##### 



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[x]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended     June 28, 2003

OR

[  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934


For the transition period from ___________________ to ____________________

Commission file number  0-16453

HearUSA, Inc.(Exact Name of Registrant as Specified in Its Charter)


Delaware
    
    22-2748248(State of Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)


1250 Northpoint Parkway, West Palm Beach, Florida
    
    33407(Address of Principal Executive Offices)
    (Zip Code)


Registrants Telephone Number, Including Area Code
(561) 478-8770


Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report


Indicate by check üwhether the registrant (1) has filed all reports
required to be filed by Section 13 or15(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   ü    No

Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).       Yes       Noü

On July 28, 2003, 30,423,636 shares of the Registrants Common Stock were
outstanding, including 2,518,343 exchangeable shares of HEARx Canada, Inc.





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##### 



INDEX

PagePART I.
    
    FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance SheetsJune 28, 2003 and December 28, 2002
    
    3Consolidated Statements of OperationsSix months ended June 28, 2003 and June 29, 2002
    
    4Consolidated Statements of OperationsThree months ended June 28, 2003 and June 29, 2002
    
    5Consolidated Statements of Cash FlowsSix months ended June 28, 2003 and June 29, 2002
    
    6Notes to Consolidated Financial Statements
    
    7-13Item 2. Management's Discussion and Analysis of Financial Conditionand Results of Operations
    
    14-20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    21Item 4: Controls and Procedures
    
    21PART II.
    
    OTHER INFORMATIONItem 4. Submission of Matters to a Vote of Security Holders
    
    22Item 6. Exhibits and Reports on Form 8-K
    
    22-24Signatures
    
    25Exhibit Index
    
    26


2



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##### 






Part I  Financial Information




Item 1. Financial Statements




HearUSA, Inc.
Consolidated Balance SheetsASSETS

June 28,
    
    December 28,2003
    
    2002Current assets:
    
    (unaudited)
    
    (audited)Cash and cash equivalents
    
    $
    5,147,202
    
    
    $
    2,410,023Investment securities
    
    
    435,000
    
    
    
    435,000Accounts and notes receivable, less allowance for
doubtful accounts of $447,206 and $587,322
    
    
    6,457,078
    
    
    
    5,963,677Inventories
    
    
    1,037,328
    
    
    
    945,743Prepaid expenses and other
    
    
    738,394
    
    
    
    889,197Assets of discontinued operations (Note 7)
    
    
    1,945,681
    
    
    
    1,472,849Total current assets
    
    
    15,760,683
    
    
    
    12,116,489Property and equipment  net
    
    
    5,930,689
    
    
    
    6,910,966Intangibles, net (Note 4)
    
    
    43,964,204
    
    
    
    44,211,588Deposits and other
    
    
    500,620
    
    
    
    482,982Other assets of discontinued operations (Note 7)
    
    
    1,260,435
    
    
    
    1,143,783$
    67,416,631
    
    
    $
    64,865,808LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    11,204,218
    
    
    $
    9,675,004Accrued expenses
    
    
    2,851,455
    
    
    
    4,665,547Accrued salaries and other compensation
    
    
    1,395,247
    
    
    
    1,868,772Current maturities of long term debt
    
    
    3,870,834
    
    
    
    4,017,007Dividends payable
    
    
    1,243,080
    
    
    
    1,215,167Liabilities of discontinued operations (Note 7)
    
    
    1,420,951
    
    
    
    906,364Total current liabilities
    
    
    21,985,785
    
    
    
    22,347,861Long term debt, less current maturities
    
    
    24,262,055
    
    
    
    21,971,499Long term debt, less current maturities of discontinued
operations
    
    
    95,481
    
    
    
    110,890Commitments and contingencies (Note 6)
    
    
    
    
    
    
    Stockholders equity:Preferred stock:(Aggregate liquidation preference $8,136,080 and
$8,108,167)$1 par, 5,000,000 shares authorizedSeries J (233 shares outstanding)
    
    
    233
    
    
    
    233Series H Junior Participating (0 shares outstanding)
    
    
    
    
    
    
    1998 Convertible (4,563 shares outstanding)
    
    
    4,563
    
    
    
    4,563Total preferred stock
    
    
    4,796
    
    
    
    4,796Common stock: $.10 par; 50,000,000 shares authorized
28,107,452 and 24,457,055 shares issued
    
    
    2,810,745
    
    
    
    2,445,705Stock subscription
    
    
    (412,500
    )
    
    
    (412,500
    )Additional paid-in capital
    
    
    116,898,972
    
    
    
    117,314,681Accumulated deficit
    
    
    (96,074,053
    )
    
    
    (96,765,446
    )Accumulated other comprehensive income  currency
translation adjustment (Note 1)
    
    
    330,491
    
    
    
    331,763Treasury stock, at cost:523,662 & 518,660 common shares
    
    
    (2,485,141
    )
    
    
    (2,483,441
    )Total stockholders equity
    
    
    21,073,310
    
    
    
    20,435,558$
    67,416,631
    
    
    $
    64,865,808


See accompanying notes to the consolidated financial statements

3



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##### 






HearUSA, Inc.
Consolidated Statements of Operations
Six Months Ended June 28, 2003 and June 29, 2002

June 28,
    
    June 29,2003
    
    2002(unaudited)
    
    (unaudited)Net Revenues
    
    $
    36,388,106
    
    
    $
    24,671,048Operating costs and expenses:Cost of products sold
    
    
    10,456,496
    
    
    
    6,690,569Center operating expenses
    
    
    17,134,807
    
    
    
    13,543,870General and administrative expenses
    
    
    4,872,128
    
    
    
    4,864,854Depreciation and amortization
    
    
    1,634,574
    
    
    
    1,040,735Total operating costs and expenses
    
    
    34,098,005
    
    
    
    26,140,028Income (loss) from operations
    
    
    2,290,101
    
    
    
    (1,468,980
    )Non-operating income (expense):Interest income
    
    
    11,961
    
    
    
    92,752Interest expense
    
    
    (1,115,538
    )
    
    
    (623,625
    )Income (loss) before equity in loss of affiliated company
    
    
    1,186,524
    
    
    
    (1,999,853
    )Equity in loss of affiliated company
    
    
    
    
    
    
    (88,420
    )Income (loss ) from continuing operations
    
    
    1,186,524
    
    
    
    (2,088,273
    )Discontinued operationsLoss from discontinued operations (including loss on
disposal of $105,296)
    
    
    (197,706
    )
    
    
    Net income (loss) before dividends on preferred stock
    
    
    988,818
    
    
    
    (2,088,273
    )Dividends on preferred stock
    
    
    (297,425
    )
    
    
    (310,705
    )Net income (loss) applicable to common stockholders
    
    $
    691,393
    
    
    $
    (2,398,978
    )Net income (loss) per common share   basic
    
    $
    0.02
    
    
    $
    (0.16
    )Net income (loss) per common share  diluted
    
    $
    0.02
    
    
    $
    (0.16
    )Weighted average number of shares of
Common stock outstanding:Basic
    
    
    30,424,872
    
    
    
    14,799,001Diluted
    
    
    52,323,137
    
    
    
    14,799,001


See accompanying notes to the consolidated financial statements

4



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##### 



HearUSA, Inc.
Consolidated Statements of Operations
Three Months Ended June 28, 2003 and June 29, 2002

June 28,
    
    June 29,2003
    
    2002(unaudited)
    
    (unaudited)Net Revenues
    
    $
    18,976,378
    
    
    $
    12,661,032Operating costs and expenses:Cost of products sold
    
    
    5,640,257
    
    
    
    3,285,471Center operating expenses
    
    
    8,719,105
    
    
    
    6,783,935General and administrative expenses
    
    
    2,426,000
    
    
    
    2,478,302Depreciation and amortization
    
    
    725,656
    
    
    
    517,137Total operating costs and expenses
    
    
    17,511,018
    
    
    
    13,064,845Income (loss) from operations
    
    
    1,465,360
    
    
    
    (403,813
    )Non-operating income (expense):Interest income
    
    
    7,743
    
    
    
    69,986Interest expense
    
    
    (592,653
    )
    
    
    (342,696
    )Income (loss) before equity in loss of affiliated company
    
    
    880,450
    
    
    
    (676,523
    )Equity in loss of affiliated company
    
    
    
    
    
    
    (27,015
    )Income (loss ) from continuing operations
    
    
    880,450
    
    
    
    (703,538
    )Discontinued operationsLoss from discontinued operations (including loss on
disposal of $105,296)
    
    
    (241,184
    )
    
    
    Net income (loss) before dividends on preferred stock
    
    
    639,266
    
    
    
    (703,538
    )Dividends on preferred stock
    
    
    (149,101
    )
    
    
    (142,636
    )Net income (loss) applicable to common stockholders
    
    $
    490,165
    
    
    $
    (846,174
    )Net income (loss) per common share   basic
    
    $
    0.02
    
    
    $
    (0.05
    )Net income (loss) per common share  diluted
    
    $
    0.01
    
    
    $
    (0.05
    )Weighted average number of shares of
Common stock outstanding:Basic
    
    
    30,423,639
    
    
    
    15,540,743Diluted
    
    
    48,619,906
    
    
    
    15,540,743


See accompanying notes to the consolidated financial statements

5



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##### 






HearUSA, Inc.
Consolidated Statements of Cash Flows
Six Months Ended June 28, 2003 and June 29, 2002

June 28, 2003
    
    June 29, 2002(unaudited)
    
    (unaudited)Cash flows from operating activities:Net income(loss)
    
    $
    988,818
    
    
    $
    (2,088,273
    )Loss from discontinued operations
    
    
    197,706
    
    
    
    Net income (loss) from continuing operations
    
    
    1,186,524
    
    
    
    (2,088,273
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,634,574
    
    
    
    1,040,735Provision for doubtful accounts
    
    
    171,291
    
    
    
    79,500Loss on disposition of equipment
    
    
    146
    
    
    
    44,154Equity loss in affiliated company
    
    
    
    
    
    
    88,420Compensation expense from the issuance
of capital stock
    
    
    
    
    
    
    40,250Changes in assets and liabilities:(Increase) decrease in:Accounts and notes receivable
    
    
    (614,568
    )
    
    
    1,174,271Inventories
    
    
    (78,734
    )
    
    
    80,353Prepaid expenses and other
    
    
    132,662
    
    
    
    195,844Increase (decrease) in:Accounts payable and accrued expenses
    
    
    1,513,139
    
    
    
    15,633Accrued salaries and other
    
    
    (1,716,281
    )
    
    
    (21,344
    )Net cash provided by continuing operations
    
    
    2,228,753
    
    
    
    649,543Net cash used by discontinued operations
    
    
    (398,544
    )
    
    
    Net cash provided by operating activities
    
    
    1,830,209
    
    
    
    649,543Cash flow from investing activities:Purchase of property and equipment
    
    
    (119,758
    )
    
    
    (348,772
    )Capital expenditure from discontinued operations
    
    
    (8,196
    )
    
    
    Purchase of investment securities
    
    
    
    
    
    
    (1,750,248
    )Iissuance of note receivable in affliated company
    
    
    
    
    
    
    (9,418,838
    )Purchase of pre-combination investment in Helix
    
    
    
    
    
    
    (2,000,000
    )Cost of business combination
    
    
    
    
    
    
    (859,148
    )Net cash used in investing activities
    
    
    (127,954
    )
    
    
    (14,377,006
    )Cash flows from financing activities:Proceeds from issuance of:Long-term debt
    
    
    3,500,000
    
    
    
    13,069,006Principal payments of debt of discontinued operations
    
    
    (29,822
    )
    
    
    Principal payments: Long-term debt
    
    
    (2,266,537
    )
    
    
    (2,126,099
    )Purchase of treasury stock
    
    
    (1,700
    )
    
    
    Redemption of preferred stock, net of costs
    
    
    (90,847
    )
    
    
    (351,093
    )Proceeds from issuance of employee stock options
    
    
    13
    
    
    
    Proceeds from issuance of capital stock
    
    
    40,250
    
    
    
    1,500,000Dividends on preferred stock
    
    
    (269,512
    )
    
    
    (379,997
    )Net cash provided by financing activities
    
    
    881,845
    
    
    
    11,711,817Effects of exchange rate changes on cash
    
    
    153,079
    
    
    
    Net increase (decrease) in cash and cash
equivalents
    
    
    2,737,179
    
    
    
    (2,015,646
    )Cash and cash equivalents at beginning of period
    
    
    2,410,023
    
    
    
    5,561,608Cash and cash equivalents at end of period
    
    $
    5,147,202
    
    
    $
    3,545,962Supplemental disclosure of non-cash investing and financing activities:Purchase of investment in affiliated company by
exchanging notes receivable from affiliated
company
    
    $
    
    
    
    $
    2,700,000


See accompanying notes to the consolidated financial statements

6



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HearUSA, Inc.
Notes to Consolidated Financial Statements

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results
for the six month period ended June 28, 2003 are not necessarily
indicative of the results that may be expected for the year ending December
27, 2003. For further information, refer to the audited consolidated
financial statements and footnotes thereto included in the Companys annual
report on Form 10-K for the year ended December 28, 2002.

1. Summary of Significant Accounting Policies

Helix Transaction

On July 27, 2001, the Company and Helix Hearing Care of America Corp., a
Canadian corporation (Helix), signed a definitive merger agreement, which
was subsequently amended and restated as of November 6, 2001. Helix owned
or managed, prior to the combination, 126 hearing healthcare clinics
located in Massachusetts, New York, Ohio, Michigan, Wisconsin, Minnesota,
Washington and Missouri as well as in the Provinces of Ontario and Quebec.
The transaction was approved by the stockholders of both the Company and
Helix on June 26, 2002 and by the Canadian courts on June 28, 2002. The
transaction closed on July 11, 2002, and was effective June 30, 2002, the
first day of the Companys third quarter of 2002, for financial reporting
purposes.

As of June 28, 2003, 2,839,846 exchangeable shares of HEARx Canada, Inc.,
an indirect subsidiary of the Company, were issued or will be issued to
certain former common shareholders of Helix in connection with the
combination. Each exchangeable share of HEARx Canada, Inc. is
exchangeable for one share of the Companys common stock. These
exchangeable shares are traded on the Toronto Stock Exchange under the
symbol HUX.

Earnings Per Share

For purposes of computing net income per common share  basic and diluted,
for the six months ended June 28, 2003, the weighted average number of
shares of common stock outstanding includes the effect of the 2,839,846
exchangeable shares of HEARx Canada, Inc. described above, as if they were
outstanding common stock of the Company on June 30, 2002, the effective
date of the combination for financial reporting purposes. For computing net
income per share  diluted for the six and three months ended June 28,
2003, 21,489,125 and 17,568,259 shares were included which represents the
common stock equivalent for the outstanding convertible preferred stock of
the Company.

Basis of Consolidation

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

Investment in Affiliated Company

Prior to the closing of the combination with Helix, the Company owned
approximately 10.5 percent of the common shares of Helix. The Company
accounted for this investment using the equity method because the Company
had the ability to exercise significant influence over the operational and
financial policies of Helix as a result of the terms of the merger
agreement with Helix and the use of certain proceeds of the Companys
credit facility with Siemens Hearing Instruments, Inc.

7



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HearUSA, Inc.
Notes to Consolidated Financial Statements

(Siemens) to repay certain debts of Helix. Under the equity method, the
Company recorded its proportionate share of profits and losses of the Helix
based on its percentage interest in Helix.

Discontinued Operations

Assets and liabilities of discontinued operations are recorded at the lower
of their carrying amount or fair value less the cost to sell. This relates
to the Quebec operations sold on July 15, 2003. See Note 7, below.

Comprehensive Income

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

Comprehensive income (loss) and the components of other comprehensive
income are as follows:

Six Months Ended
    
    Three Months EndedJune 28
    
    June 29,
    
    June 28,
    
    June 29,2003
    
    2002
    
    2003
    
    2002Comprehensive income (loss):Net income (loss) for period
    
    $
    988,818
    
    
    $
    (2,088,273
    )
    
    $
    639,266
    
    
    $
    (703,538
    )Other comprehensive income:Foreign currency translation adjustments
    
    
    (1,272
    )
    
    
    (29,735
    )
    
    
    (218,014
    )
    
    
    (44,820
    )Comprehensive income (loss) for the period
    
    $
    987,546
    
    
    $
    (2,118,008
    )
    
    $
    421,252
    
    
    $
    (748,358
    )


Reclassifications

Certain amounts in the 2002 consolidated financial statements have been
reclassified in order to conform to the 2003 presentation.

Segments

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

8



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HearUSA, Inc.
Notes to Consolidated Financial Statements

Centers
    
    E-commerce
    
    Network
    
    Corporate
    
    TotalNet Revenues6 months ended 6/28/03
    
    $
    35,803,000
    
    
    $
    33,000
    
    
    $
    552,000
    
    
    $
    
    
    
    $
    36,388,0006 months ended 6/29/02
    
    
    24,671,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,671,000Income (Loss) from Operations6 months ended 6/28/03
    
    
    7,669,000
    
    
    
    (32,000
    )
    
    
    273,000
    
    
    
    (5,620,000
    )
    
    
    2,290,0006 months ended 6/29/02
    
    
    3,759,000
    
    
    
    
    
    
    
    
    
    
    
    (5,228,000
    )
    
    
    (1,469,000
    )6 months ended 6/28/03Depreciation and
amortization
    
    
    1,047,000
    
    
    
    
    
    
    
    2,000
    
    
    
    586,000
    
    
    
    1,635,000Identifiable assets
    
    
    45,375,000
    
    
    
    
    
    
    
    1,827,000
    
    
    
    20,215,000
    
    
    
    67,417,000Capital Expenditures
    
    
    187,000
    
    
    
    
    
    
    
    
    
    
    
    152,000
    
    
    
    339,0006 months ended 6/29/02Depreciation and
amortization
    
    
    679,000
    
    
    
    
    
    
    
    
    
    
    
    362,000
    
    
    
    1,041,000Identifiable assets
    
    
    5,695,000
    
    
    
    
    
    
    
    
    
    
    
    25,275,000
    
    
    
    30,970,000Capital Expenditures
    
    
    183,000
    
    
    
    
    
    
    
    
    
    
    
    166,000
    
    
    
    349,000


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

Stock-based compensation

The Company has granted stock options to employees and directors under
stock option plans. The Company accounts for those grants using the
intrinsic value method under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Stock-based employee
compensation cost reflected in net income (loss) is not significant, as all
options granted under those plans had an exercise price greater than or
equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income (loss) and
income (loss) per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, (SFAS 123) Accounting for
Stock-Based Compensation, to stock-based employee compensation:

Six Months Ended
    
    Three Months EndedJune 28, 2003
    
    June 29, 2002
    
    June 28, 2003
    
    June 29, 2002Net income (loss) applicable to
common stockholders
    
    $
    691,393
    
    
    $
    (2,398,978
    )
    
    $
    490,165
    
    
    $
    (846,174
    )Deduct: Total stock based employeeCompensation expense determinedUnder fair value based method for all
Awards
    
    
    (178,000
    )
    
    
    (196,000
    )
    
    
    (134,000
    )
    
    
    (98,000
    )Pro Forma
    
    $
    513,393
    
    
    $
    (2,594,978
    )
    
    $
    356,165
    
    
    $
    (944,174
    )Income (loss) per share  basicAs reported
    
    $
    0.02
    
    
    $
    (0.16
    )
    
    $
    0.02
    
    
    $
    (0.05
    )Pro forma
    
    $
    0.02
    
    
    $
    (0.18
    )
    
    $
    0.01
    
    
    $
    (0.06
    )Income (loss) per share  dilutedAs reported
    
    $
    0.02
    
    
    $
    (0.16
    )
    
    $
    0.01
    
    
    $
    (0.05
    )Pro forma
    
    $
    0.01
    
    
    $
    (0.18
    )
    
    $
    0.01
    
    
    $
    (0.06
    )


9



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##### 



HearUSA, Inc.
Notes to Consolidated Financial Statements

For purposes of the above disclosure, the determination of the fair value
of stock options granted in 2003 and 2002 was based on the following: (i) a
risk free interest rate of 3.42%, and 3.20% respectively; (ii) expected
option lives ranging from 5 to 7 years; (iii) expected volatility in the
market price of the Companys common stock of 95%, and 99% respectively;
and (iv) no dividends on the underlying common stock.

2. Stockholders Equity

Conversion of Preferred Stock into shares of Common Stock

During the six months ended June 28, 2003 no shares of the 1998 Convertible
Preferred Stock were converted.

During the six months ended June 29, 2002, 214 shares of the 1998
Convertible Preferred Stock plus accrued dividends of approximately $70,000
and an 8% premium of approximately $17,000 were redeemed for cash of
approximately $351,000.

Common Stock

During the six months ended June 28, 2003 no warrants were exercised and
employee stock options for 20 shares of common stock were exercised.

Private Placement

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

All members of the board of directors of the Company, as of March 29, 2002,
participated in the private placement, purchasing 805,000 of the 1,500,000
shares of common stock. Because the shares were sold at a $0.05 per share
discount to the quoted market price of $1.05 per share, additional
compensation expense of approximately $40,000 was incurred for the quarter
ended March 30, 2002. The fair value of the warrants was not significant.
Subsequent to the closing, the directors agreed with the Company to pay an
additional $0.05 per share such that each directors purchase would be at
the then quoted market price of $1.05 per share. These additional amounts
were paid to the Company in June 2003.

3. Investment in and Advances to Affiliated Company

On November 16, 2001, the Company loaned $700,000 to Helix for use by
Helix as part of the $3.5 million acquisition by Helix of substantially
all of the capital stock of Auxiliary Benefits Corporation, a Colorado
corporation doing business as National Ear Care Plan (NECP). The note
was secured by substantially all of the assets of NECP, bore interest at a
rate of prime plus 1% (6% at December 29, 2001) per annum and originally
matured on November 16, 2002. On January 10, 2002, the Company loaned to
Helix an additional $2 million to complete the NECP transaction. On
January 14, 2002, the Company and Helix entered into a subscription
agreement pursuant to which the Company purchased 4,853,932 common shares
of Helix for an aggregate purchase price of $2.7 million. The purchase
price was paid using the $2.7 million in loans to Helix. Upon
consummation of the purchase of the 4,853,932 Helix common shares, the
Company became an approximate 10.5 percent owner of Helix common shares.
Prior to the closing of the combination with Helix, the Company accounted
for this investment using the equity method. Approximately $88,000 was
recorded as equity in loss of affiliated company for the six months ended
June 29, 2002,

10



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HearUSA, Inc.
Notes to Consolidated Financial Statements

representing the Companys equity in the net loss of Helix from the
January 14, 2002 acquisition date to June 29, 2002.

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

Three Months Ended
    
    Three Months EndedMarch 30, 2002
    
    June 29, 2002Equity in net loss of affiliated company,
    
    $
    (61,405
    )
    
    $
    (27,015
    )Equity in net loss of affiliated company,
as restated
    
    $
    (72,086
    )
    
    $
    (558,715
    )Net loss applicable to common stockholders
    
    $
    (1,552,804
    )
    
    $
    (846,174
    )Net loss applicable to common stockholders,
as restated
    
    $
    (1,563,485
    )
    
    $
    (1,377,874
    )Net loss per common share-basic and diluted
    
    $
    (0.11
    )
    
    $
    (0.05
    )Net loss per common share-basic and diluted,
as restated
    
    $
    (0.11
    )
    
    $
    (0.09
    )


4. Goodwill and Other Intangible Assets

At June 28, 2003 and December 28, 2002, the Company had goodwill of
approximately $32,459,000. The Company acquired goodwill of
approximately $2,485,000 resulting from its purchase of 10.5% of Helix in
January 2002, and approximately $29,915,000 resulting from the Helix
combination effective June 30, 2002, for total goodwill of approximately
$32,459,000. Approximately $60,000 of goodwill associated with the Quebec
operations (acquired as part of the Helix combination and disposed of on
July 15, 2003  see Note 7) is included in Other assets of discontinued
operations in the accompanying consolidated balance sheet. In addition,
approximately $7,200,000 of trademarks and tradenames, not subject to
amortization, were acquired in the Helix combination.

As of June 28, 2003 and December 28, 2002, the gross carrying amount of the
Companys intangible assets subject to amortization, which consist of
patient files, was $6,115,000, and the accumulated amortization was
approximately $1,038,000 and $748,000, respectively. In addition, the
Company has a patient file intangible asset of approximately $790,000
relating to the Quebec operations with a net carrying amount of
approximately $712,000 (see Note 7) which is included in Other assets of
discontinued operations in the accompanying consolidated balance sheets.
The aggregate amortization expense for the Quebec patient file intangible
for the six months ended June 28, 2003 was approximately $42,000. For each
of the six months ended June 28, 2003 and June 29, 2002, the aggregate
amortization expense for these assets was approximately $290,000 and
$43,000, respectively. At June 28, 2003, the estimated amortization expense
for the next five fiscal years is approximately: 2003  $268,000, 2004 -
$481,000, 2005  $448,000, 2006  $434,000, 2007- $418,000, and thereafter
  $2,316,000.

5. Recent Accounting Pronouncements

In December 2002, the FASB issued SFAS, No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. This statement
amends SFAS 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, this statement

11



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HearUSA, Inc.
Notes to Consolidated Financial Statements

amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based accounting for employee compensation
and the effect of the method used on reported results. SFAS 148 is
generally effective for financial statements for fiscal years ending after
December 15, 2002. The effect of the adoption of SFAS 148 on the Companys
financial position and results of operations was not material as the
Company continues to use the intrinsic value method.

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

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

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

6. Liquidity

As of June 28, 2003, the Company has an excess of current liabilities over
current assets of approximately $6.2 million from continuing operations.
For the six months ended June 28, 2003, the Company generated income from
continuing operations of approximately $1,187,000. The Company is
dependent upon generating sufficient cash flow from operations or
financings to repay its liabilities. Additionally, the Companys supply
agreement with Siemens requires full payment for hearing aids purchased
from Siemens within 60 days. As of June 28, 2003, the Company was not in
compliance with those payment provisions. Upon such noncompliance, Siemens
may declare the Company to be in default of the supply agreement by written
notification, which, if not cured within 60 days of the date of written
notification, would be an event of default under the Companys $51,875,000
secured credit facility with Siemens and Siemens would have the right to
declare all amounts outstanding under the credit facility immediately due
and payable. The Company has obtained a waiver of the non-compliance with
the 60-day payment term of the supply agreement from Siemens as of June 28,
2003. Future non-compliance with the supply agreement could have a
material adverse effect on the Companys financial condition and continued
operations.

As a result of the completion of the combination with Helix and significant
cost cutting initiatives implemented in 2002 and throughout 2003, the
Company believes that current cash, investment

12



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HearUSA, Inc.
Notes to Consolidated Financial Statements

securities and revenues from operations, at current net revenue levels,
will be sufficient to support the Companys operational needs through the
next twelve months, although there can be no assurance that the Company can
maintain compliance with Siemens loan covenants, that net revenue levels
will remain at or higher than current levels or that unexpected capital
needs will not arise for which cash, investments and revenues from
operations will be sufficient. Should the Company determine that additional
financing is necessary one or more of the following opportunities will be
evaluated: accounts receivable financing, short term debt or additional
equity or debt offerings. There can be no assurance, however, that such
financing would be available to the Company on favorable terms or at all.

7. Subsequent Event

On July 15, 2003, the Company sold 100% of the shares of the Companys
three subsidiaries and selected assets associated with the management of
the centers located in the Canadian Province of Quebec, to Forget & Sauve,
audioprothesistes, S.E.N.C. (Forget & Sauve) and 6068065 Canada Inc.,
private entities owned and controlled by Steve Forget, a former Helix
officer and director. Mr. Forget served as an officer of HearUSA until
October 2002 and as a director until May 2003. The sale agreement requires
total payments to the Company of approximately $1.7 million, representing
in part payment of pre-existing debt owed the Company by Forget & Sauve.
The Company received an initial cash payment of $700,000 at closing and
will receive subsequent payments of approximately $1 million over the next
five months. The payments are secured by the accounts receivable of Forget
& Sauve and one of the three subsidiaries.

The three subsidiaries and selected assets have been presented as a
discontinued operation and the consolidated financial statements have been
reclassified to segregate the assets, liabilities and operating results of
these subsidiaries for all periods presented. The assets of this operation
are reported under the center segment. The sale resulted in a loss on
disposal of approximately $105,000 for the three and six months ended June
28, 2003. Net revenues of the discontinued operations for the three and
six months ended June 28, 2003 were approximately $1.4 million and $2.6
million.

13



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

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

The Companys current network consists of 158 company-owned centers in 11
states and one Canadian province and approximately 1400 affiliated
providers in 49 states. The Company intends, as its long-term goal, to
establish a nationwide network of affiliated providers and company-owned
hearing care centers.

RESULTS OF OPERATIONS

For the three months ended June 28, 2003 compared to the
three months ended June 29, 2002

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

Net revenues for the quarter ended June 28, 2003 increased $6,315,346, or
49.9%, to $18,976,378 from $12,661,032 in the comparable quarter of 2002.
The increase in revenues is principally from the revenues of the centers
acquired in the Helix acquisition of July 2002 of approximately $5,583,000
for the quarter ended June 28, 2003. HearUSAs net revenues, excluding
revenues from the former Helix centers, for the quarter ended June 28,
2003, increased $728,679 to $13,389,711, from $12,661,032 for the
comparable quarter of 2002.

Cost of products sold increased $2,354,786, or 71.7%, to $5,640,257 in the
quarter ended June 28, 2003 from $3,285,471 in the comparable quarter of
2002. The increase is a result of the addition of cost of products for the
former Helix centers of approximately $1,530,000 for the quarter ending
June 28, 2003. HearUSAs cost of products sold, excluding the cost of
products sold at the former Helix centers, increased $839,684 to
$4,125,155 in the quarter ending June 28, 2003 from $3,285,471 in the
comparable quarter of 2002. This increase is primarily the result of
increases in sales and changes in retail pricing and marketing strategies.
The Companys sales of digital hearing aids increased approximately 15% for
the quarter ending June 28, 2003 from the comparable quarter of 2002.
Digital hearing aids generally cost more than conventional hearing aids.
The cost of products sold as a percent of net revenues was 29.7% and 25.9%
for the second quarter of 2003 and 2002, respectively. Included in
cost of product sold are preferred pricing reductions of
approximately $1,000,000 and $829,000 for the quarters ended June 2003
and 2002, respectively.

Center operating expenses increased $1,935,170, or 28.5%, to $8,719,105 in
the quarter June 28, 2003 from $6,783,935 in the comparable quarter of
2002. This increase is related to inclusion in the 2003 quarter of the
operating expenses incurred by the former Helix centers of approximately
$2,565,000 in the quarter ended June 28, 2003. HearUSAs center operating
expenses, excluding those of the former Helix centers, decreased
approximately $639,000 to approximately $6,145,000

14



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##### 



for the quarter ended June 28, 2003 from $6,783,935 for the comparable
quarter of 2002. This decrease is attributable to the cost reduction
program the Company first implemented in May 2001. The Company has
continued to reduce its marketing programs costs, reducing center
advertising expense to $1,020,168, or 7.6% of revenue, excluding the former
Helix centers, in the quarter ended June 28, 2003, down from $1,435,694,
or 11.3% in the comparable quarter of 2002. In addition, center wages
expense and regional office costs also decreased $87,156 or 2.7%, and
$116,567 or 26.7%, respectively, to $3,103,052 and $319,508, respectively,
in the quarter ended June 28, 2003 from $3,190,208 and $436,075,
respectively from the comparable quarter of 2002.

General and administrative expenses decreased $52,302, or 2.1%, to
$2,426,000 in the quarter ended June 28, 2003 from $2,478,302 in the
comparable quarter of 2002, notwithstanding the inclusion of additional
general and administrative expenses related to the former Helix operations
        .

Depreciation and amortization expense increased $208,519, or 40.3%, to
$725,656 in the quarter ended June 28, 2003 from $517,137 in the comparable
period of 2002. This increase is related to the former Helix centers
depreciation and amortization expense of approximately $169,000 for the
quarter ended June 28, 2003, and approximately $101,000 of additional
amortization of certain intangible assets acquired in the combination.

Interest income decreased $62,243, or 88.9%, to $7,743 in the quarter June
28, 2003 from $69,986 in the comparable quarter of 2002. This decrease
is primarily attributable to the decline in the average daily balance of
cash and investments. Interest expense increased $249,957 to $592,653 in
the quarter ended June 28, 2003 from $342,696 in the comparable quarter of
2002. This increase is attributable to approximately $166,000 of Helixs
interest expense and an increase of approximately $90,000 in interest on
the credit facility with Siemens due to issuance of Tranche E in March
2003.

For the six months ended June 28, 2003 compared to the six months ended June 29, 2002

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

Net revenues increased $11,717,058, or 47.5%, to $36,388,106 for the six
months ended June 28, 2003 from $24,671,048 in the comparable period of
2002. The increase in revenues is principally from the revenues of the
centers acquired in the Helix acquisition of July 2002 of approximately
$10,900,000 for the six months ended June 28, 2003.

Cost of products sold increased $3,765,927, or 56.3%, to $10,456,496 in the
six months ended June 28, 2003 from $6,690,569 in the comparable period of
2002. The increase is the direct result of inclusion of cost of products
sold at the former Helix centers of approximately $3,029,000 for the six
months ended June 28, 2003. HearUSAs cost of products sold, excluding the
former Helix centers, increased $764,515. This increase is primarily the
result of increase in revenues and changes in retail pricing and marketing
strategies. The Companys sales of digital hearing aids increased
approximately 9% for the six months ended June 28, 2003 from the comparable
period of 2002. Digital hearing aids generally cost more than conventional
hearing aids. Included in
cost of product sold are preferred pricing reductions of
approximately $2,006,000 and $1,676,000 for the six months ended June
28, 2003
and June 29, 2002, respectively. Such pricing reductions from Siemens are
accounted for as reductions of cost of products sold for financial
reporting purposes. The cost of products sold as a percent of net revenues
was 28.7% and 27.1% for the six months ended June 2003 and 2002,
respectively.

Center operating expenses increased $3,590,937, or 26.5%, to $17,134,807 in
the six months ended June 28, 2003 from $13,543,870 in the comparable
period of 2002. This increase is related to inclusion of operating
expenses for the former Helix centers of approximately $5,116,000 for the

15



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six months ended June 28, 2003. HearUSAs center operating expenses,
excluding the former Helix centers, decreased approximately $1,538,000 for
the six months ended June 28, 2003. This decrease is attributable to the
cost reduction program the Company first implemented in May 2001. The
Company continued to reduce its marketing programs, reducing center
advertising expense to $1,829,800, or 7.2% of revenue, excluding the former
Helix centers, in the six months ended June 28, 2003, down from
$2,884,938, or 11.7% in the comparable period of 2002. In addition, center
wages expense and regional office costs also decreased $196,965 or 3.1%,
and $276,257 or 30.7%, respectively, to $6,256,816 and $623,593,
respectively, in the six months ended June 28, 2003 from $6,453,781 and
$899,850, respectively from the comparable period of 2002.

General and administrative expenses remained relatively constant at
$4,872,128, in the six months ended June 28, 2003 from $4,864,854 in the
comparable period of 2002, notwithstanding the inclusion of additional
general and administrative expenses related to the former Helix operations.

Depreciation and amortization expense increased $593,839, or 57.1%, to
$1,634,574 in the six months ended June 28, 2003 from $1,040,735 in the
comparable period of 2002. This increase is related to the former Helixs
depreciation and amortization expense of approximately $331,000 for the six
months ended June 28, 2003, and approximately $202,000 of additional
amortization of certain intangible assets acquired in the combination.

Interest income decreased $80,791, or 87.1%, to $11,961 in the six months
ended June 28, 2003 from $92,752 in the comparable period of 2002. This
decrease is primarily attributable to the decline the average daily
balance of cash and investments. Interest expense increased $491,913 to
$1,115,538 in the six months ended June 28, 2003 from $623,625 in the
comparable period of 2002. This increase is attributable to approximately
$310,000 of Helixs interest expense and an increase of approximately
$107,000 in interest on the credit facility with Siemens due to the
issuance of Tranche E in March 2003.

LIQUIDITY AND CAPITAL RESOURCES

During the first six months of 2003, working capital increased $4,006,270
to a negative $6,225,102 as of June 28, 2003 from a negative $10,231,372 as
of December 28, 2002. This is a direct result of the additional $3.5
million financing the Company received from Siemens in March 2003 and the
income generated by the Company. The working capital of negative
$6,225,102 includes approximately $1.2 million of dividends payable at June
28, 2003, of which approximately $1.0 million may be paid in shares of the
Companys common stock rather than cash at the Companys option, and
approximately $2.9 million which represents the current portion of the
long-term debt to Siemens, which may be repaid through preferred pricing
reductions.

On December 7, 2001, the Company obtained a secured credit facility from
Siemens comprised of (a) a $10,875,000 secured five-year term loan credit
facility (the Tranche A Loan); (b) a $25,000,000 secured five-year
revolving loan credit facility (the Tranche B Loan); (c) a $3,000,000
secured five-year term loan facility (the Tranche C Loan) and (d) a
$13,000,000 secured five-year term loan credit facility (the Tranche D
Loan). On March 14, 2003, the Company obtained an additional $3,500,000
secured five-year term loan from Siemens bearing interest at a rate of 10%
annually (the Tranche E Loan). Tranche E Loan was obtained pursuant to an
amendment to the Companys credit agreement with Siemens and is otherwise
subject to the terms and conditions of the credit agreement and related
security agreement. At June 28, 2003 $7,050,000, $93,860, $2,400,000,
$13,000,000 and $3,500,000, representing the Tranche A, Tranche B, Tranche
C, Tranche D, and Tranche E Loans, respectively, were outstanding. As of
June 28, 2003, approximately $24,900,000 is available to the Company for
acquisitions under Tranche B of the credit facility.

The Siemens credit facility imposes certain financial and other
covenants on the Company, which are customary for loans of this size and
nature including restrictions on the conduct of the Companys business, the
occurrence of indebtedness, merger or sale of assets, the modification of
material agreements, changes in capital structure, making certain payments
and paying dividends.

16



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If the Company cannot maintain compliance with these covenants, Siemens may
terminate future funding under the credit facility and declare all then
outstanding amounts under the facility immediately due and payable.

The Tranche A, B and C Loans are payable quarterly over five years with the
outstanding principal and interest at 10%, due and payable on the final
maturity date. Principal and interest, at the prime rate (as defined) plus
1%, on the Tranche D Loan is payable on the final maturity date. The
Company is required to make monthly payments of interest only on the
Tranche E Loan in the first year. In years two through five, the Company
must make monthly principal and interest payments. Quarterly
principal and interest payments on the Tranche A, B and C Loans may be paid
through preferred pricing reductions received from Siemens by HearUSA as
long as the Company purchases certain minimum percentages of its
requirements of hearing aids from Siemens. The Company is also required to
make additional payments on the Tranche D Loan under the following
conditions. The Company must make a payment equal to 25% of net
proceeds it receives from the issuance of stock or stock equivalents. In
addition, within 120 days of any fiscal year end, the Company must make a
payment equal to 20% of Excess Cash Flow (as defined in the credit
agreement) for such fiscal year end.

As of June 28, 2003, the Company has an excess of current liabilities over
current assets of approximately $6.2 million. For the six months ended
June 28, 2003 the Company generated income from continuing operations of
$1,186,524. The Company is dependent upon generating sufficient cash flow
from operations or financings to repay its liabilities. Additionally, the
Companys supply agreement with Siemens requires full payment for hearing
aids purchased from Siemens within 60 days. As of June 28, 2003, the
Company was not in compliance with those payment provisions. Upon such
noncompliance, Siemens may declare the Company to be in default of the
supply agreement by written notification, which, if not cured within 60
days of the date of written notification, would be an event of default
under the Companys credit facility with Siemens and Siemens would have the
right to declare all amounts outstanding under the credit facility
immediately due and payable. The Company has obtained a waiver of the
non-compliance with the 60-day payment term of the supply agreement from
Siemens as of June 28, 2003. Future non-compliance with the supply
agreement could have a material adverse effect on the Companys financial
condition and continued operations.

As a result of the completion of the combination with Helix and significant
cost cutting initiatives implemented in 2002 and throughout 2003, the
Company believes that current cash, investment securities and revenues from
operations, at current net revenue levels, will be sufficient to support
the Companys operational needs through the next twelve months, although
there can be no assurance that the Company can maintain compliance with the
Siemens loan covenants, that net revenue levels will remain at or higher
than current levels or that unexpected capital needs will not arise for
which the cash, investments and revenues from operations will be
sufficient. In the event the Company needs to raise additional money to
fund unexpected cash needs or otherwise to meet requirements, one or more
of the following opportunities will be evaluated: accounts receivable
financing, short term debt or additional equity or debt offerings. There
can be no assurance however, that such financing would be available to the
Company on favorable terms or at all.

17



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Below is a chart setting forth the Companys contractual cash payment
obligations which have been aggregated to facilitate a basic understanding
of the Companys liquidity as of June 28, 2003:

Payments Due by PeriodLessContractual
    
    
    
    
    
    than 1
    
    1  3
    
    4  5
    
    After 5Obligations
    
    Total
    
    Year
    
    Years
    
    Years
    
    YearsLong-Term Debt
    
    $
    28,133,000
    
    
    $
    3,871,000
    
    
    $
    8,176,000
    
    
    $
    16,086,000
    
    
    $
    Operating Leases
    
    
    14,442,000
    
    
    
    5,332,000
    
    
    
    8,072,000
    
    
    
    826,000
    
    
    
    192,000Total Contractual Cash
Obligations
    
    $
    42,555,000
    
    
    $
    9,203,000
    
    
    $
    16,248,000
    
    
    $
    16,912,000
    
    
    $
    192,000


Net cash provided by operating activities increased from $649,543 in the
first six months of 2002 to $1,830,209 compared to the same period of
2003. The increase in net cash provided by operating activities was
primarily the result of a change from a net loss of $2,088,273 to net
income of $1,186,524 between periods, offset by a net increase in
accounts receivable, inventories and prepaid expenses of approximately
$2,011,000, a decrease in accounts payable and accrued expenses of the
periods of approximately $203,000, and cash used by discontinued
operations of approximately $399,000.

Net cash used by investing activities decreased from $14,377,006 in the
first six months of 2002, to $127,954 in the first six months of 2003.
Cash used to purchase a common stock investment in Helix prior to the
combination totaled approximately $2,000,000 in January 2002. In April
2002, a $9.42 million note was issued to the Company by Helix. Costs
incurred for the Helix acquisition during the second quarter of 2002 were
approximately $860,000. Cash was used to purchase investment securities
of $1,750,000 in the second quarter of 2002.

Net cash provided by financing activities decreased from $11,711,817 in
the first six months of 2002 to $881,845 in the first six months of 2003.
This decrease is primarily the result of the net proceeds of $3,500,000
from the Siemens Tranche E Loan in 2003, offset by approximately
$1,460,000 in repayments under the Siemens Tranche A, Tranche B and
Tranche C loans, compared to net proceeds of $12,625,000 from the Siemens
Tranche D Loan and $1,500,000 from the 2002 private placement of common
stock.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions in certain circumstances that affect
amounts reported in the accompanying consolidated financial statements
and related footnotes. In preparing these financial statements,
management has made its best estimates of certain amounts included in the
financial statements.On an ongoing basis, management evaluates these
estimates, including those related to allowances for doubtful accounts
receivable and sales returns. Management bases these estimates on
historical experience and on various other assumptions that are believed
to be reasonable under the circumstances. These estimates form the basis
for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Management believes
the following critical accounting policies affect the significant
judgments and estimates used in the preparation of the financial
statements. Application of these accounting policies involves the
exercise of judgment and use of assumptions as to future uncertainties
and, as a result, actual results could differ from these estimates.

18



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Goodwill and Intangible Assets:

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

Revenue Recognition

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

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

Sales returns

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Others (FIN 45). FIN 45 elaborates on
the disclosures that a guarantor should make in its interim and annual
financial statements regarding its obligations relating to the issuance
of certain guarantees. It also requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition
and measurement provisions of this interpretation are applicable on a
prospective basis to guarantees

19



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issued or modified after December 31, 2002. The impact of adopting FIN
45 on the Companys financial position and results of operations was not
material.

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

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

Except for historical information provided in this discussion and
analysis, the discussion includes forward looking statements, including
statements regarding the Companys goal of establishing a nationwide
network; the Companys expectation concerning the effect of cost control
measures; funds available under credit facility, current cash, investment
securities and revenues from operations being sufficient to support the
Companys operational needs; and the impact of recent accounting
pronouncements. Such statements involve certain risks and uncertainties
that could cause actual results to differ materially from those in the
forward-looking statements. Potential risks and uncertainties include
industry and market conditions, especially those affecting managed health
care; unforeseen capital requirements; trends in market sales; and the
success of the HEARx West joint venture with The Permanente Federation.

20



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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Long-Term DebtVariableRate
    
    
    
    
    
    Fixed RatePrime rate+ 1% note
    
    10% notes
    
    10% notes
    
    10% notedue April
    
    due 2008
    
    due 2007
    
    due Dec 1,2007
    
    
    
    
    
    2006
    
    Other notesAs of June 28, 2003Estimated cashinflow (outflow) byfiscal year ofprincipal maturity2003
    
    $
    
    
    
    $
    
    
    
    $
    (309,000
    )
    
    $
    (1,150,000
    )
    
    $
    (437,000
    )2004
    
    
    
    
    
    
    (555,000
    )
    
    
    (616,000
    )
    
    
    (2,300,000
    )
    
    
    (689,000
    )2005
    
    
    
    
    
    
    (807,000
    )
    
    
    (613,000
    )
    
    
    (2,300,000
    )
    
    
    (359,000
    )2006
    
    
    
    
    
    
    (892,000
    )
    
    
    (610,000
    )
    
    
    (1,300,000
    )
    
    
    (53,000
    )2007
    
    $
    (13,497,000
    )
    
    
    (985,000
    )
    
    
    (346,000
    )
    
    
    
    
    
    
    (54,000
    )2008
    
    
    
    
    
    
    (261,000
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    (13,497,000
    )
    
    $
    (3,500,000
    )
    
    $
    (2,494,000
    )
    
    $
    (7,050,000
    )
    
    $
    (1,592,000
    )Estimated fair value
    
    $
    (13,497,000
    )
    
    $
    (3,500,000
    )
    
    $
    (2,494,000
    )
    
    $
    (7,050,000
    )
    
    $
    (1,592,000
    )Carrying value
    
    $
    (13,497,000
    )
    
    $
    (3,500,000
    )
    
    $
    (2,494,000
    )
    
    $
    (7,050,000
    )
    
    $
    (1,592,000
    )





Item 4.  Controls and Procedures



|a. |  | The Company evaluated the effectiveness of its
disclosure controls and procedures pursuant to Exchange Act
rules. Based upon that evaluation, the Companys Chief Executive
Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective, as of the end
of the period covered by this report, in timely alerting them to
material information relating to the Company required to be
included in its periodic SEC filings.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

21



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Part II Other Information




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

The Company held its annual meeting of stockholders on May 30, 2003. At that
meeting, the stockholders were asked to consider and act on the election of
directors. The following persons were elected as directors for terms expiring
in 2004 and received the number of votes set forth opposite their respective
names:

Against/
    
    BrokerNominee
    
    For
    
    Withheld
    
    Non-votes
    
    AbstentionsPaul A. Brown, M.D.
    
    
    21,972,176
    
    
    
    206,769
    
    
    
    0
    
    
    
    8,062,178Stephen J. Hansbrough
    
    
    21,973,865
    
    
    
    205,080
    
    
    
    0
    
    
    
    8,062,178Thomas W. Archibald
    
    
    22,021,115
    
    
    
    157,830
    
    
    
    0
    
    
    
    8,062,178David J. McLachlan
    
    
    22,021,815
    
    
    
    157,130
    
    
    
    0
    
    
    
    8,062,178Joseph L. Gitterman III
    
    
    22,021,005
    
    
    
    157,940
    
    
    
    0
    
    
    
    8,062,178Michel Labadie
    
    
    21,672,802
    
    
    
    506,143
    
    
    
    0
    
    
    
    8,062,178Pierre Bourgie
    
    
    21,673,190
    
    
    
    505,755
    
    
    
    0
    
    
    
    8,062,178





Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:



|2.1 |  | The Amended and Restated Merger Agreement, dated November 6,
2001, between HEARx and Helix Hearing Care of America Corp.
(incorporated herein by reference as Exhibit 2.1 to the Companys
Joint Proxy Statement/Prospectus on Form S-4 (Reg. No. 333-73022)).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2.2 |  | Interim Order issued by the Superior Court of Quebec and
Notice of Application (incorporated herein by reference as Exhibit
2.2 to the Companys Joint Proxy Statement/Prospectus Form S-4 (Reg.
No. 333-73022)).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2.3 |  | Plan of Arrangement, including exchangeable share provisions
(incorporated herein by reference as Exhibit 2.3 to the Companys
Joint Proxy Statement/Prospectus on Form S-4 (Reg. No. 333-73022)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3.1 |  | Restated Certificate of Incorporation of HEARx Ltd.,
including certain certificates of designations, preferences and
rights of certain preferred stock of the Company (incorporated
herein by reference as Exhibit 3 to the Companys Current Report on
Form 8-K, filed May 17, 1996 (File No. 001-11655)).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3.2 |  | Amendment to the Restated Certificate of Incorporation
(incorporated herein by reference as Exhibit 3.1A to the Companys
Quarterly Report on Form 10-Q for the period ended June 28, 1996
(File No. 001-11655)).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3.3 |  | Amendment to Restated Certificate of Incorporation including
one for ten reverse stock split and reduction of authorized shares
(incorporated herein as Exhibit 3.5 to the Companys Quarterly
Report on Form 10-Q for the period ending July 2, 1999 (File No.
001-11655)).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|3.4 |  | Amendment to Restated Certificate of Incorporation including
an increase in authorized shares and change of name (incorporated
herein by reference as Exhibit 3.1 to the Companys Current Report
on Form 8-K, filed July 17, 2002 (File No. 001-11655)).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3.5 |  | Certificate of Designations, Preferences and Rights of the
Companys 1998 Convertible Preferred Stock (incorporated herein by
reference as Exhibit 3 to the Companys Current Report on Form 8-K,
filed August 27, 1998 (File No. 001-11655)).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3.6 |  | Certificate of Designations, Preferences and Rights of the
Companys 1999 Series H Junior Participating Preferred Stock
(incorporated herein by reference as Exhibit 4 to the Companys
Current Report on Form 8-K, filed December 17, 1999 (File No.
001-11655)).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3.7 |  | Certificate of Designations, Preferences and Rights of the
Companys Special Voting Preferred Stock (incorporated herein by
reference as Exhibit 3.2 to the Companys Current Report on Form
8-K, filed July 19, 2002 (File No. 001-11655)).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3.8 |  | Amendment to Certificate of Designations, Preferences and
Rights of the Companys 1999 Series H Junior Participating
Preferred Stock (incorporated herein by reference as Exhibit 4 to
the Companys Current Report on Form 8-K, filed July 17, 2002 (File
No. 001-11655)).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3.9 |  | Amended and Restated By-Laws of HearUSA, Inc. (incorporated
by reference as Exhibit 3.9 to the Companys Annual Report on Form
10-K for the period ended December 28, 2002 (File No. 001-11655)).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4.1 |  | Form of Placement Agent Warrant (to purchase up to 1,125,000
shares of Common Stock at an exercise price equal to $1.80 per
share) (incorporated herein by reference as Exhibit 4.3 to the
Companys Current Report on Form 8-K, filed August 27, 1998
(Registration No. 001-11655)).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4.2 |  | Form of Placement Agent Warrant (to purchase up to 203,390
shares of Common Stock at an exercise price equal to $4.46 per
share) (incorporated herein by reference as Exhibit 4.3 to the
Companys Current Report on Form 8-K, filed May 9, 2000
(Registration No. 001-11655)).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4.3 |  | Exchange and Redemption Agreement, dated as of December 4,
2001, by and between HEARx Ltd. and Advantage Fund II Ltd.
(incorporated herein by reference as Exhibit 10.1 to the Companys
Current Report on Form 8-K, filed December 26, 2001 (Registration
No. 001-11655)).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4.4 |  | Amended and Restated Rights Agreement, dated July 11, 2002
between HEARx Ltd. and the Rights Agent, which includes an
amendment to the Certificate of Designations, Preferences and Rights
of the Companys 1999 Series H Junior Participating Preferred Stock
(incorporated herein by reference as Exhibit 4.9.1 to the Companys
Joint Proxy/Prospectus on Form S-4 (Reg. No. 333-73022)).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4.5 |  | Form of Support Agreement among HEARx Ltd., HEARx Canada,
Inc. and HEARx Acquisition ULC (incorporated herein by reference as
Exhibit
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------

23



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| |  | 99.3 to the Companys Joint Proxy Statement/Prospectus
on Form S-4 (Reg No. 333-73022)).
| |  | ----------------------------------------------------------------------------------------



|10.1 |  | Amendment to Credit Agreement, dated March 12,2003 between
HearUSA, Inc. and Siemens Hearing Instruments, Inc. (incorporated
herein by reference as Exhibit 10.1 to the Companys Form 10Q for
the period ended March 29, 2003.)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.2 |  | Amendment to Security Agreement, dated March 12, 2003 between
HearUSA, Inc. and Siemens Hearing Instruments, Inc. (incorporated
herein by reference as Exhibit 10.2 to the Companys Form 10Q for
the period ended March 29, 2003.)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|31.1 |  | CEO Certification, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|---- |  | -----------------------------------------------------------------------------



|31.2 |  | CFO Certification, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|---- |  | -----------------------------------------------------------------------------



|32 |  | CEO and CFO Certification, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|-- |  | -------------------------------------------------------------------------------------

(b)
    
    Reports on Form 8-K:An Item 7 and 9 current report on Form 8-K, dated May 6, 2003, was
filed with the Securities and Exchange Commission on May 8, 2003.


24



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

HearUSA, Inc.
(Registrant)

Date:
    
    August 12, 2003
    
    By: /s/Stephen J. HansbroughStephen J. Hansbrough
Chief Executive OfficerDate:
    
    August 12, 2003
    
    By: /s/Gino ChouinardGino Chouinard
Chief Financial Officer


25



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Exhibit Index

31.1
    
    Section 302 of Sarbanes-Oxley CEO Certification31.2
    
    Section 302 of Sarbanes-Oxley CFO Certification32
    
    Section 906 of Sarbanes-Oxley CEO and CFO Certification


26