation
S-K is not contained herein and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in PART III of this Form
10-K or any amendment to this Form 10-K . o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
 Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of
the Exchange Act). Yes o No þ
 As of June 30, 2008, the aggregate market value of the registrants Common Stock held by
non-affiliates (based upon the closing price of the Common Stock on the NYSE Amex, formerly known
as the American Stock Exchange) was approximately $53,665,692.
 On March 5, 2009, 44,836,964 shares of the registrants Common Stock including 503,061 of
exchangeable shares were outstanding.
 DOCUMENTS INCORPORATED BY REFERENCE
 Portions of registrants definitive proxy statement for the 2008 Annual Meeting of the
registrants stockholders (2009 Proxy Statement), to be filed with the Securities and Exchange
Commission, are incorporated by reference in Part III hereof.




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PART I
 Item 1. Business
    Products
    Acquisition Program
   1




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Managed Care, Institutional Contracts and Benefit Providers
     Sales Development
   2




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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 promoting 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 calls from consumers and
outbound telemarketing. The Company uses a predictive dialer system which has improved
call center productivity and increased 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
   Revenues
  Segments
   3




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Centers
    Network
   E-commerce
  Distinguishing Features
     4




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Competition
     5




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Reliance on Manufacturers
   Regulation
      6




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7




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8




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Product and Professional Liability
  Seasonality
  Employees
  Where to Find More Information
 www.hearusa.com
  9




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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; and
 
    
    Timing and amounts of payments by health insurance and managed care organizations.
  The current severe economic
downturn is adversely affecting our sales.
  We may not effectively compete in the hearing care industry.
  We are dependent on manufacturers who may not perform.
   10




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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.
  Current credit and financial market conditions could prevent or delay us from obtaining financing
if our Siemens facility is unavailable to us, which would adversely affect our business, our
operating results and financial condition.
  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.
  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.
   11




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




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HearUSA might fail to maintain a listing for its common stock on the NYSE Amex, 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 million 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 million if the company has
sustained losses from continuing operations or net losses in three of its four most
recent fiscal years;
 
    
    the company fails to maintain stockholders equity of $6 million if the company has
sustained losses from continuing operations or net losses in its five most recent fiscal
years; or
 
    
    the company has sustained losses which are so substantial in relation to its overall
operations or its existing financial resources, or its financial condition has become so
impaired that it appears questionable, in the opinion of the NYSE Amex, as to whether
such issuer will be able to continue operations and/or meet its obligations as they
mature.
  If penny stock regulations apply to HearUSA common stock, you may not be able to sell or dispose
of your shares.
  Exercise of outstanding HearUSA options and warrants could cause substantial dilution.
  
    
    Warrants to purchase approximately 2.5 million shares of common stock and
 
    
    Options to purchase approximately 5.4 million 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.
  Terms of our agreement with Siemens may discourage a third party from making a takeover offer which
could be beneficial to HearUSA and its stockholders.
  Other Risks Relating to the Business of HearUSA
 We may not be able to obtain additional capital on reasonable terms, or at all, to fund our
operations.
  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.
  14




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
    
    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.
  If the Company is required to write down goodwill and other intangible assets, the Companys
financial condition and results would be negatively affected.
    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
  Item 3. Legal Proceedings
  Item 4. Submission of Matters to a Vote of Security Holders
   16




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EXECUTIVE OFFICERS OF THE COMPANY
  First Served as ExecutiveName and Position
    
    Age
    
    OfficerStephen J. Hansbrough
    
    
    62
    
    
    
    1993Chairman and Chief Executive Officer DirectorGino Chouinard
    
    
    40
    
    
    
    2002President and Chief Operating OfficerFrancisco Puñal
    
    
    50
    
    
    
    2008Senior Vice President and Chief Financial Officer
      17




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PART II
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters
  Common StockFiscal Quarter
    
    High
    
    
    Low2008First
    
    $
    1.58
    
    
    $
    1.04Second
    
    $
    1.82
    
    
    $
    1.15Third
    
    $
    1.76
    
    
    $
    1.21Fourth
    
    $
    1.32
    
    
    $
    0.222007First
    
    $
    1.91
    
    
    $
    1.00Second
    
    $
    1.95
    
    
    $
    1.50Third
    
    $
    1.77
    
    
    $
    1.28Fourth
    
    $
    1.70
    
    
    $
    1.28
  Dividend Policy
   18




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Item 6. Selected Financial Data
   Year EndedDecember 27
    
    
    December 29
    
    
    December 30
    
    
    December 31
    
    
    December 25Dollars in thousands
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Total net revenues
    
    $
    111,988
    
    
    $
    102,804
    
    
    $
    88,786
    
    
    $
    76,672
    
    
    $
    68,749Income from operations (1 and 2)
    
    
    3,917
    
    
    
    6,823
    
    
    
    3,809
    
    
    
    3,715
    
    
    
    2,338Non-operating income:Gain from insurance settlement (3)
    
    
    
    
    
    
    
    
    
    
    203
    
    
    
    430
    
    
    
    Gain on settlement of intangible
asset (4)
    
    
    981
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest income
    
    
    42
    
    
    
    164
    
    
    
    152
    
    
    
    54
    
    
    
    18Interest expense (5)
    
    
    (5,755
    )
    
    
    (8,022
    )
    
    
    (5,964
    )
    
    
    (4,641
    )
    
    
    (4,564
    )Income tax expense
    
    
    (1,126
    )
    
    
    (769
    )
    
    
    (741
    )
    
    
    (1,759
    )
    
    
    (690
    )Minority interest
    
    
    (1,260
    )
    
    
    (1,478
    )
    
    
    (633
    )
    
    
    
    
    
    
    Loss before dividends on
preferred stock
    
    
    (3,201
    )
    
    
    (3,282
    )
    
    
    (3,174
    )
    
    
    (2,264
    )
    
    
    (3,449
    )Net loss applicable to common
stockholders
    
    
    (3,340
    )
    
    
    (3,419
    )
    
    
    (3,312
    )
    
    
    (2,965
    )
    
    
    (4,157
    )Loss per common share:Basic and
diluted, loss after
dividends on preferred stock
    
    
    (0.09
    )
    
    
    (0.09
    )
    
    
    (0.10
    )
    
    
    (0.09
    )
    
    
    (0.12
    )Basic and diluted net loss
applicable to common stockholders
    
    
    (0.09
    )
    
    
    (0.09
    )
    
    
    (0.10
    )
    
    
    (0.09
    )
    
    
    (0.14
    )
 (1)
    
    Income from operations in 2008, 2007 and 2006 includes approximately $849,000, $606,000 and
$976,000, respectively of non-cash employee stock-based compensation expense, which did not exist
in prior years.(2)
    
    Income from operations includes approximately $1,450,000, $896,000, $815,000, $618,000 and
$478,000, in 2008, 2007, 2006, 2005 and 2004, respectively, of intangible assets amortization.(3)
    
    The gain from insurance settlement is from insurance proceeds and final payment resulting from
2005 and 2004 hurricane damages and business interruption claims sustained in Florida hearing care
centers.(4)
    
    The gain on settlement of intangible asset is the result of the December 22, 2008 Amendment to
the license agreement with AARP, which eliminated the fixed $7.6 million annual
license payment. The Company is currently in negotiations with AARP
for restructuring the royalty compensation provision.(5)
    
    Interest expense includes
approximately $763,000 of non-cash interest expense on a long-term
contractual commitment in 2008, $421,000 and $117,000 of non-cash interest expense on discounted notes
payable in 2008 and 2007, $192,000, $3.5 million, $2.7 million, $2.5 million and $2.1 million in
2008, 2007, 2006, 2005 and 2004, respectively, of non-cash debt discount amortization (including
$1.4 million in 2007 due to the reduction in the price of warrants related to the 2003 Convertible
Subordinated Notes) and approximately $319,000 and $513,000 in 2006 and 2005, respectively, of
non-cash decreases in interest expense related to a decrease in the fair market value of the
warrant liability.  19




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As ofDecember 27
    
    
    December 29
    
    
    December 30
    
    
    December 31
    
    
    December 25Dollars in thousands
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Total assets
    
    $
    100,601
    
    
    $
    100,542
    
    
    $
    83,276
    
    
    $
    71,044
    
    
    $
    61,774Working capital deficit (1)
    
    
    (7,247
    )
    
    
    (16,012
    )
    
    
    (14,896
    )
    
    
    (3,549
    )
    
    
    (4,898
    )Long-term debt:Long-term debt, net of current maturities
    
    
    49,099
    
    
    
    36,499
    
    
    
    28,599
    
    
    
    19,970
    
    
    
    17,296Convertible subordinated notes and
subordinated notes, net of debt discount of
$278,000, $2,078,000 and $5,444,000 in 2006,
2005 and 2004, respectively
    
    
    
    
    
    
    
    
    
    
    3,762
    
    
    
    6,222
    
    
    
    2,056Mandatorily redeemable convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,710
 (1)
    
    Includes approximately $2.7 million, $2.6 million, $3.5 million, $2.2 million and $2.9
million in 2008, 2007, 2006, 2005 and 2004, respectively, representing the current maturities of
the long-term debt to Siemens which may be repaid through rebate credits and approximately $2.5
million and $652,000, net of debt discount, in 2006 and 2005 respectively, related to the $7.5
million convertible subordinated notes that could be repaid by either cash or stock, at the option
of the Company.  20




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Item 7. Managements Discussion and Analysis of Results of Operations
and Financial Condition
 GENERAL
    RESULTS OF OPERATIONS
 2008 compared to 2007 (in thousands of dollars)
 Revenues
 Revenues
    
    2008
    
    
    2007
    
    
    Change
    
    
    % ChangeHearing aids and other products
    
    $
    104,392
    
    
    $
    95,936
    
    
    $
    8,456
    
    
    
    8.8
    %Services
    
    
    7,596
    
    
    
    6,868
    
    
    
    728
    
    
    
    10.6
    %Total net revenues
    
    $
    111,988
    
    
    $
    102,804
    
    
    $
    9,184
    
    
    
    8.9
    %2008
    
    
    2007
    
    
    Change
    
    
    % Change (3)Revenues from centers acquired in 2007 (1)
    
    $
    5,127
    
    
    $
    
    
    
    $
    5,127
    
    
    
    5.0
    %Revenues from centers acquired in 2008
    
    
    4,670
    
    
    
    
    
    
    
    4,670
    
    
    
    4.5
    %Revenues from acquired centers
    
    
    9,797
    
    
    
    
    
    
    
    9,797
    
    
    
    9.5
    %Revenues from comparable centers (2)
    
    
    102,191
    
    
    
    102,804
    
    
    
    (613
    )
    
    
    (0.6
    )%Total net revenues
    
    $
    111,988
    
    
    $
    102,804
    
    
    $
    9,184
    
    
    
    8.9
    %
 (1)
    
    Represents that portion of revenues from the 2007 acquired centers recognized for those
acquisitions that had less than one full year of revenues recorded in 2007 due to the
timing of their acquisition.(2)
    
    Also includes revenues from the network business segment as well as the impact of
fluctuation of the Canadian exchange rate.(3)
    
    The revenues from acquired centers percentage changes are calculated by dividing those
revenues by the total of 2007 total net revenues.  21




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Cost of Products Sold and Services
 Cost of products sold and services
    
    2008
    
    
    2007
    
    
    Change
    
    
    %Hearing aids and other products
    
    $
    30,171
    
    
    $
    26,017
    
    
    $
    4,154
    
    
    
    16.0
    %Services
    
    
    2,311
    
    
    
    2,088
    
    
    
    223
    
    
    
    10.7
    %Total cost of products sold and services
    
    $
    32,482
    
    
    $
    28,105
    
    
    $
    4,377
    
    
    
    15.60
    %Percent of total net revenues
    
    
    29.0
    %
    
    
    27.3
    %
    
    
    1.7
    %
    
    
    6.2
    %
  Rebate credits included above
    
    2008
    
    
    2007
    
    
    Change
    
    
    %Base required payments on Tranche C forgiven
    
    $
    3,099
    
    
    $
    3,945
    
    
    $
    (846
    )
    
    
    (21.4
    )%Required payments of $65 per Siemens unit from acquired centers on Tranche B forgiven
    
    
    684
    
    
    
    546
    
    
    
    138
    
    
    
    25.3
    %Interest expense on Tranches B and C forgiven
    
    
    2,832
    
    
    
    2,696
    
    
    
    136
    
    
    
    5.0
    %Total rebate credits
    
    $
    6,615
    
    
    $
    7,187
    
    
    $
    (572
    )
    
    
    (8.0
    )%Percent of total net revenues
    
    
    5.9
    %
    
    
    7.0
    %
    
    
    (1.1
    )%
    
    
    (15.7
    )%
  Expenses
 Operating expenses
    
    2008
    
    
    2007
    
    
    Change
    
    
    %Center operating expenses
    
    $
    57,450
    
    
    $
    50,401
    
    
    $
    7,049
    
    
    
    14.0
    %Percent of total net revenues
    
    
    51.3
    %
    
    
    49.0
    %
    
    
    2.3
    %
    
    
    4.7
    %General and administrative expenses
    
    $
    15,176
    
    
    $
    15,227
    
    
    $
    (51
    )
    
    
    (0.3
    )%Percent of total net revenues
    
    
    13.6
    %
    
    
    14.8
    %
    
    
    (1.2
    )%
    
    
    (8.1
    )%Depreciation and amortization
    
    $
    2,963
    
    
    $
    2,248
    
    
    $
    715
    
    
    
    31.8
    %Percent of total net revenues
    
    
    2.6
    %
    
    
    2.2
    %
    
    
    0.4
    %
    
    
    18.2
    %
    22




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Interest Expense
 Interest expense
    
    2008
    
    
    2007
    
    
    Change
    
    
    %Notes payable from business acquisitions and others (1)
    
    $
    978
    
    
    $
    642
    
    
    $
    336
    
    
    
    52.3
    %Long-term contractual commitment to AARP (2)
    
    
    763
    
    
    
    
    
    
    
    763
    
    
    
    100.0
    %Siemens Tranches B and C (3)
    
    
    2,832
    
    
    
    2,696
    
    
    
    136
    
    
    
    5.0
    %Siemens Tranche D and E
    
    
    935
    
    
    
    691
    
    
    
    244
    
    
    
    35.3
    %2003 Convertible Subordinated Notes (4)
    
    
    
    
    
    
    3,168
    
    
    
    (3,168
    )
    
    
    (100.0
    )%2005 Subordinated Notes (5)
    
    
    247
    
    
    
    825
    
    
    
    (578
    )
    
    
    (70.1
    )%Total interest expense
    
    $
    5,755
    
    
    $
    8,022
    
    
    $
    (2,267
    )
    
    
    (28.3
    )%
 2008
    
    
    2007
    
    
    Change
    
    
    %Total cash interest expense (6)
    
    $
    1,617
    
    
    $
    1,703
    
    
    $
    (86
    )
    
    
    (5.0
    )%Total non-cash interest expense (7)
    
    
    4,138
    
    
    
    6,319
    
    
    
    (2,181
    )
    
    
    (34.5
    )%Total interest expense
    
    $
    5,755
    
    
    $
    8,022
    
    
    $
    (2,267
    )
    
    
    (28.3
    )%
 (1)
    
    Includes $421,000 and $117,000 in 2008 and 2007, respectively, of non-cash interest expense
related to recording of notes at their present value by discounting future payments to market
rate of interest (see Note 6  Long-term Debt, Notes to Consolidated Financial Statements
included herein).(2)
    
    Includes $763,000 of non-cash interest expense related to recording of long-term contractual
commitment to AARP at its present value by discounting future payments to market rate of
interest (see Note 6   Long-term Debt, Notes to Consolidated Financial Statements included
herein).(3)
    
    The interest expense on Tranches B and C is forgiven by Siemens as long as the minimum
purchase requirements are met and a corresponding rebate credit is recorded as a reduction of
the cost of products sold (see Note 6  Long-term Debt, Notes to Consolidated Financial
Statements included herein and Liquidity and Capital Resources, below).(4)
    
    Includes $3.0 million in 2007 of non-cash debt discount amortization (see Note 7 
Convertible Subordinated Notes, Notes to Consolidated Financial Statements included herein).(5)
    
    Includes $192,000 and $496,000 in 2008 and 2007, respectively, of non-cash debt discount
amortization (see Note 8  Subordinated Notes and Warrant Liability, Notes to Consolidated
Financial Statements included herein).(6)
    
    Represents the sum of the cash interest portion paid on the notes payable for business
acquisitions and others, the cash interest paid on the Siemens on Tranches D and E loans,
Subordinated notes and the cash portion paid on the Convertible Subordinated in 2007.(7)
    
    Represents the sum of the non-cash interest expense related to recording the notes payable
for business acquisitions at their present value by discounting future payments to market rate
of interest, long-term contractual commitment to AARP at its present value, Siemens Tranches B
and C loans, the non-cash interest imputed to the 2005 Subordinated Notes and the 2003
Convertible Subordinated Notes in 2007 related to the debt discount amortization.  Gain on Restructuring of Contract
    23




---



##### 



Income Taxes
   Minority Interest
   24




---



##### 



2007 compared to 2006 (in thousands of dollars)
 Revenues
 Revenues
    
    2007
    
    
    2006
    
    
    Change
    
    
    % ChangeHearing aids and other products
    
    $
    95,936
    
    
    $
    82,820
    
    
    $
    13,116
    
    
    
    15.8
    %Services
    
    
    6,868
    
    
    
    5,966
    
    
    
    902
    
    
    
    15.1
    %Total net revenues
    
    $
    102,804
    
    
    $
    88,786
    
    
    $
    14,018
    
    
    
    15.8
    %2007
    
    
    2006
    
    
    Change
    
    
    % Change (3)Revenues from centers acquired in 2006 (1)
    
    $
    8,193
    
    
    $
    
    
    
    $
    8,193
    
    
    
    9.2
    %Revenues from centers acquired in 2007
    
    
    4,600
    
    
    
    
    
    
    
    4,600
    
    
    
    5.2
    %Total Revenues from acquired centers
    
    
    12,793
    
    
    
    
    
    
    
    12,793
    
    
    
    14.4
    %Revenues from comparable centers (2)
    
    
    90,011
    
    
    
    88,786
    
    
    
    1,225
    
    
    
    1.4
    %Total net revenues
    
    $
    102,804
    
    
    $
    88,786
    
    
    $
    14,018
    
    
    
    15.8
    %
 (1)
    
    Represents that portion of revenue from the 2006 acquired centers recognized for those
acquisitions that had less than one full year of revenues recorded in 2006 due to the
timing of their acquisition.(2)
    
    Includes revenues from the network business segment as well as the impact of
fluctuation of the Canadian exchange rate.(3)
    
    The revenues from acquired centers percentage changes are calculated by dividing them
by the total 2006 net revenues.   Cost of Products Sold and Services
 Cost of products sold and services
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Hearing aids and other products
    
    $
    26,017
    
    
    $
    24,942
    
    
    $
    1,075
    
    
    
    4.3
    %Services
    
    
    2,088
    
    
    
    1,761
    
    
    
    327
    
    
    
    18.6
    %Total cost of products sold and services
    
    $
    28,105
    
    
    $
    26,703
    
    
    $
    1,402
    
    
    
    5.3
    %Percent of total net revenues
    
    
    27.3
    %
    
    
    30.1
    %
    
    
    (2.8
    )%
    
    
    (9.3
    )%
  Rebate Credits included above
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Base required payments on Tranches C forgiven
    
    $
    3,945
    
    
    $
    2,922
    
    
    $
    1,023
    
    
    
    35.0
    %Required payments of $65 per Siemens unit
from acquired centers on Tranche B forgiven
    
    
    546
    
    
    
    190
    
    
    
    356
    
    
    
    187.4
    %Interest expense on Tranches B and C forgiven
    
    
    2,696
    
    
    
    626
    
    
    
    2,070
    
    
    
    330.7
    %Total rebate credits
    
    $
    7,187
    
    
    $
    3,738
    
    
    $
    3,449
    
    
    
    92.3
    %Percent of total net revenues
    
    
    7.0
    %
    
    
    4.2
    %
    
    
    2.8
    %
    
    
    66.7
    %
   25




---



##### 



Expenses
 Operating expenses
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Center operating expenses
    
    $
    50,401
    
    
    $
    42,281
    
    
    $
    8,120
    
    
    
    19.2
    %Percent of total net revenues
    
    
    49.0
    %
    
    
    47.6
    %
    
    
    1.4
    %
    
    
    2.9
    %General and administrative expenses
    
    $
    15,227
    
    
    $
    14,005
    
    
    $
    1,222
    
    
    
    8.7
    %Percent of total net revenues
    
    
    14.8
    %
    
    
    15.8
    %
    
    
    (1.0
    )%
    
    
    (6.3
    )%Depreciation and amortization
    
    $
    2,248
    
    
    $
    1,988
    
    
    $
    260
    
    
    
    13.1
    %Percent of total net revenues
    
    
    2.2
    %
    
    
    2.2
    %
    
    
    0.0
    %
    
    
    0.0
    %
     26




---



##### 



Interest Expense
 Interest expense
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Notes payable from business acquisitions and others (1)
    
    $
    642
    
    
    $
    264
    
    
    $
    371
    
    
    
    140.5
    %Siemens Tranche C2   Interest paid with monthly payments (2)
    
    
    
    
    
    
    345
    
    
    
    (345
    )
    
    
    (100.0
    )%Siemens Tranches C1 and C3  accrued interest added to loan
balance (2)
    
    
    
    
    
    
    1,130
    
    
    
    (1,130
    )
    
    
    (100.0
    )%Siemens Tranches A, B and C  interest forgiven (3)
    
    
    2,696
    
    
    
    626
    
    
    
    2,077
    
    
    
    331.8
    %Siemens Tranche D
    
    
    691
    
    
    
    
    
    
    
    691
    
    
    
    2003 Convertible Subordinated Notes (4)
    
    
    3,168
    
    
    
    2,556
    
    
    
    612
    
    
    
    23.9
    %2005 Subordinated Notes (5)
    
    
    825
    
    
    
    1,361
    
    
    
    (536
    )
    
    
    (39.4
    )%Warrant liability change in value (6)
    
    
    
    
    
    
    (319
    )
    
    
    319
    
    
    
    (100.0
    )%Total interest expense
    
    $
    8,022
    
    
    $
    5,963
    
    
    $
    2,059
    
    
    
    34.5
    %
 2007
    
    
    2006
    
    
    Change
    
    
    %Total cash interest expense (7)
    
    $
    1,703
    
    
    $
    2,962
    
    
    $
    (1,266
    )
    
    
    (42.7
    )%Total non-cash interest expense (8)
    
    
    6,319
    
    
    
    3,001
    
    
    
    3,325
    
    
    
    110.8
    %Total interest expense
    
    $
    8,022
    
    
    $
    5,963
    
    
    $
    2,059
    
    
    
    34.5
    %
 (1)
    
    Includes $117,000 of non-cash interest expense related to the recording of notes at
their present value by discounting future payments at an imputed rate of interest (see Note
6  Long-term Debt, Notes to Consolidated Financial Statements included herein).(2)
    
    The loan balances related to this interest expense were transferred to the new
self-liquidating loan with Siemens under the new December 30, 2006 agreement (Tranches B
and C) and will be forgiven going forward so long as minimum purchase requirements are met
(see Note 6  Long-term Debt, Notes to Consolidated Financial Statements included herein
and Liquidity and Capital Resources, below).(3)
    
    The interest expense on Tranches B and C is forgiven by Siemens as long as the minimum
purchase requirements are met and a corresponding rebate credit is recorded in reduction of
the cost of products sold (see Note 6  Long-term Debt, Notes to Consolidated Financial
Statements included herein and Liquidity and Capital Resources, below).(4)
    
    Includes $3.0 million in 2007 and $1.8 million in 2006 of non-cash debt discount
amortization (see Note 7  Convertible Subordinated Notes, Notes to Consolidated Financial
Statements included herein).(5)
    
    Includes $496,000 in 2007 and $850,000 in 2006 of non-cash debt discount amortization
(see Note 8  Subordinated Notes and Warrant Liability, Notes to Consolidated Financial
Statements included herein).(6)
    
    Relates to the change in value of the warrants related to the 2005 subordinated notes
and is a non-cash item (see Note 8  Subordinated Notes and Warrant Liability, Notes to
Consolidated Financial Statements included herein).(7)
    
    Represents the sum of the cash interest portion paid on the notes payable for business
acquisitions and others, the cash interest paid to Siemens on the Siemens loans (Tranche C2
in 2006 and Tranche D in 2007) and the cash portion paid on the Convertible Subordinated
and Subordinated Notes.(8)
    
    Represents the sum of the non-cash interest portion imputed on the notes payable for
business acquisitions to adjust the interest rates at market value, the Siemens non-cash
interest imputed on Tranches C1 and C3 in 2006 and Tranches B and C in 2007 and the
non-cash interest imputed to the 2003 Convertible Subordinated Notes and 2005 Subordinated
Notes related to the debt discount amortization.   27




---



##### 



LIQUIDITY AND CAPITAL RESOURCES
 Siemens Transaction
    
    
    The previous amendment of
the Credit Agreement called for cash payments of $7.2 million in
December 2008 on Tranches D and E and quarterly principal payments of
$500,000 on Tranche C. The Amendment transferred the amounts
due under Tranches D and E to Tranche C. Providing the Company meets
the purchase requirements in the Supply Agreement, all repayments on
both Tranches can now be self-liquidating.
 
    
    The balances of Tranche D and
E were transferred to Tranche C. Going forward the credit
agreement will have only Tranches B and C.
 
    
    Approximately $3.8 million of outstanding debt under the supply agreement was
converted into 6.4 million shares of the Companys Common Stock at a conversion price of
$0.60 per share. The conversion provisions of the credit
agreement were eliminated from the Credit Agreement.
 
    
    An additional $6.2 million of debt under the supply agreement was converted into
long-term indebtedness under Tranche C.
 
    
    The maturity date of the credit and supply agreement was extended an additional two
years, to February, 2015.
 
    
    Siemens was granted a right of first refusal for all new issuances of equity (except
issuances pursuant to employee compensation plans and pursuant to warrants outstanding on
the date of the amendments) for a period of 18 months and thereafter a more limited right
of first refusal and preemptive rights for the life of the investor rights agreement.
 
    
    The Company will invite a representative of Siemens to attend meetings of the Board in a
nonvoting observer capacity.
  28




---



##### 



Financing and rebate arrangement
   Rebate credits on product sales
    Calculation of Pro forma Rebates to HearUSA when at least 90% ofUnits Sold are from Siemens (1)Quarterly Siemens Unit Sales Compared to Prior Years Comparable Quarter90% but < 95%
    
    
    95% to 100%
    
    
    > 100% < 125%
    
    
    125% and >Tranche B Rebate
    
    $65/ unit
    
    $65/ unit
    
    $65/ unit
    
    $65/ unitPlus
    
    Plus
    
    Plus
    
    PlusTranche C Rebate
    
    $
    500,000
    
    
    $
    500,000
    
    
    $
    500,000
    
    
    $
    500,000Additional Volume Rebate
    
    
    
    
    
    
    156,250
    
    
    
    312,500
    
    
    
    468,750Interest Forgiveness Rebate (2)
    
    $
    712,500
    
    
    $
    712,500
    
    
    $
    712,500
    
    
    
    712,500$
    1,212,500
    
    
    $
    1,368,750
    
    
    $
    1,525,000
    
    
    $
    1,681,250
 (1)
    
    Calculated using trailing twelve month units sold by the Company(2)
    
    Assuming the first $30 million portion of the line of credit is fully utilized Marketing arrangement
   29




---



##### 



Conversion of debt for equity
   Investor and other rights arrangement
    Working Capital
   Cash Flows
    30




---



##### 



Contractual Obligations
  Payments due by period (000s)Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1  3
    
    
    4  5
    
    
    Than 5Contractual obligations
    
    Total
    
    
    year
    
    
    years
    
    
    Years
    
    
    years$
    
    
    $
    
    
    $
    
    
    $
    
    
    $Long-term debt (1 and 3)
    
    
    56,583
    
    
    
    7,011
    
    
    
    10,483
    
    
    
    5,499
    
    
    
    33,590Subtotal of obligations recorded on balance sheet
    
    
    56,583
    
    
    
    7,011
    
    
    
    10,483
    
    
    
    5,499
    
    
    
    33,590Interest to be paid on long-term debt (2 and 3)
    
    
    23,310
    
    
    
    4,773
    
    
    
    8,185
    
    
    
    6,869
    
    
    
    3,483Operating leases
    
    
    19,036
    
    
    
    6,450
    
    
    
    8,718
    
    
    
    2,877
    
    
    
    991Employment agreements
    
    
    4,881
    
    
    
    2,484
    
    
    
    2,288
    
    
    
    109
    
    
    
    Purchase obligations (4)
    
    
    3,961
    
    
    
    2,514
    
    
    
    1,447
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    
    107,771
    
    
    
    23,232
    
    
    
    31,121
    
    
    
    15,354
    
    
    
    38,064
 (1)
    
    Approximately $46.7 million can be repaid through rebate credits from Siemens, including $2.7
million in less than 1 year and $5.3 million in years 1-3,
$5.1 million in years 4-5 and $33.6
million in more than 5 years.(2)
    
    Interest on long-term debt includes the interest on the new Tranches B and C that can be
repaid through rebate credits from Siemens pursuant to the Amended and Restated Credit
Agreement, including $4.3 million in less than 1 year and $7.8 million in years 1-3, $6.9 in
years 4-5 and $3.5 million in more than 5 years. Interest repaid through preferred pricing
reductions was $2.8 million in 2008. (See Note 6  Long-Term Debt, Notes to Consolidated
Financial Statements included herein).(3)
    
    Principal and interest payments on long-term debt is based on cash payments and not the fair
value of the discounted notes (See Note 6  Long-Term Debt, Notes to Consolidated Financial
Statements included herein). (4)
    
    Purchase obligations includes the contractual commitment to AARP for campaigns to educate and
promote hearing loss awareness and prevention and the contractual commitment to AARP
for public marketing funds for the AARP Health Care Options General Program, including $1.8
million in less than 1 year and $907,000 in years 1-3.  31




---



##### 



CRITICAL ACCOUNTING POLICIES
  Business acquisitions and goodwill
 We account for business acquisitions using the purchase method of
accounting. As of January 1, 2009 we adopted the provisions of SFAS 141(R) and will account for acquisitions
completed after December 31, 2008 in accordance with SFAS 141(R). SFAS 141(R) revises the manner in
which companies account for business combinations and is described more fully elsewhere in this annual report. We
determine the purchase price of an acquisition based on the fair value of the consideration given or the fair value of
the net assets acquired, whichever is more clearly evident. The total purchase price of an acquisition is allocated to
the underlying net assets based on their respective estimated fair values. As part of this allocation process,
management must identify and attribute values and estimated lives to intangible assets acquired. Such determinations
involve considerable judgment, and often involve the use of significant estimates and assumptions, including those with
respect to future cash inflows and outflows, discount rates and asset lives. These determinations will affect the
amount of amortization expense recognized in future periods. Assets acquired in a business combination that will be
re-sold are valued at fair value less cost to sell. Results of operating these assets are recognized currently in the
period in which those operations occur.    The market capitalization
of the Companys stock temporarily declined to approximately $17.3 million on December 11, 2008, which was substantially lower than the Company’s estimated combined fair
values of its three reporting units.  The Company completed a reconciliation of the sum of the estimated fair
values of its reporting units to its market value (based upon its stock price at December 11, 2008).  We
believe one of the primary reconciling differences between fair value and our market capitalization is due to a control
premium. We believe the value of a control premium is the value a market participant could extract as savings
and / or synergies by obtaining control, and thereby eliminating duplicative overhead costs and obtaining
discounts on volume purchasing from suppliers. The Company also considers the following qualitative items that cannot
be accurately quantified and are based upon the beliefs of management, but provide additional support for the
explanation of the remaining difference between the estimated fair value of the Company’s reporting units and its
market capitalization:  •
  
  The Company’s stock is thinly traded;  •
  
  The decline in the Company’s stock price during 2008 is not directly correlated
to a change in the overall operating performance of the Company; and  •
  
  Previously unseen pressures are in place given the global financial and economic
crisis. At December 27, 2008
the Companys market capitalization of $26.2 million
exceeded the book value of its three reporting units. We will continue to monitor market trends in our business, the related
expected cash flows and our calculation of market capitalization for purposes of identifying possible indicators of
impairment. Should our market capitalization again decline below our book
value or we have other indicators of
impairment, as previously discussed, we will be required to perform an interim step one impairment analysis, which may
lead to a step two analysis resulting in a goodwill impairment. Additionally, we would then be required to review our
remaining long-lived assets for impairment. Judgments regarding the existence of impairment indicators
are based on legal factors, market conditions and operational performance of the acquired businesses. Future events
could cause us to conclude that impairment indicators exist and that goodwill associated with the acquired businesses
is impaired. Additionally, as the valuation of identifiable goodwill requires significant estimates and judgment about
future performance, cash flows and fair value, our future results could be affected if these current estimates of
future performance and fair value change. Any resulting impairment loss could have a material adverse impact on our
financial condition and results of operations. Revenue recognition
    32




---



##### 



Allowance for doubtful accounts
    33




---



##### 



Sales returns
  Impairment of Long-Lived Assets
  Stock-based compensation
 Share-Based Payment
  Income taxes
    34




---



##### 



RECENT ACCOUNTING PRONOUNCEMENTS
  ,
      35




---



##### 



Item 7A. Quantitative and Qualitative Disclosure About Market Risk
  Fixed Rate
    
    
    Variable Rate9.5%
    
    
    5% to 13.9%Due February 2015
    
    
    Other
    
    
    Total$
    
    
    $
    
    
    $(000s)
    
    
    (000s)
    
    
    (000s)2009
    
    
    (2,683
    )
    
    
    (4,232
    )
    
    
    (6,915
    )2010
    
    
    (2,676
    )
    
    
    (2,839
    )
    
    
    (5,515
    )2011
    
    
    (2,653
    )
    
    
    (1,846
    )
    
    
    (4,499
    )2012
    
    
    (2,579
    )
    
    
    (393
    )
    
    
    (2,972
    )2013
    
    
    (2,480
    )
    
    
    (43
    )
    
    
    (2,523
    )Thereafter
    
    
    (33,590
    )
    
    
    
    
    
    
    (33,590
    )Total
    
    
    (46,661
    )
    
    
    (9,353
    )
    
    
    (56,014
    )Estimated fair value
    
    
    (46,661
    )
    
    
    (9,353
    )
    
    
    (56,014
    )
  36




---



##### 



Item 8. Financial Statements and Supplementary Data
 PageIndex to Financial StatementsFinancial Statements:Report of Independent Registered Public Accounting Firm
    
    
    38Consolidated Balance Sheets at December 27, 2008 and December 29, 2007
    
    
    39Consolidated Statements of Operations for the years ended December 27, 2008,
December 29, 2007 and December 30, 2006
    
    
    40Consolidated Statements of Changes in Stockholders Equity for the years ended
December 27, 2008, December 29, 2007 and December 30, 2006
    
    
    41Consolidated Statements of Cash Flows for the years ended December 27, 2008,
December 29, 2007 and December 30, 2006
    
    
    43Notes to Consolidated Financial Statements
    
    
    45Financial Statement Schedule:II Valuation and Qualifying Accounts  For the years ended December 27, 2008,
December 29, 2007 and December 30, 2006
    
    
    73
  37




---



##### 



Report of Independent Registered Public Accounting Firm
 
      
  38




---



##### 



December 27,
    
    
    December 29,2008
    
    
    2007(Dollars in thousands)ASSETSCurrent assetsCash and cash equivalents
    
    $
    3,553
    
    
    $
    3,369Accounts and notes receivable, less allowance for
doubtful accounts of $506,000 and $498,000
    
    
    7,371
    
    
    
    8,825Inventories
    
    
    1,682
    
    
    
    2,441Prepaid expenses and other
    
    
    502
    
    
    
    1,283Deferred tax asset
    
    
    
    
    
    
    62Total current assets
    
    
    13,108
    
    
    
    15,980Property and equipment, net (Notes 3 and 4)
    
    
    4,876
    
    
    
    4,356Goodwill (Notes 3 and 5)
    
    
    65,953
    
    
    
    63,134Intangible assets, net (Notes 3 and 5)
    
    
    15,630
    
    
    
    16,165Deposits and other
    
    
    810
    
    
    
    691Restricted cash and cash equivalents
    
    
    224
    
    
    
    216Total Assets
    
    $
    100,601
    
    
    $
    100,542LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    4,959
    
    
    $
    12,467Accrued expenses
    
    
    3,208
    
    
    
    2,523Accrued salaries and other compensation
    
    
    3,713
    
    
    
    3,521Current maturities of long-term debt
    
    
    6,915
    
    
    
    10,746Current maturities of subordinated notes, net of
debt discount of $60,000 in 2007
    
    
    
    
    
    
    1,480Dividends payable
    
    
    34
    
    
    
    34Minority interest in net income of consolidated joint venture, currently payable
    
    
    1,526
    
    
    
    1,221Total current liabilities
    
    
    20,355
    
    
    
    31,992Long-term debt (Notes 3 and 6)
    
    
    49,099
    
    
    
    36,499Deferred income taxes
    
    
    7,284
    
    
    
    6,462Total long-term liabilities
    
    
    56,383
    
    
    
    42,961Commitments and contingencies (Note 15)
    
    
    
    
    
    
    Stockholders equity (Notes 9 and 10)Preferred stock (aggregate liquidation preference $2,330,000, $1 par,
7,500,000 shares authorized)Series H Junior Participating (none outstanding)
    
    
    
    
    
    
    Series J (233 shares outstanding)
    
    
    
    
    
    
    Total preferred stock
    
    
    
    
    
    
    Common stock: $.10 par; 75,000,000 shares authorized44,828,384 and 38,325,414 shares issued
    
    
    4,483
    
    
    
    3,833Stock subscription
    
    
    
    
    
    
    (412
    )Additional paid-in capital
    
    
    137,032
    
    
    
    133,261Accumulated deficit
    
    
    (116,416
    )
    
    
    (113,076
    )Accumulated other comprehensive income
    
    
    1,249
    
    
    
    4,468Treasury stock, at cost: 523,662 common shares
    
    
    (2,485
    )
    
    
    (2,485
    )Total Stockholders Equity
    
    
    23,863
    
    
    
    25,589Total Liabilities and Stockholders Equity
    
    $
    100,601
    
    
    $
    100,542
 See accompanying notes to consolidated financial statements
  39




---



##### 



Year EndedDecember 27,
    
    
    December 29,
    
    
    December 30,2008
    
    
    2007
    
    
    2006(Dollars and shares in thousands, except per share amounts)Net revenuesHearing aids and other products
    
    $
    104,392
    
    
    $
    95,936
    
    
    $
    82,820Services
    
    
    7,596
    
    
    
    6,868
    
    
    
    5,966Total net revenues
    
    
    111,988
    
    
    
    102,804
    
    
    
    88,786Operating costs and expensesHearing aids and other products
    
    
    30,171
    
    
    
    26,017
    
    
    
    24,942Services
    
    
    2,311
    
    
    
    2,088
    
    
    
    1,761Total cost
of products sold and services excluding depreciation and amortization
    
    
    32,482
    
    
    
    28,105
    
    
    
    26,703Center operating expenses
    
    
    57,450
    
    
    
    50,401
    
    
    
    42,281General and administrative expenses (including approximately
$849,000, $606,000 and $976,000 in 2008, 2007 and 2006 of
non-cash employee stock-based compensation expense Notes 1 and
10)
    
    
    15,176
    
    
    
    15,227
    
    
    
    14,005Depreciation and amortization
    
    
    2,963
    
    
    
    2,248
    
    
    
    1,988Total operating costs and expenses
    
    
    108,071
    
    
    
    95,981
    
    
    
    84,977Income from operations
    
    
    3,917
    
    
    
    6,823
    
    
    
    3,809Non-operating income (expense):Gain from insurance settlement
    
    
    
    
    
    
    
    
    
    
    203Gain on restructuring of contract (Note 13)
    
    
    981
    
    
    
    
    
    
    
    Interest income
    
    
    42
    
    
    
    164
    
    
    
    152Interest expense (including approximately $763, 000 of non-cash
interest expense on a long-term contractual commitment in 2008
(Note 13), $421,000
and $117,000 of non-cash interest expense on discounted notes
payable in 2008 and 2007 (Note 6) and $192,000, $3.5 million and $2.7
million of non-cash debt discount amortization in 2008, 2007 and
2006 (Note 7) and a non-cash reduction of approximately $319,000 for the
decrease in the fair value of the warrant liability in 2006  Note 8)
    
    
    (5,755
    )
    
    
    (8,022
    )
    
    
    (5,964
    )Loss before income tax expense and minority interest in income of
consolidated Joint Venture
    
    
    (815
    )
    
    
    (1,035
    )
    
    
    (1,800
    )Income tax expense (Note 14)
    
    
    (1,126
    )
    
    
    (769
    )
    
    
    (741
    )Minority interest in income of consolidated Joint Venture
    
    
    (1,260
    )
    
    
    (1,478
    )
    
    
    (633
    )Net loss
    
    
    (3,201
    )
    
    
    (3,282
    )
    
    
    (3,174
    )Dividends on preferred stock (Notes 9C)
    
    
    (139
    )
    
    
    (137
    )
    
    
    (138
    )Net loss applicable to common stockholders
    
    $
    (3,340
    )
    
    $
    (3,419
    )
    
    $
    (3,312
    )Net loss applicable to common stockholders per common share 
basic and diluted (Note 1)
    
    $
    (0.09
    )
    
    $
    (0.09
    )
    
    $
    (0.10
    )Weighted average number of shares of common stock outstanding
(Notes 1, 9 and 10)
    
    
    38,635
    
    
    
    36,453
    
    
    
    32,225
 See accompanying notes to consolidated financial statements
  40




---



##### 



Year EndedDecember 27, 2008
    
    
    December 29, 2007
    
    
    December 30, 2006Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount(Dollars and shares in thousands)Preferred stockBalance beginning and end of year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Common stockBalance, beginning of year
    
    
    38,325
    
    
    $
    3,833
    
    
    
    32,030
    
    
    $
    3,203
    
    
    
    31,893
    
    
    $
    3,189Exercise of employee stock options
    
    
    210
    
    
    
    21
    
    
    
    473
    
    
    
    47
    
    
    
    7
    
    
    
    1Issuance of common stock for
exchangeable shares
    
    
    93
    
    
    
    9
    
    
    
    164
    
    
    
    17
    
    
    
    30
    
    
    
    3Issuance of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    10Cancellation of stock subscription
    
    
    (200
    )
    
    
    (20
    )Issuance of common stock for
convertible debt
    
    
    
    
    
    
    
    
    
    
    3,158
    
    
    
    316
    
    
    
    
    
    
    
    Issuance of common stock for
repayment of debt
    
    
    6,400
    
    
    
    640Warrant exercise
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    250
    
    
    
    
    
    
    
    Balance, end of year
    
    
    44,828
    
    
    $
    4,483
    
    
    
    38,325
    
    
    $
    3,833
    
    
    
    32,030
    
    
    $
    3,203Treasury stockBalance beginning and end of year
    
    
    524
    
    
    $
    (2,485
    )
    
    
    524
    
    
    $
    (2,485
    )
    
    
    524
    
    
    $
    (2,485
    )Stock subscriptionBalance, beginning of year
    
    
    
    
    
    $
    (412
    )
    
    
    
    
    
    $
    (412
    )
    
    
    
    
    
    $
    (412
    )Cancellation of stock subscription
    
    
    
    
    
    
    412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, end of year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    (412
    )
    
    
    
    
    
    $
    (412
    )Additional paid-in capital:Balance, beginning of year
    
    
    
    
    
    $
    133,261
    
    
    
    
    
    
    $
    123,972
    
    
    
    
    
    
    $
    121,935Cumulative effect of adjustment
(Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    246
    
    
    
    
    
    
    
    Employee stock-based compensation
expense
    
    
    
    
    
    
    849
    
    
    
    
    
    
    
    606
    
    
    
    
    
    
    
    976Cancellation of stock subscription
    
    
    
    
    
    
    (392
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value of warrants issued with debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    917Exercise of employee stock options
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    399
    
    
    
    
    
    
    
    4Issuance of common stock for
exchangeable shares
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    (3
    )Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,871
    
    
    
    
    
    
    
    Consulting expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    143Issuance of common stock for
convertible debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,151
    
    
    
    
    
    
    
    Issuance of common stock for
repayment of debt
    
    
    
    
    
    
    3,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, end of year
    
    
    
    
    
    $
    137,032
    
    
    
    
    
    
    $
    133,261
    
    
    
    
    
    
    $
    123,972
 See accompanying notes to consolidated financial statements
  41




---



##### 



Year EndedDecember 27, 2008
    
    
    December 29, 2007
    
    
    December 30, 2006Amount
    
    
    Amount
    
    
    Amount(Dollars in thousands)Accumulated deficit:Balance, beginning of year
    
    $
    (113,076
    )
    
    $
    (109,521
    )
    
    $
    (106,209
    )Cumulative effect adjustment (Note 8)
    
    
    
    
    
    
    (136
    )
    
    
    Net loss
    
    
    (3,201
    )
    
    
    (3,282
    )
    
    
    (3,174
    )Dividends on preferred stock
    
    
    (139
    )
    
    
    (137
    )
    
    
    (138
    )Balance, end of year
    
    $
    (116,416
    )
    
    $
    (113,076
    )
    
    $
    (109,521
    )Accumulated other comprehensive income:Balance, beginning of year
    
    $
    4,468
    
    
    $
    2,163
    
    
    $
    2,214Foreign currency translation adjustment
    
    
    (3,219
    )
    
    
    2,305
    
    
    
    (51
    )Balance, end of year
    
    $
    1,249
    
    
    $
    4,468
    
    
    $
    2,163Comprehensive income (loss):Net loss
    
    $
    (3,201
    )
    
    $
    (3,282
    )
    
    $
    (3,174
    )Foreign currency translation adjustment
    
    
    (3,219
    )
    
    
    2,305
    
    
    
    (51
    )Comprehensive loss
    
    $
    (6,420
    )
    
    $
    (977
    )
    
    $
    (3,225
    )
 See accompanying notes to consolidated finanical statements
  42




---



##### 



Year EndedDecember 27,
    
    
    December 29,
    
    
    December 30,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Cash flows from operating activitiesNet loss
    
    $
    (3,201
    )
    
    $
    (3,282
    )
    
    $
    (3,174
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Debt discount amortization
    
    
    192
    
    
    
    2,122
    
    
    
    2,694Depreciation and amortization
    
    
    2,963
    
    
    
    2,248
    
    
    
    1,988Interest on Siemens Tranche C and Tranche D
    
    
    
    
    
    
    
    
    
    
    1,130Employee stock-based compensation
    
    
    849
    
    
    
    606
    
    
    
    976Interest on reduction of warrant exercise price
    
    
    
    
    
    
    1,371
    
    
    
    Minority interest in income of consolidated subsidiary
    
    
    1,260
    
    
    
    1,478
    
    
    
    633Deferred tax expense
    
    
    1,068
    
    
    
    769
    
    
    
    870Interest on
long-term contractual commitment
    
    
    763
    
    
    
    
    
    
    
    Provision for doubtful accounts
    
    
    424
    
    
    
    478
    
    
    
    379Interest on discounted notes payable
    
    
    421
    
    
    
    117
    
    
    
    Consulting stock-based compensation
    
    
    
    
    
    
    32
    
    
    
    28Principal payments on long-term debt made through rebate credits
    
    
    (3,783
    )
    
    
    (4,491
    )
    
    
    (3,112
    )Gain on restructuring of contract
    
    
    (981
    )
    
    
    
    
    
    
    Decrease in fair value of warrant liability
    
    
    
    
    
    
    
    
    
    
    (319
    )Other
    
    
    (102
    )
    
    
    (8
    )
    
    
    7(Increase) decrease in:Accounts and notes receivable
    
    
    569
    
    
    
    (1,209
    )
    
    
    (1,233
    )Inventories
    
    
    755
    
    
    
    (281
    )
    
    
    (767
    )Prepaid expenses and other
    
    
    679
    
    
    
    287
    
    
    
    218Increase in:Accounts payable and accrued expenses
    
    
    6,595
    
    
    
    1,171
    
    
    
    4,348Accrued salaries and other compensation
    
    
    245
    
    
    
    666
    
    
    
    233Net cash provided by operating activities
    
    
    8,716
    
    
    
    2,074
    
    
    
    4,899Cash flows from investing activitiesPurchase of property and equipment
    
    
    (1,501
    )
    
    
    (736
    )
    
    
    (1,200
    )Proceeds from redemption of certificates of deposit
    
    
    
    
    
    
    
    
    
    
    226Business acquisitions
    
    
    (4,157
    )
    
    
    (6,963
    )
    
    
    (9,601
    )Net cash used in investing activities
    
    
    (5,658
    )
    
    
    (7,699
    )
    
    
    (10,575
    )Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    4,271
    
    
    
    11,806
    
    
    
    7,539Payments on long-term debt
    
    
    (4,444
    )
    
    
    (3,803
    )
    
    
    (3,039
    )Payments on subordinated notes
    
    
    (1,540
    )
    
    
    (1,760
    )
    
    
    (1,760
    )Payments on convertible subordinated notes
    
    
    
    
    
    
    (784
    )
    
    
    (1,250
    )Proceeds from exercise of employee stock options
    
    
    146
    
    
    
    447
    
    
    
    5Proceeds from the exercise of warrants
    
    
    
    
    
    
    1,750
    
    
    
    Distributions paid to minority interest
    
    
    (956
    )
    
    
    (890
    )
    
    
    Dividends on preferred stock
    
    
    (139
    )
    
    
    (137
    )
    
    
    (138
    )Net cash provided by financing activities
    
    
    (2,662
    )
    
    
    6,629
    
    
    
    1,357
 See accompanying notes to consolidated financial statements
  43




---



##### 



Year EndedDecember 27,
    
    
    December 29,
    
    
    December 30,2008
    
    
    2007
    
    
    2006Effects of exchange rate changes on cash
    
    
    (212
    )
    
    
    39
    
    
    
    (62
    )Net increase (decrease) in cash and cash equivalents
    
    
    184
    
    
    
    1,043
    
    
    
    (4,381
    )Cash and cash equivalents at beginning of year
    
    
    3,369
    
    
    
    2,326
    
    
    
    6,707Cash and cash equivalents at end of year
    
    $
    3,553
    
    
    $
    3,369
    
    
    $
    2,326Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    1,567
    
    
    $
    1,659
    
    
    $
    1,200Supplemental schedule of non-cash investing and financing
activities:Principal payments on long-term debt through rebate credits
    
    $
    3,783
    
    
    $
    4,491
    
    
    $
    3,112Interest payments on long-term debt through rebate credits
    
    $
    2,832
    
    
    $
    2,696
    
    
    $
    626Issuance of note payable in exchange for business acquisitions
    
    $
    3,227
    
    
    $
    6,445
    
    
    $
    6,711Issuance of capital leases in exchange for property and
equipment
    
    $
    445
    
    
    $
    416
    
    
    $
    172Conversion of accounts payable to notes payable
    
    $
    8,985
    
    
    $
    
    
    
    $
    2,200Conversion of debt to common stock
    
    $
    3,840
    
    
    $
    
    
    
    $
    Acquisition
of intangible asset
    
    $
    19,273
    
    
    $
    
    
    
    $
    Issuance of
contractual liability
    
    $
    19,273
    
    
    $
    
    
    
    $
    Restructuring of contractual obligation written off (AARP)
    
    $
    20,036Intangible
asset written off (AARP)
    
    $
    19,055
    
    
    $
    
    
    
    $
    Purchase of equipment with volume discount credit
    
    $
    200
    
    
    $
    
    
    
    $
    
 See accompanying notes to consolidated financial statements
  44




---



##### 



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
      45




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
      Foreign Currency Translation
   Comprehensive Income (Loss)
  Fiscal year
  Concentration of credit risk
   46




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
 Allowance for doubtful accounts
  Inventories
   Property and equipment
  Business
acquisitions and goodwill and other intangible assets
     The market
capitalization of the Companys stock temporarily declined to approximately $17.3 million on
December 11, 2008, which was substantially lower than the Company’s estimated combined fair
values of its three reporting units.  The Company completed a reconciliation of the sum of the estimated fair
values of its reporting units to its market value (based upon its stock price at December 11, 2008).  We
believe one of the primary reconciling differences between fair value and our market capitalization is due to a control
premium. We believe the value of a control premium is the value a market participant could extract as savings
and / or synergies by obtaining control, and thereby eliminating duplicative overhead costs and obtaining
discounts on volume purchasing from suppliers. The Company also considers the following qualitative items that cannot
be accurately quantified and are based upon the beliefs of management, but provide additional support for the
explanation of the remaining difference between the estimated fair value of the Company’s reporting units and its
market capitalization:  •
  
  The Company’s stock is thinly traded;  •
  
  The decline in the Company’s stock price during 2008 is not directly correlated
to a change in the overall operating performance of the Company; and  •
  
  Previously unseen pressures are in place given the global financial and economic
crisis. At December 27, 2008
the Companys market capitalization of $26.2 million
exceeded the book value of its three reporting units. We will continue to monitor market trends in our business, the related
expected cash flows and our calculation of market capitalization for purposes of identifying possible indicators of
impairment. Should our market capitalization again decline below our book
value or we have other indicators of
impairment, as previously discussed, we will be required to perform an interim step one impairment analysis, which may
lead to a step two analysis resulting in a goodwill impairment. Additionally, we would then be required to review our
remaining long-lived assets for impairment. Judgments regarding the existence of impairment indicators
are based on legal factors, market conditions and operational performance of the acquired businesses. Future events
could cause us to conclude that impairment indicators exist and that goodwill associated with the acquired businesses
is impaired. Additionally, as the valuation of identifiable goodwill requires significant estimates and judgment about
future performance, cash flows and fair value, our future results could be affected if these current estimates of
future performance and fair value change. Any resulting impairment loss could have a material adverse impact on our
financial condition and results of operations.  47




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
  Pre-opening costs
  Long-lived assets  impairments and disposals
  Deferred Financing Costs and Debt Discounts
  Vendor rebates
  Marketing allowances
  Advertising costs
  Sales return policy
   48




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
 Warranties
  Income taxes
  Net loss per common share
   Stock-based compensation
    49




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
  Year EndedDecember 27,
    
    
    December 29,
    
    
    December 30,2008
    
    
    2007
    
    
    2006Risk free interest rate
    
    
    3.79
    %
    
    
    4.63
    %
    
    
    4.69
    %Expected life in years
    
    
    10
    
    
    
    10
    
    
    
    10Expected volatility
    
    
    86
    %
    
    
    84
    %
    
    
    86
    %Weighted average exercise
price
    
    $
    0.76
    
    
    $
    1.28
    
    
    $
    1.30
   Cash and Cash Equivalents
  Estimates
  2. Restricted Cash and Cash Equivalents
  3. Business Acquisitions
    50




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
    December 27,
    
    
    December 29,
    
    
    December 30,2008
    
    
    2007
    
    
    2006Total revenue
    
    $
    115,000
    
    
    $
    118,000
    
    
    $
    109,000Net loss
    
    $
    (3,011
    )
    
    $
    (1,650
    )
    
    $
    (1,037
    )Net loss applicable
to common
stockholder per
share  basic and
diluted
    
    $
    (0.08
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    51




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
 4. Property and Equipment and Leases
  Range of
    
    
    December 27,
    
    
    December 29,Useful Lives
    
    
    2008
    
    
    2007Equipment, furniture and fixtures
    
    5 -10 years
    
    $
    13,776
    
    
    $
    12,900Leasehold Improvements
    
    Lesser of life of lease or asset
life
    
    
    7,930
    
    
    
    8,629Computer systems
    
    3 years
    
    
    3,686
    
    
    
    3,648Construction in progress
    
    
    N/A
    
    
    
    555
    
    
    
    6325,947
    
    
    
    25,240Less accumulated depreciation
and amortization
    
    
    
    
    
    
    21,071
    
    
    
    20,884$
    4,876
    
    
    $
    4,356
    2009
    
    $
    1,4862010
    
    
    9902011
    
    
    6022012
    
    
    4182013
    
    
    235Thereafter
    
    
    1,145
   2009
    
    $
    6,4502010
    
    
    5,4952011
    
    
    3,2232012
    
    
    1,8582013
    
    
    1,019Thereafter
    
    
    991
  52




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
 5. Goodwill and Intangible Assets
  December 29,
    
    
    Additions/
    
    
    Currency
    
    
    December 27,2007
    
    

Adjustments
    
    
    Translation
    
    
    2008Centers
    
    $
    62,254
    
    
    $
    5,229
    
    
    $
    (2,410
    )
    
    $
    65,073Network
    
    
    880
    
    
    
    
    
    
    
    
    
    
    
    880$
    63,134
    
    
    $
    5,229
    
    
    $
    (2,410
    )
    
    $
    65,953
 December 30,
    
    
    Additions/

    
    Currency
    
    
    December 29,2006
    
    

Adjustments
    
    
    Translation
    
    
    2007Centers
    
    $
    50,090
    
    
    $
    10,434
    
    
    $
    1,730
    
    
    $
    62,254Network
    
    
    880
    
    
    
    
    
    
    
    
    
    
    
    880$
    50,970
    
    
    $
    10,434
    
    
    $
    1,730
    
    
    $
    63,134
 Business acquisitions and goodwill impairment
      
    
    The Companys stock is thinly traded;
 
    
    The decline in the Companys stock price during 2008 is not directly correlated to a
change in the overall operating performance of the Company; and
 
    
    Previously unseen pressures are in place given the global financial and economic
crisis.
    December 27,
    
    
    December 29,2008
    
    
    2007Amortizable intangible assets:Customer lists
    
    $
    11,532
    
    
    $
    11,268Non-Compete agreements
    
    
    1,259
    
    
    
    1,268Computer Software
    
    
    1,581
    
    
    
    1,584Accumulated amortization  customer list
    
    
    (4,102
    )
    
    
    (3,935
    )Accumulated amortization  non-compete
    
    
    (475
    )
    
    
    (255
    )Accumulated amortization  computer software
    
    
    (1,534
    )
    
    
    (1,487
    )Amortizable intangible assets, net
    
    
    8,261
    
    
    
    8,443Trademark and trade names
    
    
    7,347
    
    
    
    7,700Intellectual property
    
    
    22
    
    
    
    22$
    15,630
    
    
    $
    16,165
  53




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
  2009
    
    $
    1,0512010
    
    
    9492011
    
    
    8682012
    
    
    7572013
    
    
    702Thereafter
    
    
    3,934
 6. Long-term Debt (also see Notes 3, 7 and 8)
  December 27,
    
    
    December 29,2008
    
    
    2007Notes payable to a SiemensTranche B
    
    $
    5,552
    
    
    $
    5,403Tranche C
    
    
    41,109
    
    
    
    23,670Tranche D
    
    
    
    
    
    
    7,895Total notes payable to Siemens
    
    
    46,661
    
    
    
    36,968Notes payable from business acquisitions and other
    
    
    9,353
    
    
    
    10,27756,014
    
    
    
    47,245Less current maturities
    
    
    6,915
    
    
    
    10,746$
    49,099
    
    
    $
    36,499
  2009
    
    $
    6,9152010
    
    
    5,5152011
    
    
    4,4992012
    
    
    2,9722013
    
    
    2,523Thereafter
    
    
    33,590
  Notes payable to Siemens
   54




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
   
    
    The previous amendment of
the Credit Agreement called for cash payments of
$7.2 million in December 2008 on Tranches D and E and quarterly principal payments of $500,000 on Tranche C.
The Amendment transferred the amounts due under Tranches D and E to Tranche C. Providing the Company meets the
purchase requirements in the Supply Agreement, all repayments on both Tranches can now be self-liquidating.
 
    
    The balances of Tranche D and
E were transferred to Tranche C. Going forward the credit
agreement will have only Tranches B and C.
 
    
    Approximately $3.8 million of outstanding debt under the supply agreement was
converted into 6.4 million shares of the Companys Common Stock at a conversion price of
$0.60 per share.  The conversion provisions of the credit
agreement were eliminated from the Credit Agreement.
 
    
    An additional $6.2 million of debt under the supply agreement was converted into
long-term indebtedness under Tranche C.
 
    
    The maturity date of the credit and supply agreement was extended an additional two
years, to February, 2015.
 
    
    Siemens was granted a right of first refusal for all new issuances of equity (except
issuances pursuant to employee compensation plans and pursuant to warrants outstanding on
the date of the amendments) for a period of 18 months and thereafter a more limited right
of first refusal and preemptive rights for the life of the investor rights agreement.
 
    
    The Company will invite a representative of Siemens to attend meetings of the Board in a
nonvoting observer capacity.
 Financing and rebate arrangement
    55




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
 Rebate credits on product sales
    (Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2006Portion applied
against quarterly
principal payments
    
    $
    3,783
    
    
    $
    4,491
    
    
    $
    3,112Portion applied
against quarterly
interest payments
    
    
    2,832
    
    
    
    2,696
    
    
    
    626$
    6,615
    
    
    $
    7,187
    
    
    $
    3,738
 Conversion of debt for equity
   Investor and other rights arrangement
    Notes payable from business acquisitions and other
   56




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
 7. Convertible Subordinated Notes
     8. Subordinated Notes and Warrant
   57




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
    9. Stockholders Equity
 A. Common Stock
  B. Stock Subscription
   58




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
 C. Series J Preferred Stock
     D. Shareholder Rights Plan
    E. Series H Junior Participating Preferred Stock
   59




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
 F. Exchangeable Rights Plan
  G. Warrants
    Outstanding
    
    Expiration
    
    ExerciseWarrants
    
    Date
    
    Price240
    
    2010
    
    1.25560
    
    2010
    
    1.311,555
    
    2010
    
    2.00100
    
    2010
    
    1.562,455
 H. Aggregate and Per Share Cumulative Preferred Dividends
  I. Exchangeable Shares
   60




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
 10. Stock-based Benefit Plans
 A. Stock Options and Awards
     Impact of the Adoption of SFAS 123(R)
   61




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
  Stock-based Payment Award Activity
  WeightedAverageWeighted
    
    
    RemainingAverage
    
    
    Contractual Term
    
    
    Aggregate(Options in thousands)
    
    Shares
    
    
    Exercise
    
    
    (in years)
    
    
    Intrinsic ValueOutstanding at December 29, 2007
    
    
    5,158
    
    
    $
    1.28Granted
    
    
    1,055
    
    
    $
    1.65Exercised
    
    
    (210
    )
    
    $
    0.69
    
    
    
    
    
    
    $
    143Forfeited/expired/cancelled
    
    
    (647
    )
    
    $
    1.92Outstanding at December 27, 2008
    
    
    5,356
    
    
    $
    1.30
    
    
    
    6.02
    
    
    $
    207Exercisable at December 27, 2008
    
    
    3,804
    
    
    $
    1.18
    
    
    
    4.73
    
    
    $
    207
   Options Outstanding
    
    
    Options ExercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageRange of
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExerciseExercise Price
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$.35  $.77
    
    
    1,193
    
    
    
    3.90
    
    
    $
    0.43
    
    
    
    1,193
    
    
    $
    0.43$.78  $2.00
    
    
    3,928
    
    
    
    6.88
    
    
    $
    1.46
    
    
    
    2,376
    
    
    $
    1.37$2.01  $5.75
    
    
    235
    
    
    
    2.44
    
    
    $
    3.12
    
    
    
    235
    
    
    $
    3.125,356
    
    
    
    
    
    
    
    
    
    
    
    3,804
  B. Restricted Stock Units
   62




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
 In the first quarter of 2008, we granted to our executive officers 136,500
restricted stock units with service based vesting provisions that may vest in three equal tranches over each of the
next three years. The fair value of the service based restricted stock units is the quoted market price of the
Company’s common stock on the date of the grant. We also granted to our executive officers 345,500 restricted stock units
with performance based vesting provisions that may vest in three equal tranches over each of the next three years.
These performance based awards are contingent on the achievement of specific annual performance criteria related to
increased revenue, net income and institutional investors. As of December 27, 2008, the performance criteria for
2008 were not met and no performance shares vested in February 2009. Accordingly, we have not recorded any
compensation expense at December 31, 2008 related to the restricted stock units that will not vest in
February 2009 due to 2008 performance criteria not being met.  Service-Based
Restricted Stock Units (1)
    
    

Performance-BasedRestricted Stock Units (1)Outstanding at December 29, 2007
    
    
    
    
    
    
    Awarded
    
    
    136,500
    
    
    
    345,500Vested
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    (115,167
    )Outstanding at December 27, 2008
    
    
    136,500
    
    
    
    230,333
 (1)
    
    Each stock unit represents one share of common stock.   C. Non-Employee Director Non-Plan Grant
  11. Major Customers and Suppliers
   12. Related Party Transactions
   63




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
 13. Gain on Restructuring of Contract
      14. Income Taxes
  2008
    
    
    2007
    
    
    2006Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    (129
    )Foreign
    
    
    58
    
    
    
    
    
    
    
    Current income tax provision (benefit)
    
    $
    58
    
    
    $
    
    
    
    $
    (129
    )Deferred:Federal and state deferred
    
    $
    831
    
    
    $
    595
    
    
    $
    437Foreign deferred
    
    
    220
    
    
    
    155
    
    
    
    415Deferred income tax provision
    
    $
    1,051
    
    
    $
    750
    
    
    $
    852Benefit applied to reduce goodwill  foreign
    
    
    17
    
    
    
    19
    
    
    
    18Total income tax provision
    
    $
    1,126
    
    
    $
    769
    
    
    $
    741
  64




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
  2008
    
    
    2007
    
    
    2006Domestic
    
    $
    (1,708
    )
    
    $
    (1,570
    )
    
    $
    (2,962
    )Foreign
    
    
    893
    
    
    
    535
    
    
    
    1,162Total loss from operations, before income tax expense and minority interest in income of consolidated joint venture
    
    $
    (815
    )
    
    $
    (1,035
    )
    
    $
    (1,800
    )
    Balance as of December 29, 2007
    
    $
    14.8Additions to tax provisions related to the current year
    
    
    Additions to tax provision related to prior years
    
    
    Reduction for tax provisions of prior years
    
    (1.0
    )Balance as of December 27, 2008
    
    $
    13.8
     65




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
  2008
    
    
    2007Deferred income tax assets:Fixed assets depreciation
    
    $
    1,082
    
    
    $
    1,254Employee stock-based compensation-non-qualified
    
    
    128
    
    
    
    27Accrued severance
    
    
    223
    
    
    
    79Inventory costs
    
    
    20
    
    
    
    41Joint venture
    
    
    283
    
    
    
    287Accrued vacation
    
    
    415
    
    
    
    358Bad debts
    
    
    172
    
    
    
    173Charitable contributions
    
    
    11
    
    
    
    15Net operating loss carryfowards
    
    
    22,089
    
    
    
    21,583Total deferred tax assets
    
    
    24,423
    
    
    
    23,817Less valuation allowance
    
    
    (24,018
    )
    
    
    (23,302
    )Net deferred tax assets
    
    $
    405
    
    
    $
    515Deferred income tax liabilities:Amortization of definite lived intangibles
    
    
    (405
    )
    
    
    (515
    )Amortization of indefinite lived intangibles
    
    
    (2,200
    )
    
    
    (2,200
    )Amortization of goodwill for tax purposes
    
    
    (4,203
    )
    
    
    (3,423
    )Total deferred tax liabilities
    
    
    (6,808
    )
    
    
    (6,138
    )Net deferred income tax liability
    
    $
    (6,403
    )
    
    $
    (5,623
    )
   2008
    
    
    2007Deferred income tax assets:Fixed assets depreciation
    
    $
    135
    
    
    $
    420Net loss carryforwards
    
    
    
    
    
    
    62Other
    
    
    29
    
    
    
    35Capital loss carryforwards
    
    
    4,695
    
    
    
    5,838Total deferred tax assets
    
    
    4,859
    
    
    
    6,355Less: valuation allowance
    
    
    (4,695
    )
    
    
    (5,838
    )Net deferred tax assets
    
    $
    164
    
    
    $
    517Deferred income tax liabilities:Amortizable intangible assets
    
    $
    (176
    )
    
    $
    (267
    )Indefinite lived intangibles and goodwill for tax purposes
    
    
    (869
    )
    
    
    (1,027
    )Total deferred income tax liability
    
    
    (1,045
    )
    
    
    (1,294
    )Net deferred income tax liability
    
    $
    (881
    )
    
    $
    (777
    )
  66




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
    2008
    
    
    2007
    
    
    2006Benefit at Federal statutory rate
    
    $
    (706
    )
    
    $
    (855
    )
    
    $
    (827
    )State income taxes, net of Federal income
tax effect
    
    
    (87
    )
    
    
    (37
    )
    
    
    (88
    )Nondeductible expenses
    
    
    196
    
    
    
    687
    
    
    
    (82
    )Effect of foreign earnings
    
    
    (42
    )
    
    
    (25
    )
    
    
    (36
    )Change in valuation allowance
    
    
    1,249
    
    
    
    965
    
    
    
    1,128Deferred tax liability recorded to goodwill
    
    
    622
    
    
    
    (80
    )
    
    
    512Other
    
    
    (106
    )
    
    
    114
    
    
    
    134Income tax expense
    
    $
    1,126
    
    
    $
    769
    
    
    $
    741
  15. Commitments and Contingencies
     67




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
 16. Quarterly Financial Data (Unaudited)
 Year Ended
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthDecember 27, 2008
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterNet revenues
    
    $
    28,688
    
    
    $
    30,125
    
    
    $
    28,717
    
    
    $
    24,458Operating costs and expenses
    
    
    27,577
    
    
    
    27,922
    
    
    
    26,420
    
    
    
    26,152Income
(loss) from operations
    
    
    1,111
    
    
    
    2,203
    
    
    
    2,297
    
    
    
    (1,694
    )Net income (loss) applicable to
common stockholders
    
    $
    (685
    )
    
    $
    245
    
    
    $
    (75
    )
    
    $
    (2,825
    )Net income (loss) including
dividends on preferred stock,
applicable to common
stockholders  basic and
diluted
    
    $
    (0.02
    )
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    (0.08
    )
 Year Ended
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthDecember 29, 2007
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterNet revenues
    
    $
    23,586
    
    
    $
    24,920
    
    
    $
    26,862
    
    
    $
    27,436Operating costs and expenses
    
    
    21,944
    
    
    
    24,110
    
    
    
    24,353
    
    
    
    25,574Income from operations
    
    
    1,642
    
    
    
    810
    
    
    
    2,509
    
    
    
    1,862Net income (loss) applicable to
common stockholders
    
    $
    (595
    )
    
    $
    (3,351
    )
    
    $
    488
    
    
    $
    39Net income (loss) including
dividends on preferred stock,
applicable to common
stockholders  basic and
diluted
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    0.01
    
    
    $
    0.00
 17. Fair Value of Financial Instruments
    Level 1 
    
    Quoted prices (unadjusted) in active markets for identical assets or liabilities;Level 2 
    
    Inputs other than quoted prices included in Level 1 that are either directly or
indirectly observable;Level 3 
    
    Unobservable inputs in which little or no market activity exists, therefore
requiring an entity to develop its own assumptions about the assumptions that
market participants would use in pricing.
  68




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
    18. Restructuring Paul A. Brown, M.D., the founder and chairman of the board of
directors of HearUSA, Inc. (the “Company”), retired as chairman of the Company effective February 4,
2008. In honor of Dr. Brown’s service to the Company and in recognition of his industry knowledge and
expertise, the Board designated Dr. Brown as chairman emeritus of the board of directors and will pay him $30,000
annually in such role. The Company and Dr. Brown entered into a retirement agreement pursuant to which the parties
set forth the terms of Dr. Brown’s retirement from the Company. The retirement agreement provides for the
termination of his employment agreement dated August 31, 2005 and the payment of a sum equal to $720,000 over
three years, provision of continuing health and life insurance benefits for three years and extension of the
post-termination exercise period for his options. The total amount included in general and administrative expenses
related to Dr. Brown’s severance costs was approximately $811,000 in 2008. The Company implemented an expense reduction plan intended to save
approximately $5 million in annual expenses on November 10, 2008. This plan was initiated to increase
profitability and to respond to the current economic downturn. The expense reduction plan includes a restructuring of
center operations, a reduction in the number of marketing programs and other cost control measures.  The Company
eliminated approximately 65 positions, all previously held by active employees. Included in center operating expenses
is approximately $235,000 of severance and other costs incurred in the fourth quarter of 2008 as a result of
implementing the plan. 19. Recent Accounting Pronouncements
  ,
   69




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
    20. Segments
   70




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
  Centers
    
    
    E-commerce
    
    
    Network
    
    
    Corporate
    
    
    TotalFor the years ended:Hearing aids and other
products revenuesDecember 27, 2008
    
    $
    104,291
    
    
    $
    101
    
    
    $
    
    
    
    $
    
    
    
    $
    104,392December 29, 2007
    
    $
    95,861
    
    
    $
    75
    
    
    $
    
    
    
    $
    
    
    
    $
    95,936December 30, 2006
    
    $
    82,769
    
    
    $
    51
    
    
    $
    
    
    
    $
    
    
    
    $
    82,820Service revenuesDecember 27, 2008
    
    $
    5,710
    
    
    $
    
    
    
    $
    1,886
    
    
    $
    
    
    
    $
    7,596December 29, 2007
    
    $
    5,306
    
    
    $
    
    
    
    $
    1,562
    
    
    $
    
    
    
    $
    6,868December 30, 2006
    
    $
    4,371
    
    
    $
    
    
    
    $
    1,596
    
    
    $
    
    
    
    $
    5,967Income (loss) from operationsDecember 27, 2008
    
    $
    18,854
    
    
    $
    (141
    )
    
    $
    830
    
    
    $
    (15,626
    )
    
    $
    3,917December 29, 2007
    
    $
    21,417
    
    
    $
    (66
    )
    
    $
    1,081
    
    
    $
    (15,609
    )
    
    $
    6,823December 30, 2006
    
    $
    17,233
    
    
    $
    (188
    )
    
    $
    966
    
    
    $
    (14,202
    )
    
    $
    3,809As of and for years ended:December 27, 2008Depreciation and
amortization
    
    $
    2,510
    
    
    $
    
    
    
    $
    3
    
    
    $
    450
    
    
    $
    2,963Total assets
    
    $
    84,144
    
    
    $
    
    
    
    $
    920
    
    
    $
    15,537
    
    
    $
    100,601Capital expenditures
    
    $
    1,111
    
    
    $
    
    
    
    $
    
    
    
    $
    390
    
    
    $
    1,501December 29, 2007Depreciation and
amortization
    
    $
    1,863
    
    
    $
    
    
    
    $
    3
    
    
    $
    382
    
    
    $
    2,248Total assets
    
    $
    81,797
    
    
    $
    
    
    
    $
    934
    
    
    $
    17,811
    
    
    $
    100,542Capital expenditures
    
    $
    199
    
    
    $
    
    
    
    $
    
    
    
    $
    537
    
    
    $
    736December 30, 2006Depreciation and
amortization
    
    $
    1,788
    
    
    $
    
    
    
    $
    3
    
    
    $
    197
    
    
    $
    1,988Total assets
    
    $
    66,362
    
    
    $
    
    
    
    $
    971
    
    
    $
    15,943
    
    
    $
    83,276Capital expenditures
    
    $
    667
    
    
    $
    
    
    
    $
    
    
    
    $
    533
    
    
    $
    1,200
  2008
    
    
    2007
    
    
    2006Hearing aid revenues
    
    
    95.4
    %
    
    
    95.3
    %
    
    
    95.9
    %Other products revenues
    
    
    4.6
    %
    
    
    4.7
    %
    
    
    4.1
    %
  2008
    
    
    2007
    
    
    2006Hearing aid repairs
    
    
    48.1
    %
    
    
    49.8
    %
    
    
    51.7
    %Testing and other income
    
    
    51.9
    %
    
    
    50.2
    %
    
    
    48.3
    %
  71




---



##### 



HearUSA, Inc.Notes to Consolidated Financial Statements
  2008
    
    
    2007
    
    
    2006General and administrative expense
    
    $
    15,176
    
    
    $
    15,227
    
    
    $
    14,005Depreciation and amortization
    
    $
    450
    
    
    $
    382
    
    
    $
    197Corporate loss from operations
    
    $
    15,626
    
    
    $
    15,609
    
    
    $
    14,202
   United States
    
    
    Canada
    
    
    United States
    
    
    Canada
    
    
    United States
    
    
    Canada2008
    
    
    2008
    
    
    2007
    
    
    2007
    
    
    2006
    
    
    2006$
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Hearing aid and
other product
revenues
    
    
    88,306
    
    
    
    16,086
    
    
    
    82,789
    
    
    
    13,147
    
    
    
    73,542
    
    
    
    9,278Service revenues
    
    
    6,991
    
    
    
    605
    
    
    
    6,305
    
    
    
    563
    
    
    
    5,539
    
    
    
    428Long-lived assets
    
    
    73,866
    
    
    
    13,626
    
    
    
    68,728
    
    
    
    15,834
    
    
    
    58,071
    
    
    
    11,451Total assets
    
    
    84,559
    
    
    
    16,042
    
    
    
    81,013
    
    
    
    19,529
    
    
    
    69,995
    
    
    
    13,281
  21. Liquidity
     72




---



##### 



HearUSA Inc.
 
 Schedule II  Valuation and Qualifying Accounts
 Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    
    
    
    
    
    
    
    
    
    EndOf Period
    
    
    Additions
    
    
    Deductions
    
    
    Of PeriodDecember 27, 2008Allowance for doubtful accounts
    
    $
    498
    
    
    $
    424
    
    
    $
    (416
    )
    
    $
    506Allowance for sales returns (1)
    
    $
    385
    
    
    $
    455
    
    
    $
    (163
    )
    
    $
    677Valuation allowance  US
    
    $
    23,302
    
    
    $
    716
    
    
    $
    
    
    
    $
    24,018Valuation allowance  foreign
    
    $
    5,838
    
    
    $
    
    
    
    $
    (1,143
    )
    
    $
    4,695December 29, 2007Allowance for doubtful accounts
    
    $
    434
    
    
    $
    478
    
    
    $
    (414
    )
    
    $
    498Allowance for sales returns (1)
    
    $
    443
    
    
    $
    132
    
    
    $
    (190
    )
    
    $
    385Valuation allowance
    
    $
    29,639
    
    
    $
    
    
    
    $
    (6,337
    )
    
    $
    23,302Valuation allowance  foreign
    
    $
    4,901
    
    
    $
    937
    
    
    $
    
    
    
    $
    5,838December 30, 2006Allowance for doubtful accounts
    
    $
    413
    
    
    $
    379
    
    
    $
    (358
    )
    
    $
    434Allowance for sales returns (1)
    
    $
    440
    
    
    $
    97
    
    
    $
    (94
    )
    
    $
    443Valuation allowance
    
    $
    27,764
    
    
    $
    1,875
    
    
    $
    
    
    
    $
    29,639Valuation allowance  foreign
    
    $
    5,648
    
    
    $
    
    
    
    $
    (747
    )
    
    $
    4,901
 (1)
    
    Allowance for sales returns is included in accounts payable on the Consolidated Balance Sheets.  73




---



##### 



Item 9.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
  Item 9A (T). Controls and Procedures
       Item 9B Other Information
   74




---



##### 



PART III
 Item 10. Directors, Executive Officers and Corporate Governance
  
 Item 11. Executive Compensation
  Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
   75




---



##### 



Number of securitiesremaining availableNumber of Securities
    
    
    
    
    
    
    for future issuanceto be issued upon
    
    
    Weighted-average
    
    
    under equityexercise of
    
    
    exercise price of
    
    
    compensation plansoutstanding options,
    
    
    outstanding options,
    
    
    (excluding securitieswarrants and rights
    
    
    warrants and rights
    
    
    reflected in columnPlan Category
    
    (a)
    
    
    (b)
    
    
    (a))Equity compensation plans
approved by security holders
    
    
    5,255,955
    
    
    $
    1.32
    
    
    
    1,303,000Equity compensation plans
not approved by security
holders
    
    
    100,000
    (1)
    
    $
    0.35
    
    
    
    Total equity compensation
plans approved and not
approved by security holders
    
    
    5,355,955
    
    
    $
    1.30
    
    
    
    1,303,000
 (1)
    
    Consists of non-employee director options granted on April 1, 2003 outside of the Non-
Employee Director Plan at an exercise price of $0.35, which was equal to the closing price of the
Common Stock as reported on the NYSE Amex (formerly known as the American Stock Exchange) the grant
date. The options vested after one year and have a ten-year life. Item 13. Certain Relationships and Related Transactions and Director Independence
  Item 14. Principal Accountant Fees and Services
   76




---



##### 



PART IV
 Item 15
   (i)
    
    Consolidated Balance Sheets as of December 27, 2008 and December 29,
2007. Consolidated Statements of Operations for the years ended December 27, 2008,
December 29, 2007 and December 30, 2006.(ii)
    
    Consolidated Statements of Changes in Stockholders Equity for the
years ended December 27, 2008, December 29, 2007 and December 30, 2006.(iii)
    
    Consolidated Statements of Cash Flows for the years ended December
27, 2008, December 29, 2007 and December 30, 2006.(iv)
    
    Notes to Consolidated Financial Statements
  Schedule II Valuation and Qualifying Accounts
  77




---



##### 



Exhibits: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)).
  78




---



##### 



Exhibits:4.2
    
    
    Form of Support Agreement among HEARx Ltd., HEARx Canada, Inc. and HEARx
Acquisition ULC (incorporated herein by reference to Annex D in the Companys Joint
Proxy Statement/Prospectus on Form S-4/A, filed May 28, 2002 (Reg No. 333-73022)).9.1
    
    
    Form of Voting and Exchange Trust Agreement among HearUSA, Inc., HEARx Canada, Inc
and HEARx Acquisition ULC and ComputerShare Trust Company of Canada (incorporated
herein by reference to Annex C in the Companys Joint Proxy Statement/Prospectus on
Form S-4/A, filed May 28, 2002 (Reg. No. 333-73022)).10.1
    
    
    HEARx Ltd. 1987 Stock Option Plan (incorporated herein by reference to Exhibit
10.11to the Companys Registration Statement on Form S-18 (Reg. No. 33-17041-NY))#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 on 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
    
    
    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.)#10.5
    
    
    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)#10.6
    
    
    Amended and Restated Security Agreement, dated February 10, 2006 between HearUSA,
Inc. and Siemens Hearing Instruments, Inc. (incorporated herein by reference to
Exhibit 10.2 to the Companys Form 10-Q for the period ended April 1, 2006).10.7
    
    
    Amended and Restated Supply Agreement, dated December 30, 2006 between HearUSA,
Inc. and Siemens Hearing Instruments, Inc. (incorporated herein by reference to
Exhibit 10.23 to the Companys Form 10-K for the period ended December 30, 2006).*10.8
    
    
    Second Amended and Restated Credit Agreement, dated December 30, 2006 between
HearUSA, Inc. and Siemens Hearing Instruments, Inc. (incorporated herein by
reference to Exhibit 10.22 to the Companys Form 10-K for the period ended December
30, 2006).10.9
    
    
    Investor Rights Agreement by and among HearUSA, Inc. and Siemens Hearing
Instruments, Inc., dated December 30, 2006 (incorporated herein by reference to
Exhibit 10.24 to the Companys Form 10-K for the period ended December 30, 2006).10.10
    
    
    First Amendment to the Second Amended and Restated Credit Agreement, dated June 27,
2007 between HearUSA, Inc. and Siemens Hearing Instruments, Inc. (incorporated
herein by reference to Exhibit 10.5 to the Companys Form S-3/A, filed August 3,
2007).10.11
    
    
    Second Amendment to the Second Amended and Restated Credit Agreement dated
September 24, 2007 between HearUSA, Inc. and Siemens Hearing Instruments, Inc.
(incorporated herein by reference to Exhibit 10.1 to the Companys Current Report
of Form 8-K, filed October 4, 2007).
  79




---



##### 



Exhibits:10.12
    
    
    First Amendment to the Amended and Restated Supply Agreement, dated September 24,
2007 between HearUSA, Inc. and Siemens Hearing Instruments, Inc. (incorporated
herein by reference to Exhibit 10.1 to the Companys Current Report of Form 8-K,
filed October 4, 2007).10.13
    
    
    First Amendment to the Investor Rights Agreement by and among HearUSA, Inc. and
Siemens Hearing Instruments, Inc. dated September 24, 2007 (incorporated herein by
reference to Exhibit 10.1 to the Companys Current Report of Form 8-K, filed
October 4, 2007).10.14
    
    
    Third Amendment to Credit Agreement dated December 23, 2008, by and between the
Company 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 23, 2008).10.15
    
    
    Second Amendment to Supply Agreement dated December 23, 2008 by and between the
Company and Siemens Hearing Instruments, Inc. (incorporated herein by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K, filed December 23,
2008).*10.16
    
    
    Second Amendment to Investor Rights Agreement dated December 23, 2008 by and
between the Company and Siemens Hearing Instruments, Inc. (incorporated herein by
reference to Exhibit 10.3 to the Companys Current Report on Form 8-K, filed
December 23, 2008).10.17
    
    
    Amendment No. 2 to Amended and Restated Security Agreement dated December 23, 2008
by and between the Company and Siemens Hearing Instruments, Inc. (incorporated
herein by reference to Exhibit 10.4 to the Companys Current Report on Form 8-K,
filed December 23, 2008).10.18
    
    
    Stock Purchase Agreement dated December 23, 2008 by and between the Company and
Siemens Hearing Instruments, Inc. (incorporated herein by reference to Exhibit 10.5
to the Companys Current Report on Form 8-K, filed December 23, 2008).10.19
    
    
    Hearing Care Program Services Agreement by and among HearUSA, Inc., AARP, Inc. and
AARP Services, Inc. dated August 8, 2008 (incorporated herein by reference to
Exhibit 10.1 to the Companys Form 10-Q for the period ended September 27, 2008).10.20
    
    
    AARP License Agreement by and between HearUSA, Inc. and AARP, Inc. dated August 8,
2008 (incorporated herein by reference to Exhibit 10.2 to the Companys Form 10-Q
for the period ended September 27, 2008).10.21
    
    
    Amendment No. 1 to the AARP License Agreement dated as of December 22, 2008, by and
between the Company and AARP, Inc. (incorporated herein by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K, filed December 29, 2008).10.22
    
    
    Separation Agreement and Release by and between the Company and Kenneth Schofield
dated October 12, 2007 (incorporated herein by reference to Exhibit 10.24 to the
Companys Form 10-K for the period ended December 29, 2007).#10.23
    
    
    Amended and Restated HearUSA 2007 Equity Incentive Compensation Plan (incorporated
herein by reference to Exhibit 10.25 to the Companys Form 10-K for the period
ended December 29, 2007).#
  80




---



##### 



Exhibits:10.24
    
    
    Form of option grant agreement pursuant to 2007 Equity Incentive Compensation Plan
(incorporated herein by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K, filed September 18, 2007).#10.25
    
    
    Form of time-vesting restricted stock unit grant agreement pursuant to 2007 Equity
Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.27 to
the Companys Form 10-K for the period ended December 29, 2007).#10.26
    
    
    Form of performance-based restricted stock unit grant agreement pursuant to 2007
Equity Incentive Compensation Plan (incorporated herein by reference to Exhibit
10.28 to the Companys Form 10-K for the period ended December 29, 2007).#10.27
    
    
    Form of time-vesting restricted stock unit grant agreement pursuant to 2002
Flexible Stock Plan (incorporated herein by reference to Exhibit 10.29 to the
Companys Form 10-K for the period ended December 29, 2007).#10.28
    
    
    Retirement Agreement entered into by and between Paul A. Brown, M.D. and the
Company dated February 4, 2008 (incorporated herein by reference to Exhibit 10.30
to the Companys Form 10-K for the period ended December 29, 2007).#10.29
    
    
    Amended and Restated Executive Employment Agreement entered into by and between the
Company and Stephen J. Hansbrough as of February 25, 2008 (incorporated herein by
reference to Exhibit 10.31 to the Companys Form 10-K for the period ended December
29, 2007).#10.30
    
    
    Amended and Restated Executive Employment Agreement entered into by and between the
Company and Gino Chouinard as of February 25, 2008 (incorporated herein by
reference to Exhibit 10.32 to the Companys Form 10-K for the period ended December
29, 2007).#21
    
    
    List of Subsidiaries23
    
    

Consent
of the Independent Registered Public Accountants31.1
    
    

CEO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    CFO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    
    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.*
    
    Confidential treatment has
been requested or granted for portions of this agreement  81




---



##### 



SIGNATURES
  HearUSA, Inc.
(Registrant)Date: March 27, 2009
    /s/ Stephen J. HansbroughStephen J. HansbroughChairman and Chief Executive Officer
HearUSA, Inc./s/ Francisco PuñalFrancisco PuñalSenior Vice President and
Chief Financial Officer
HearUSA, Inc.  82




---



##### 



Signature
    
    Title
    
    Date/s/ Stephen J. Hansbrough

Stephen J. Hansbrough
    
    Chairman of the Board Chief
Executive Officer and Director
    
    March 27, 2009/s/ Gino Chouinard

Gino Chouinard
    
    President Chief
Operating Officer
    
    March 27, 2009/s/ Francisco Puñal

Francisco Puñal
    
    Senior Vice President 
Chief Financial Officer
(Chief Accounting Officer)
    
    March 27, 2009/s/ Paul A Brown

Paul A. Brown, M.D.
    
    Director
    
    March 27, 2009/s/ David J. McLachlan

David J. McLachlan
    
    Director
    
    March 27, 2009/s/ Thomas W. Archibald

Thomas W. Archibald
    
    Director
    
    March 27, 2009/s/ Joseph L. Gitterman III

Joseph L. Gitterman III
    
    Director
    
    March 27, 2009/s/ Michel Labadie

Michel Labadie
    
    Director
    
    March 27, 2009/s/ Bruce Bagni

Bruce Bagni
    
    Director
    
    March 27, 2009/s/ Stephen W. Webster

Stephen W. Webster
    
    Director
    
    March 27, 2009
  83




---



##### 



EXHIBIT INDEX
 ExhibitNumber
    
    Description21
    
    
    List of Subsidiaries23
    
    

Consent
of the Independent Registered Public Accountants31.1
    
    

CEO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    CFO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    
    CEO and CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  84