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United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-11655

HearUSA, Inc.

Exact Name of Registrant as Specified in Its Charter

Registrant’s Telephone Number, Including Area Code

(561) 478-8770

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

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

None

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ         No o

     Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form 10-K or any amendment to this Form 10-K. o

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

     As of June 28, 2004, the aggregate market value of the Registrant’s Common Stock held by non-affiliates (based upon the closing price of the Common Stock on the American Stock Exchange) was approximately $44,009,280.

     On February 18, 2005, 29,549,049 shares of the Registrant’s common stock and 880,493 of exchangeable shares were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of Registrant’s definitive Proxy Statement for the 2005 Annual Meeting of the Registrant’s Stockholders (“2005 Proxy Statement”), to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III hereof.

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PART I

Item 1.     Business

      HearUSA, Inc. (“HearUSA” or the “Company”) has a network of 154 company-owned hearing care centers (the “centers”) in 11 states and the Province of Ontario, Canada. The Company also sponsors approximately 1,400 credentialed audiology providers (the “network providers” or the “network”) that participate in selected hearing benefit programs contracted by the Company with employer groups, health insurers and benefit sponsors in 49 states. The centers and the network providers provide audiological products and services for the hearing impaired.

      HearUSA seeks to increase market share and market penetration in its center and network markets. HearUSA will also look for acquisitions in markets where its existing centers are located. The Company’s strategy for increasing market penetration includes advertising to the non-insured self-pay market, positioning itself as the leading provider of hearing care to healthcare providers and increasing awareness of physicians about hearing care services and products in the Company’s geographic markets. The Company believes it is well positioned to successfully address the concerns of access, quality and cost for the patients of managed care and other health insurance companies, diagnostic needs of referring physicians and, ultimately, the hearing health needs of the public in general.

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

Facilities and Services

      Each HearUSA center is staffed by a licensed and credentialed audiologist or hearing instrument specialist and at least one patient care coordinator. Experienced audiologists supervise clinical operations. The majority of the Company’s centers are conveniently located in shopping or medical centers, and the centers are typically 1,000 to 2,500 square feet in size (1,000 to 2,000 square feet for the Helix centers and 2,000 to 2,500 square feet for the HEARx and HEARx West centers). The Company’s goal is to have all centers similar in design, exterior marking and signage, because a uniform appearance reinforces the message of consistent service and quality of care.

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

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

      Each of the 1,400 network providers operates independently from the Company. However, to ensure compliance with its hearing benefit programs, the Company performs annual credential verification for each of the network providers to ensure they meet the Company’s network criteria. Also, on a random basis, the Company performs patient surveys on the quality of their services.

Products

      HearUSA’s centers offer a complete range of quality hearing aids, with emphasis on the latest digital technology. While the centers may order a hearing aid from any manufacturer, it is likely the

majority of the hearing aids sold by the centers will be manufactured by Siemens Hearing Instruments, Inc. (“Siemens”) and its subsidiaries, Rexton and Electone. The Company has a supply agreement with Siemens for the HearUSA centers in the United States. The Company has agreed to buy certain minimum percentages of the centers’ hearing aid requirements from Siemens. In exchange, Siemens has agreed to give the Company preferred pricing reductions. See Note 6a, Notes to the Consolidated Financial Statements included herein. The centers also sell hearing aids manufactured by Phonak, Oticon, Starkey, Sonic Innovation and Unitron.

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

      The network providers also provide hearing aids, assistive listening devices and other products related to hearing care.

Managed Care, Institutional Contracts and Benefit Providers

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

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

      The terms of most of these provider agreements are renegotiated annually, and most of these agreements may be terminated by either party on 90-days notice. The early termination of or failure to renew the agreements could adversely affect the operation of the hearing care centers located in the related market area. In addition, the early termination of or failure to renew the agreements that provide for payment to the Company on a per capita basis would cause the Company to lower its estimates of revenues to be received over the life of the agreements and could have an adverse effect on the Company’s results of operations.

      The Company and its subsidiary, HEARx West, currently receive a per-member-per-month fee for more than 1.1 million managed care members. In total, HearUSA services over 268 benefit programs for hearing care with various health maintenance organizations, preferred provider organizations, insurers, benefit administrators and healthcare providers.

Marketing

      HearUSA’s marketing plan for its centers focuses on:

Revenues

      For the fiscal years 2004, 2003 and 2002, HearUSA revenues were $72,300,623, $70,545,154 and $57,230,128, respectively. During 2004, 2003 and 2002, the Company did not have revenues totaling 10% or more of total net revenues from a single customer. Financial information about revenues by geographic area is set out in Note 19, Notes to Consolidated Financial Statements included herein.

Segments

      We operate three business segments: company-owned centers, the network of independent providers and an e-commerce business line. Financial information regarding these business segments is provided in Note 19, Notes to the Consolidated Financial Statements included herein.

Centers

      At the end of 2004, the company owned a total of 154 centers located in Florida, New York, New Jersey, Massachusetts, Ohio, Michigan, Wisconsin, Minnesota, Missouri, Washington, California (through HEARx West) and the Province of Ontario, Canada. These centers offer people a complete range of services and products, including diagnostic audiological testing, the latest technology in hearing aids and assistive listening devices to improve their quality of life.

      The centers owned through HEARx West are located in California. HearUSA is responsible for the daily operation of the centers. All clinical and quality issues are the responsibility of a joint committee comprised of HearUSA and Kaiser Permanente clinicians. HEARx West centers concentrate on providing hearing aids and audiology testing to Kaiser Permanente’s members and self-pay patients in the state of California. At the end of 2004, there were twenty full-time and two part-time HEARx West centers.

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

Network

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

      Unlike the company-owned centers, the network is comprised of hearing care practices owned by independent audiologists. Through the network, the Company can pursue national hearing care contracts and offer managed hearing benefits in areas outside of the company-owned center markets. The network’s revenues are derived mainly from administrative fees paid by employer groups, health insurers and benefit sponsors to administer their benefit programs as well as maintaining an affiliated provider network and from royalties paid by Siemens for each Siemens unit purchased by a participating provider.

E-commerce

      The Company offers on-line information about hearing loss, hearing aids, assistive listening devices and the services offered by hearing health care professionals. The Company’s web site also offers on-line purchases of hearing related products, such as batteries, hearing aid accessories and assistive listening devices. In addition to on-line product sales, e-commerce operations are also designed as a marketing tool to inform the public and generate referrals for centers and for network providers.

Distinguishing Features

      Integral to the success of HearUSA’s strategy is increased awareness of the impact of hearing loss and the medical necessity of treatment, in addition to the strengthening of consumer confidence and the differentiation of HearUSA from other hearing care providers. To this end, the Company has taken the following unique steps:

Joint Commission on Accreditation of Healthcare Organizations

      During 1998, the Company distinguished itself as an accredited healthcare organization when it earned a three-year accreditation by the Joint Commission. The Company was re-accredited in 2002 as a preferred provider organization in hearing care, demonstrating its willingness to provide safe, high quality care and to be measured against high standards of performance. Accreditation means that the Company volunteered to undergo a comprehensive evaluation by a team of physicians and nurses, who personally conducted a review to assess provider credentialing, training and orientation, patient rights and care, organizational leadership and ethics, management of information and performance improvement. At this time, only the 82 company-owned centers doing business as HEARx are accredited. The Company’s long-term goal is to accredit all company-owned centers as well as interested network providers. The Company currently employs 186 licensed hearing professionals, of which 139 are audiologists, including 17 AuD, Doctor in Audiology, and 47 are licensed hearing aid specialists.

Center Management System, Medical Reporting and HearUSA Data Link

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

further capabilities for the wide area network. This system is only used in the company-owned centers.

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

      One of the outputs of CMS is a computerized reporting system that provides referring physicians the test results and recommended action for every patient examined by HearUSA staff in a company-owned center. To the Company’s knowledge, no other dispenser or audiologist presently offers any referring physician similar documentation. Consistent with the Company’s mission of making hearing care a medical necessity, this reporting system makes hearing a part of the individual’s health profile, and increases awareness of hearing conditions in the medical community. Another unique aspect of CMS is its data mining capability which allows for targeted marketing to its customer base. The national call center also has the ability to access the CMS system and can directly schedule appointments.

Competition

      The U.S. hearing care industry is highly fragmented with approximately 11,000 practitioners providing hearing care products and services. The Company competes on the basis of price and service and, as described above, tries to distinguish itself as a leading provider of hearing care to health care providers and the self-pay patient. The Company competes for the managed care customer on the basis of access, quality and cost.

      In the Canadian Province of Ontario, the traditional hearing instrument distribution system is made up of small independent practices where associations are limited to two or three centers. Most centers are relatively small and are located in medical centers, professional centers or in small shopping centers.

      It is difficult to determine the precise number of the Company’s competitors in every market where it has operations, or the percentage of market share enjoyed by the Company. Some competitors are large distributors, including Amplifon of Italy, which owns a network of franchised centers (Miracle Ear) and company-owned centers (Sonus and National Hearing Center) in the United States and Canada, and Beltone Electronics Corp., a hearing aid manufacturer owned by Great Nordic that distributes its products primarily through a national network of “authorized” distributors in the United States and Canada. Large discount retailers, such as Costco, also sell hearing aids and present a competitive threat in selected HearUSA markets. All of these companies have greater resources than HearUSA, and there can be no assurance that one or more of these competitors will not expand and/or change their operations to capture the market targeted by HearUSA.

      The Company’s network business will also face competition by companies offering similar network services.. These companies attempt to aggregate demand for hearing products and sell marketing and other services to network participants. In addition, some of these networks are able to offer discounts to managed care payors, insurers and membership organizations. Many independent hearing care providers belong to more than one network. In addition, contract terms for membership are typically short and may be terminated by either party at will. There can be no assurance, however, that the largely fragmented hearing care market cannot be successfully consolidated by the establishment of co-operatives, alliances, confederations or the like, which would then compete more directly with HearUSA’s network and its company-owned centers.

Reliance on Manufacturers

      The Company’s supply agreement with Siemens requires that a certain portion of the company-owned center’s sales will be of Siemens devices. Siemens has a well-diversified product line (including Rexton and Electone) with a large budget devoted to research and development. However, there is no guaranty that Siemens’ technology or product line will remain desirable in the marketplace. Furthermore, if Siemens’ manufacturing capacity cannot keep pace with the demand of HearUSA and other customers, HearUSA’s business may be adversely affected.

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

Regulation

Federal

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

      In addition, a portion of the Company’s revenues comes from participation in Medicare and Medicaid programs. Federal laws prohibit the payment of remuneration in order to receive or induce the referral of Medicare or Medicaid patients, or in return for the sale of goods or services to Medicare or Medicaid patients. Furthermore, Federal law limits physicians and other healthcare providers from referring patients to providers of certain designated services in which they have a financial interest. HearUSA believes that all of its managed care and other provider contracts and its relationships with referring physicians are in compliance with these Federal laws.

      The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) requires the use of uniform electronic data transmission standards for health care claims and payment transactions submitted or received electronically. The Department of Health and Human Services (“HHS”) adopted regulations establishing electronic data transmission standards that all health care providers must use when submitting or receiving certain health care transactions electronically. In addition, HIPAA required HHS to adopt standards to protect the security and privacy of health-related information. Final regulations containing privacy standards became effective on April 14, 2003. HearUSA believes it has taken the necessary steps to be in full compliance with these regulations.

      The Federal Trade Commission (FTC) issued the amended Telemarketing Sales Rule on January 29, 2003. The amended rule gives effect to the Telemarketing and Consumer Fraud and Abuse Prevention Act. This legislation gives the FTC and state attorneys generals law enforcement tools to combat telemarketing fraud, give consumers added privacy protections and defenses against unscrupulous telemarketers, and help consumers tell the difference between fraudulent and legitimate telemarketing. One significant amendment to the Telemarketing Sales Rule was inclusion of the prohibition on calling consumers who have put their telephone numbers on the national “Do Not Call” registry unless one of several exceptions is applicable to the call or to the consumer. Other FTC guidelines pertinent to the Company involve professional business practices relating to issues

such as transmitting the caller’s telephone number on caller id, abandoning calls and speaking to consumers in a non-professional manner.

      On July 25, 2003 the Federal Communications Commission issued a revised Final Rule Implementing the Telephone Consumer Protection Act of 1991 (TCPA Rule). The original TCPA Rule, issued in 1992, required telemarketers to honor all requests by a consumer that the telemarketer not make future calls on behalf of a specified seller to that consumer, restricted the use of recorded messages in telemarketing, and prohibited unsolicited commercial facsimile transmissions. The revised TCPA Rule prohibits telemarketing calls to telephone numbers on the national “Do Not Call” registry unless one of several exceptions is applicable to the call or consumer, and also contains provisions similar to those in the revised Telemarketing Sales Rule regarding the transmission of caller ID and abandoned calls. Among other new provisions, the revised TCPA rule prohibits the uses of predictive dialers to place telephone calls to cellular telephones. The Company adheres to policies set forth by the FTC and the FCC, and has established policies and practices to ensure its compliance with FTC and FCC regulations, including the requirements related to the national “Do Not Call” registry.

      The CAN-SPAM Act of 2003 regulates commercial electronic mail on a nationwide basis. It imposes certain requirements on senders of commercial electronic mail. The Company adheres to the law by properly representing the nature of its commercial email messages in the subject line, not tampering with source and transmission information in the email “header,” and obtaining email addresses through lawful means. The Company adheres to the specific disclosure requirements of the law by including a physical mail address and a clearly identified and conspicuous “opt-out” mechanism in all commercial email. The Company honors all consumer requests to stop receiving future commercial emails in a timely manner.

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

State

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

      Many states have laws and regulations that impose additional requirements related to telemarketing and to the use of commercial email. These include telemarketing registration requirements and anti-fraud protections related to telemarketing and email. In some cases, state laws and regulations may be more restrictive than federal laws and regulations. The Company makes a good faith effort to understand and comply with all applicable state laws and regulations regarding its marketing practices.

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

      The Company employs licensed audiologists and hearing aid dispensers. Under the regulatory framework of certain states, business corporations are not able to employ audiologists or offer hearing services. California has such a law, restricting the employment of audiologists to professional corporations owned by audiologists or similar licensees. The Company believes, however, that because the State of California’s Department of Consumer Affairs has indicated that speech-language pathologists may be employed by business corporations, the Company may employee audiologists. The similarity of speech-language pathology to audiology, and the fact that speech-language pathologists and audiologists are regulated under similar statutes and regulations, leads the Company to believe that business corporations and similar entities may employ audiologists. No assurance can be given that the Company’s interpretation of California’s laws will be found to be in compliance with laws and regulations governing the corporate practice of audiology or, if its activities are not in compliance, that the legal structure of the Company’s California operations can be modified to permit compliance.

      In addition, state laws prohibit any remuneration for referrals, similar to Federal laws discussed above. Generally, these laws follow the federal statues described above.

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

Canada

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

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

      In addition, Ontario regulation and codes of conduct of audiologists and hearing instrument practitioners prohibit any remuneration for referrals. The Company has structured its operations in Canada to assure compliance with these regulations and codes and believes it is in full compliance with Canadian law.

Product and Professional Liability

      In the ordinary course of its business, HearUSA may be subject to product and professional liability claims alleging the failure of, or adverse effects claimed to have been caused by, products sold or services provided by the Company. The Company maintains insurance at a level which the

Company believes to be adequate. A successful claim in excess of the policy limits of the Company’s liability insurance, however, could adversely affect the Company. As the distributor of products manufactured by others, the Company believes it would properly have recourse against the manufacturer in the event of a product liability claim; however, there can be no assurance that recourse against a manufacturer by the Company would be successful or that any manufacturer will maintain adequate insurance or otherwise be able to pay such liability.

Seasonality

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

Employees

      At December 25, 2004, HearUSA had 462 full-time employees and 43 part-time employees, of whom 81 were employed by HEARx West.

Where to Find More Information

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

Item 2.     Properties

      HearUSA’s corporate offices and national call center are located in West Palm Beach, Florida. The leases on these properties are for five years and expire in 2006. As of December 25, 2004, the Company operated 31 centers in Florida, 15 in New Jersey, 15 in New York, 9 in Massachusetts, 7 in Ohio, 8 in Michigan, 2 in Wisconsin, 6 in Minnesota, 7 in Missouri, 13 in Washington and 22 HEARx West centers in California. HearUSA also operates 19 centers in the Province of Ontario. All of the locations are leased for one to ten year terms pursuant to generally non-cancelable leases (with renewal options in some cases). The Company believes these locations are suitable to serve its patients’ needs. The network is operated from an office located in Denver, Colorado (head office of NECP at the time of its acquisition). The lease for this location expires in June 2007. The Company has no interest or involvement in the network providers properties or leases. The e-commerce business is operated from the Company’s corporate office in West Palm Beach.

Item 3.     Legal Proceedings

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

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

      None

EXECUTIVE OFFICERS OF THE COMPANY

      The following sets forth certain information as of the date hereof with respect to the Company’s executive officers. Dr. Brown and Mr. Hansbrough are serving pursuant to employment agreements, renewed in 2003, with 5-year terms expiring in 2008 unless renewed or extended. The other executive officers are serving until their successors are duly appointed and qualified to serve or their earlier resignations or removal.

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

      Paul A. Brown, M.D., holds an A.B. from Harvard College and an M.D. from Tufts University School of Medicine. Dr. Brown founded HearUSA in 1986 and has served as Chairman of the Board since that time and Chief Executive Officer until July 2002. From 1970 to 1984, Dr. Brown was Chairman of the Board and Chief Executive Officer of MetPath Inc. (“MetPath”), a New Jersey-based corporation offering a full range of clinical laboratory services to physicians and hospitals, which he founded in 1967 while a resident in pathology at Columbia Presbyterian Medical Center in New York City. MetPath developed into the largest clinical laboratory in the world with over 3,000 employees and was listed on the American Stock Exchange prior to being sold to Corning in 1982 for $140 million. Dr. Brown is formerly Chairman of the Board of Overseers of Tufts University School of Medicine, an Emeritus member of the Board of Trustees of Tufts University, a past member of the Visiting Committee of Boston University School of Medicine and part-time lecturer in pathology at Columbia University College of Physicians and Surgeons.

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

      Gino Chouinard, Executive Vice President and Chief Financial Officer, joined HearUSA in July 2002 with its acquisition of Helix. Mr. Chouinard served as Helix’s Chief Financial Officer from November 1999 until its acquisition by HearUSA. Mr. Chouinard is a Chartered Accountant who previously worked for Ernst & Young LLP, an international accounting firm, as Manager from 1996 until 1999 and as Senior Accountant from 1994 until 1996.

      Kenneth J. Schofield, Chief Operating Officer, joined the company in May 1997 as the Director of Information Technology and became Vice President, Information Technology in February 1998.

He was appointed to the office of Chief Operating Officer in August 2004. Before joining the Company, Mr. Schofield served as the Controller for a government contracting company, Teltara, Inc., and the manager of information systems for a privately held group of 25 community newspapers.

      Donna L. Taylor, Senior Vice President of Operations, joined HearUSA in July 1987 as an audiologist. She was later promoted to Area Manager and Director of Operations for the Company in Florida. Prior to her present position she assumed her role as Vice President Sales and Operations in December 1993 and in October 2000 was promoted to Senior Vice President – Sales and Operations.

PART II

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

      The common stock of the Company is traded on the American Stock Exchange (AMEX) under the symbol “EAR” and the exchangeable shares of HEARx Canada Inc. are traded on the Toronto Stock Exchange under the symbol “HUX.” Holders of exchangeable shares may tender their holdings for common stock on a one-for-one basis at any time. As of February 18, 2005, the Company had 29,549,409 shares of common stock and 880,493 of exchangeable shares outstanding. The closing price on February 18, 2005 was $1.88 for the common stock and Canadian $2.15 for the exchangeable shares. The following table sets forth the high and low sales prices for the common stock as reported by the AMEX for the fiscal quarters indicated:

      As of February 18, 2005, there were 1,601 holders of record of the common stock.

Dividend Policy

      HearUSA has never paid and does not anticipate paying any dividends on the common stock in the foreseeable future but intends to retain any earnings for use in the Company’s business operations. Payment of dividends is restricted under the terms of the Company’s credit agreement with Siemens.

Item 6.     Selected Financial Data

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

OPERATING STATEMENT DATA:

BALANCE SHEET DATA:

GENERAL

      The focus of the Company in 2004 was to develop advertising campaigns and pricing structures to increase its gross profit on each transaction. As a result of these initiatives, the Company sustained a growth in net revenues for four consecutive quarters in 2004 and was cash flow positive in 2004.

      Toward the end of 2004, the Company created a sales development department whose objective is to improve sales capabilities of its professionals. In 2005, the Company expects to benefit from this new department and from new advertising campaigns and programs developed to increase patient accessibility to its products.

      During 2004, the Company incurred a net loss of approximately $2,759,000 compared to approximately $1,109,000 in 2003. The increase in the net loss is attributable to an increase in center operating expenses and interest expense. The increase in interest expense is mainly due to the 2004 effects of the December 2003 financing. These increases were offset by a decrease in general and administrative expenses, depreciation and amortization and an increase in net revenues.

      During 2004 and 2003, HEARx West generated net income of approximately $1,385,000 and $723,000. The HEARx West members’ deficit decreased from approximately $4,591,000 at the end of 2003 to approximately $3,206,000 at the end of 2004. According to the Company’s agreement with the Permanente Federation, the Company included in its statement of operations 100% of the losses incurred by the venture since its inception and will receive 100% of the net income of the venture until the members’ deficit is eliminated. At such time as the members’ deficit is eliminated and the Venture continues to be profitable, the Company will begin recording a minority interest, corresponding to 50% of the venture’s net income as an expense in the Company’s consolidated statement of operations and with a corresponding liability on its consolidated balance sheet.

RESULTS OF OPERATIONS

2004 Compared to 2003

      Net revenues in 2004 increased approximately $1,755,000 or 2.4%. The increase is primarily attributable to an increase in non-hearing aid revenues of approximately $1.9 million during 2004 compared to 2003 mainly due to the Company’s new contract with the Department of Veteran Affairs. Hearing aid revenues remained flat in 2004. A decrease of approximately 4.9% in the number of hearing aids sold during the year was offset by an increase in the average selling price of approximately 4.8%, as patients selected a higher percentage of high end technology hearing aids. Approximately $485,000 of the overall increase in revenues relates to a favorable change in the average Canadian exchange rate from 2003 to 2004. Unlike the first six months of 2003, the first six months of 2004 did not benefit from an aggregate of approximately $2.8 million in revenues from a special contract and an excess of undelivered hearing aids from the prior year.

      Cost of products sold in 2004 decreased approximately $367,000 or 1.8%. Included in the cost of products sold are Siemens preferred pricing reductions of approximately $3,641,000 in 2004 and $3,947,000 in 2003, respectively. Such pricing reductions from Siemens are accounted for as reductions of cost of products sold for financial reporting purposes and applied, pursuant to the Siemens credit agreement, against the principal and interest payments due to Siemens on Tranches A, B and C of the Siemens loan. (See Liquidity and Capital Resources, below) The cost of products sold, as a percent of net revenues, was essentially unchanged at 28.3% and 28.5% in 2004 and 2003, respectively.

      Center operating expenses in 2004 increased approximately $2.5 million, or 7.0% from 2003. This increase is mainly attributable to an increase in compensation and marketing in 2004 compared to 2003 of approximately $1.4 million and $1.0 million, respectively. The increase in compensation is attributable in part to annual increases to employees and new employees at the center level and in part to increases in commissions. The increase in commissions is due to changes to some of the compensation programs at the end of the second quarter of 2003 and increases in revenues in regions and/or sectors with higher commission rates. The increase in marketing is attributable to increase in the frequency in the Company’s advertising to the private pay sector and additional mailers to members of managed care companies in 2004 compared to the prior year.

      General and administrative expenses in 2004 decreased approximately $252,000, or 2.4%. This decrease is mainly attributable to a reduction of expenses of approximately $159,000 resulting from a volume discount for telephone expense, and a reduction of professional fees of approximately $576,000. These decreases were offset by an increase in wages and fringe benefits of approximately $291,000, due to an increase in salaries and in additional employees, and an increase in public and shareholder relations expense of approximately $174,000.

      Depreciation and amortization expense in 2004 decreased approximately $706,000 or 30.6%. This decrease is due to certain property and equipment being fully depreciated.

      Interest expense in 2004 increased approximately $1.7 million or 61% over 2003. This increase is attributable to approximately $2,902,000 of interest (including the non-cash portion of approximately $2,127,000) on the $7.5 million financing that was completed in December 2003. These increases were offset by a decrease of interest on other existing balances due to repayments of principal during 2003 and the beginning of 2004. The non-cash charge of $2,127,000 included in the interest expense is the amortization of the debt discount resulting from the intrinsic value of the beneficial conversion option and the proceeds allocated to the warrants to purchase 2,642,750 shares of the Company’s common stock based on relative fair values of the $7.5 million financing in December 2003. This non-cash charge does not impact the liquidity or working capital of the Company.

2003 Compared to 2002

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

      Cost of products sold in 2003 increased approximately $3.7 million, or 22.3%. The increase is the direct result of inclusion of cost of products sold at the former Helix centers of approximately $2.9 million for the first six months of 2003, which was not included in the comparable period of 2002. Excluding the Helix cost of product sold for the first six months of 2003, cost of products sold increased by approximately $740,000, or 4.5%, of which approximately $153,000 is attributable to a change in the average Canadian exchange rate from 2002 to 2003. The remaining increase of approximately $587,000 is the direct result of the increase in the number of hearing aids sold, offset by a reduction from improved product pricing the Company received as a result of the former Helix centers selling more Siemens’ products during the last six months of 2003 as compared to the same

period in 2002. Included in the cost of products sold are preferred pricing reductions of approximately $3.9 million and $3.8 million for 2003 and 2002, respectively.

      Such pricing reductions from Siemens are accounted for as reductions of cost of products sold for financial reporting purposes and applied, pursuant to the credit agreement, against the principal and interest payments due on Tranches A, B and C. The cost of products sold as a percent of net revenues was 28.5% and 28.7% for 2003 and 2002, respectively.

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

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

      Depreciation and amortization expense increased $495,000 or 19.6% in 2003. This increase is related to the former Helix depreciation and amortization expense for the first six months of 2003, which was not included in the comparable period of 2002, and additional amortization of certain intangible assets acquired in the combination, which were being amortized for twelve months in 2003 compared to only six months in 2002. These increases in depreciation and amortization were offset by decreases due to property and equipment being fully depreciated.

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

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

      The non-cash $517,000 charge included in the interest expense in 2003 is the amortization of the debt discount resulting from the proceeds allocated to the warrants to purchase 800,000 shares of the Company’s common stock issued with the $2 million financing in October 2003 of approximately $429,000 based on relative fair values, and approximately $88,000 of amortization of debt discount resulting from the intrinsic value of the beneficial conversion option, and the proceeds allocated to the warrants to purchase 2,642,750 shares of the Company’s common stock based on relative fair values of the $7.5 million financing in December 2003 (see Note 7 of the Notes to the

Consolidated Financial Statements, included herein). These non-cash charges do not have any impact on the liquidity and working capital of the Company.

LIQUIDITY AND CAPITAL RESOURCES

      On December 7, 2001, the Company obtained a secured credit facility from Siemens comprised of (a) a $10,875,000 secured five-year term loan credit facility (the Tranche A Loan); (b) a $25,000,000 secured five-year revolving loan credit facility (the Tranche B Loan); (c) a $3,000,000 secured five-year term loan facility (the Tranche C Loan) and (d) a $13,000,000 secured five-year term loan credit facility (the Tranche D Loan). On March 14, 2003, the Company obtained an additional $3,500,000 secured five-year term loan from Siemens bearing interest at a rate of 10% annually (the Tranche E Loan). Tranche E Loan was obtained pursuant to an amendment to the Company’s credit agreement with Siemens and is otherwise subject to the terms and conditions of the credit agreement and related security agreement. At December 25, 2004 $3,599,988, $62,400, $1,500,000, $11,776,313 and $2,171,330, representing principal on the Tranche A, Tranche B, Tranche C, Tranche D, and Tranche E Loans, respectively, were outstanding. As of December 25, 2004, approximately $24.9 million is available to the Company for acquisitions under Tranche B of the credit facility.

      The Tranche A, B and C Loans are payable quarterly over five years with the outstanding principal and interest at 10%, due and payable on the final maturity date. Principal and interest, at the prime rate (as defined) plus 1%, on the Tranche D Loan is payable on the final maturity date. The Company is required to make monthly payments of interest only on the Tranche E Loan in the first year. In years two through five, the Company must make monthly principal and interest payments. Quarterly principal and interest payments on the Tranche A, B and C Loans may be paid through preferred pricing reductions received from Siemens by HearUSA as long as the Company purchases certain minimum percentages of its requirements of hearing aids from Siemens. During 2004, 2003 and 2002, approximately $3.6 million, $3.9 million and $3.8 million of earned preferred pricing reductions were recorded as a reduction of cost of products sold. In 2004, 2003 and 2002, $720,000, $1.0 million and $1.3 million of interest payable, and $2.9 million, $2.9 million and $3.1 million of principal, respectively, has been paid through such preferred pricing reductions. (See Note 6, Notes to Consolidated Financial Statements) The Company is also required to make additional payments on the Tranche D Loan under the following conditions: The Company must make a payment equal to 25% of net proceeds it receives from the issuance of stock or stock equivalents. In addition, within 120 days of any fiscal year end, the Company must make a payment equal to 20% of Excess Cash Flow (as defined in the credit agreement) for such fiscal year end. The total of payments in 2005 based on 2004 Excess Cash Flow is estimated to be approximately $220,000, which is included as a current maturity of Tranche D.

      The Siemens’ credit facility imposes certain financial and other covenants on the Company, which are customary for loans of this size and nature, including restrictions on the conduct of the Company’s business, the occurrence of indebtedness, merger or sale of assets, the modification of material agreements, changes in capital structure, making certain payments and paying dividends. If the Company cannot maintain compliance with these covenants, Siemens may terminate future funding under the credit facility and declare all then outstanding amounts under the facility immediately due and payable. Also, the Company’s supply agreement with Siemens requires full payment for hearing aids purchased from Siemens within 60 days from statement date. As of December 25, 2004, the Company was in compliance with those payment provisions. Upon noncompliance, Siemens may declare the Company to be in default of the supply agreement by written notification, which, if not cured within 60 days of the date of written notification, would be an event of default under the Company’s credit facility with Siemens and Siemens would have the right to declare all amounts outstanding under the credit facility immediately due and payable. Any non-compliance with the supply agreement could have a material adverse effect on the Company’s financial condition and continued operations.

      During 2004, the working capital deficit increased $2.6 million to $4.9 million from a negative $2.3 million as of December 27, 2003. This increase is mainly due to an excess in the cash flow used for financing and investing activities over cash flow generated from operations. The working capital deficit of $4.9 million includes approximately $2.9 million representing the current maturities of the long-term debt to Siemens for Tranche A, B and C, which may be repaid through preferred pricing reductions. In 2004, the Company generated income from operations of approximately $1.8 million compared to $1.9 million in 2003. Cash and cash equivalents as of December 25, 2004 were approximately $2.6 million.

      Net cash from operating activities improved from approximately $4.8 million used in 2003 to approximately $45,000 generated in 2004. This improvement was primarily the result of a net decrease in accounts receivable, inventories and prepaid expenses of approximately $345,000 in 2004, compared to a net increase of approximately $750,000 in 2003, and a net decrease in accounts payable, accrued expenses, accrued salaries and other compensation of approximately $220,000 in 2004, compared to a net decrease of approximately $4.9 million in 2003. The decrease in the changes in accounts payable and accrued expenses from 2003 to 2004 is attributable to the payment of approximately of $3.8 million of additional Siemens trade payables during 2003 made in order to comply with the original terms of the supply agreement. This improvement in net cash used in operating activities due to changes in non-cash current assets and liabilities was offset by a decrease in the Company’s cash flow from operations before changes in non-cash current assets and liabilities of approximately $1.4 million from 2003 to 2004.

      Accounts receivable increased approximately $398,000 from December 27, 2003 to December 25, 2004 due to the increase in net revenues of approximately $1.9 million from the fourth quarter 2003 to the fourth quarter of 2004. Prepaid expenses decreased approximately $638,000 from December 27, 2003 to December 25, 2004 due to reclassifications and the amortization of prepaid expenses. Accounts payable and accrued expenses decreased approximately $482,000 and accrued salaries and other compensation increased approximately $262,000 from December 27, 2003 to December 25, 2004 due to timing in payments.

      Net cash from investing activities decreased from approximately $1.4 million provided in 2003 to approximately $278,000 used in 2004. This decrease is due to approximately $1.9 million received in 2003 related to the discontinued operations compared to only $105,000 in 2004. (See Note 18 of the Consolidated Financial Statements herein.)

      Net cash from financing activities decreased from approximately $7.8 million provided in 2003 to net cash used of approximately $4.0 million in 2004. This decrease is mainly attributable to net proceeds from financings in 2003 of approximately $10.2 million compared to only $500,000 in 2004 and an increase in repayment of long term debt of approximately $2.2 million from 2003 to 2004. The increase in repayment of long-term debt is primarily due to special payments of $1.8 million to Siemens in January 2004 under the credit agreement (See Note 7 — Notes to the Consolidated Financial Statements, included herein). During 2004 and 2003, $2.9 million each year of preferred pricing reductions were applied against principal payments due on Tranches A, B and C. These payments, being non-cash, are not presented as principal repayments on long-term debt in the consolidated statements of cash flows.

      The Company believes that current cash and cash equivalents and cash flow from operations, at current net revenue levels, will be sufficient to support the Company’s operational needs through the next twelve months, although there can be no assurance that the Company can maintain compliance with the Siemens’ loan covenants, that net revenue levels will remain at or higher than current levels or that unexpected cash needs will not arise for which the cash, cash equivalents and cash flow from operations will not be sufficient. In the event of a shortfall in cash, the Company might consider short-term debt, or additional equity or debt offerings. There can be no assurance

however, that such financing will be available to the Company on favorable terms or at all. The Company also is continuing its aggressive cost controls and sales and gross margin improvements.

      Below is a chart setting forth the Company’s contractual cash payment obligations, which have been aggregated to facilitate a basic understanding of the Company’s liquidity as of December 25, 2004.

Payments Due by Period

      Also, the Company expects using a range of $150,000 to $700,000 in cash in 2005 to replace existing computers and equipment as well as for center relocations upon lease expirations.

CRITICAL ACCOUNTING POLICIES

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

Goodwill

      The majority of the Company’s goodwill resulted from the combination with Helix. On at least an annual basis, the Company is required to assess whether its goodwill is impaired. The Company elected to perform this analysis on the first day of its fourth quarter. In order to do this, management applied judgment in determining its “reporting units”, which represent distinct parts of the Company’s business. The reporting units determined by management are the centers, the network and e-commerce. The definition of the reporting units affects the Company’s goodwill impairment assessments. The annual goodwill impairment assessment involves estimating the fair value of a reporting unit and comparing it with its carrying amount. If the carrying value of the reporting unit exceeds its fair value, additional steps are required to calculate a potential impairment charge. Calculating the fair value of the reporting units requires significant estimates and long-term assumptions. The Company utilized an independent appraisal firm to test goodwill for impairment as of the first day of the Company’s fourth quarter during 2004 and 2003, and each of these tests indicated no impairment. The Company estimates the fair value of its reporting units by applying a weighted average of three methods: quoted market price, external transactions, and discounted cash flow. Significant changes in key assumptions about the business and its prospects, or changes in market conditions, stock price, interest rates or other externalities, could result in an impairment charge.

Revenue recognition

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

      The Company has capitation contracts with certain health care organizations under which the Company is paid an amount for each enrollee of the health maintenance organization to provide to the enrollee a once every three years discount on certain hearing products and services. The amount paid to the Company by the healthcare organization is calculated on a per-capita basis and is referred to as capitation revenue. Capitation revenue is earned as a result of agreeing to provide services to members without regard to the actual amount of service provided; revenue is recorded in the period that the beneficiaries are entitled to hearing care services.

Allowance for doubtful accounts

      Certain of the accounts receivable of the Company are from health insurance and managed care organizations and government agencies. These organizations could take up to nine months before paying a claim made by the Company and also impose a limit on the time the claim can be billed. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. That estimate is based on historical collection experience, current economic and market conditions, and a review of the current status of each customer’s trade accounts receivable.

      In order to calculate that allowance, the Company first identifies any known uncollectible amounts in its accounts receivable listing and charges them against the existing allowance for doubtful accounts. Then a specific percent per plan and per aging categories is applied against the remaining receivables to estimate the needed allowance. Any changes in the percent assumptions per plan and aging categories results in a change in the allowance for doubtful accounts. For example, an increase of 10% in the percent applied against the remaining receivables would increase the allowance for doubtful accounts by approximately $22,000.

Sales returns

      The Company provides to all patients purchasing hearing aids a specific return period of at least 30 days if the patient is dissatisfied with the product. The Company provides an allowance in accrued expenses for returns. The return period can be extended to 60 days if the patient attends the Company’s H.E.L.P. program. The Company calculates its allowance for returns using estimates based upon actual historical returns. The cost of the hearing aid is reimbursed to the Company by the manufacturer.

RECENT ACCOUNTING PRONOUNCEMENT

      In December 2004, SFAS No. 123®, “Share-Based Payment,” which addresses the accounting for employee stock options, was issued. SFAS No. 123® revises the disclosure provisions of SFAS 123, “Accounting for Stock Based Compensation” and supercedes APB Opinion 25, “Accounting for Stock Issued to Employees.” SFAS 123® requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in the financial statements based on the estimated fair value of the awards. This statement is effective for all public entities who file as of the beginning of the first interim period that begins after June 15, 2005. The Company plans to implement SFAS 123® on its effective date. Based on the outstanding number of employee stock options and excluding the impact of any future grants at December 25, 2004, the total stock-based employee compensation expense determined under the fair value method that would be reflected in the financial statements is approximately $887,000 in 2004 (See Note 1 Description of the Company and Summary of Significant Accounting Policies — stock-based compensation) and $1,425,000 in 2005.

Forward Looking Statements

      This Annual Report on Form 10-K and, in particular, this management discussion and analysis contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. These statements include those relating to the Company’s belief that it could obtain comparable products from other manufacturers in the event of a disruption of supply from Siemens and that its current cash and cash equivalents and cash flow from operations at current net revenue levels will be sufficient to support the Company’s operational needs through the next twelve months. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions. Any statements that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included in this report. The statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. We do not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

      The Company does not engage in derivative transactions. The Company does become exposed to foreign currency transactions as a result of its operations in Canada. The Company does not hedge such exposure. Differences in the fair value of investment securities are not material; therefore, the related market risk is not significant. The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s long-term debt and convertible

subordinated notes. The following table presents the Company’s financial instruments for which fair value and cash flows are subject to changing market interest rates:

Long-Term Debt and Convertible Subordinated Notes

Item 8.     Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

Board of Directors

HearUSA, Inc.

West Palm Beach, Florida

We have audited the accompanying consolidated balance sheets of HearUSA, Inc. as of December 25, 2004 and December 27, 2003, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 25, 2004. We have also audited the schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HearUSA, Inc. at December 25, 2004 and December 27, 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 25, 2004 in conformity with accounting principles generally accepted in the United States of America.

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

BDO Seidman, LLP

West Palm Beach, Florida
February 1, 2005

HearUSA, Inc.

Consolidated Balance Sheets

See accompanying notes to consolidated financial statements

HearUSA, Inc.

Consolidated Statements of Operations

See accompanying notes to consolidated financial statements

HearUSA, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

See accompanying notes to consolidated financial statements

HearUSA, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

See accompanying notes to consolidated financial statements

HearUSA, Inc.

Consolidated Statements of Cash Flows

See accompanying notes to consolidated financial statements

HearUSA, Inc.

Consolidated Statements of Cash Flows

See accompanying notes to consolidated financial statements

HearUSA, Inc.

Notes to Consolidated Financial Statements

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

The Company

      HearUSA Inc. (“HearUSA” or “the Company”), a Delaware corporation, was organized in 1986. As of December 25, 2004, the Company has a network of 154 company-owned hearing care centers in 11 states and the Province of Ontario, Canada. The Company also sponsors a network of approximately 1,400 credentialed audiology providers that participate in selected hearing benefit programs contracted by the Company with employer groups, health insurers and benefit sponsors in 49 states. The centers and the network providers provide audiological products and services for the hearing impaired.

Basis of Consolidation

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

      During 2004 and 2003, HEARx West generated net income of approximately $1,385,000 and $723,000. The HEARx West members’ deficit decreased from approximately $4,591,000 at the end of 2003 to approximately $3,206,000 at the end of 2004. According to the Company’s agreement with the Permanente Federation, the Company included in its statement of operations 100% of the losses incurred by the venture since its inception and will receive 100% of the net income of the venture until the members’ deficit is eliminated. At such time as the members’ deficit is eliminated and the venture continues to be profitable, the Company will begin recording a minority interest, corresponding to 50% of the venture’s net income, as an expense in the Company’s consolidated statement of operations and with a corresponding liability on its consolidated balance sheet.

Investment in Affiliated Company

      Prior to the closing of the combination with Helix in July 2002, the Company owned approximately 10.5 percent of the common stock of Helix. The Company accounted for this investment using the equity method because the Company had the ability to exercise significant influence over the operational and financial policies of Helix as a result of the terms of the merger agreement with Helix and the use of certain proceeds of the Company’s credit facility with Siemens to repay certain debts of Helix. Under the equity method, the Company recorded its proportionate share of profits and losses of the affiliated company based on its percentage interest in the affiliated company.

Foreign Currency Translation

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

Comprehensive Income (Loss)

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

HearUSA, Inc.

Notes to Consolidated Financial Statements — (Continued)

Fiscal year

      The Company’s fiscal year ends on the last Saturday in December and customarily consists of four 13-week quarters for a total of 52 weeks. Every sixth year includes 53 weeks and the next year with 53 weeks will be 2005. The additional week will be included in the first quarter of 2005.

Concentration of credit risk

      The Company maintains its cash deposits at commercial banks. We place our cash and cash equivalents with high quality financial institutions. At times, our account balances may exceed federally insured limits. Management believes the Company is not exposed to any significant risk on its cash accounts.

Investment securities

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

Allowance for doubtful accounts

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

Inventories

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

Property and equipment

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

Goodwill and other intangible assets

      Under Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, effective in 2002 goodwill amortization ceased and is subject to impairment assessments. A fair-value-based test is applied at the reporting unit level. This test requires various judgments and estimates. A goodwill impairment loss would be recorded for any goodwill that is determined to be impaired. The Company utilized an independent appraisal firm to test goodwill for impairment as of the first day of the Company’s fourth quarter during 2003 and 2004, and each of these tests indicated no impairment. Other intangible assets include finite lived intangible assets, such as patient files and customer lists, which are amortized over the estimated useful life of the assets of 15 years, generally based upon estimated undiscounted future cash flows resulting from use of the asset. Indefinite lived assets include trademarks and trade names, which are not amortized.

HearUSA, Inc.

Notes to Consolidated Financial Statements — (Continued)

Pre-opening costs

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

Long-lived assets – impairments and disposals

      The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable through the estimated undiscounted future cash flows resulting from the use of these assets. At December 25, 2004 and December 27, 2003, no long-lived assets were held for disposal and no impairment losses were recorded in the statement of operations.

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

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

Advertising Costs

      Costs for newspaper, television, and other media advertising are expensed as incurred and were $5,785,000, $4,797,000 and $5,596,000 in 2004, 2003, and 2002, respectively.

Sales return policy

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

Warranties

      The Company provides its patients with warranties on hearing aids varying from one to three years. The first year on the warranty is always covered by the manufactures’ warranty. The warranties provided for the second and third years always require a co-payment from the patients, usually covering the cost of the repair or replacement to the Company. When the cost of repair or replacement to the Company is estimated to exceed the patient co-pay, the Company provides an allowance in accrued expenses to cover the future excess cost, such amounts have been minimal historically.

Revenue Recognition

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

HearUSA, Inc.

Notes to Consolidated Financial Statements — (Continued)

      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 discount on certain hearing products and services. The amount paid to the Company by the healthcare organization is calculated on a per-capita basis and is referred to as capitation revenue. Capitation revenue is earned as a result of agreeing to provide services to members without regard to the actual amount of service provided. Revenue is recorded in the period that the beneficiaries are entitled to health care services.

Income taxes

      Deferred taxes are provided for temporary differences arising from the differences between financial statement and income tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates. Valuation allowances are established when necessary to reduce deferred tax assets and liabilities to amounts considered more likely than not to be realized.

Net loss per common share

      Net loss per common share is calculated in accordance with SFAS No. 128 “Earnings Per Share” which requires companies to present basic and diluted earnings per share. Net loss per common share — basic is based on the weighted average number of common shares outstanding during the year. Net loss per common share — diluted is based on the weighted average number of common shares and dilutive potential common shares outstanding during the year. Under the if-converted method, securities are assumed to be converted at the beginning of the period and the resulting common shares are included in the denominator of the diluted earnings per share calculation for the entire period presented. Convertible preferred stock, stock options and stock warrants are excluded from the computations of net loss per common share because the effect of their inclusion would be anti-dilutive.

      Due to the Company’s net losses, the following common stock equivalents for convertible debt, mandatorily redeemable convertible preferred stock, outstanding options and warrants to purchase common stock, of 9,738,372, 18,984,654 and 12,965,555, respectively, were excluded from the computation of net loss per common share — diluted at December 25, 2004, December 27, 2003 and December 28, 2002 because they were anti-dilutive. For purposes of computing net loss per common share — basic and diluted, for the years ended December 25, 2004 and December 27, 2003, the weighted average number of shares of common stock outstanding includes the effect of the 892,872 and 1,418,848, respectively, exchangeable shares of HEARx Canada, Inc. described in Note 5, as if they were outstanding common stock of the Company on June 30, 2002, the effective date of the combination for financial reporting purposes.

Stock-based compensation

      The Company has granted stock options to employees and directors under stock option plans that are more fully described in Note 10. The Company accounts for those plans using the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. No stock-based employee compensation cost has been reflected in net loss, as all options granted under those plans had an exercise price greater than or equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS

HearUSA, Inc.

Notes to Consolidated Financial Statements — (Continued)

No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation (See Note 17 Recent Accounting Pronouncement):

      For purposes of the above disclosure, the determination of the fair value of stock options granted in 2004, 2003 and 2002 was based on the following: (i) a risk free interest rate of 4.16%, 2.90% and 3.29% respectively; (ii) expected option lives ranging from 5 to 10 years; (iii) expected volatility in the market price of the Company’s common stock of 92%, 98% and 95% respectively; and (iv) no dividends on the underlying common stock.

Statements of Cash Flows

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

Estimates

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

Reclassifications

      Certain amounts in the 2003 and 2002 financial statements have been reclassified in order to conform to the 2004 presentation.

2.     Cash and Cash Equivalents and Investment Securities

Restricted cash and investment securities

      During the year ended December 25, 2004 a certificate of deposit for $285,000 matured. The bank currently requires that the Company maintain this balance in its operating account.

HearUSA, Inc.

Notes to Consolidated Financial Statements — (Continued)

      Investment securities available for sale at December 25, 2004 and December 27, 2003 consist of certificates of deposit of $150,000 and $435,000.

      At December 25, 2004, certificates of deposit of $150,000 with contractual maturities with in one year or less were pledged as collateral to a financial institution for automated clearing house exposure.

3. Property and Equipment and Leases

      Property and equipment consists of the following:

      The Company leases facilities primarily for hearing centers. These are located in retail shopping areas having terms expiring at various dates through fiscal 2010. The Company recognizes rent expense on a straight line basis over the lease term. The lease term is determined on the date the lease is executed and includes only the original term of the lease and does not include renewal options. The leases have renewal clauses of 1 to 10 years at the option of the Company. The difference between the straight-line and cash payments, which is due to escalating rents in the lease contracts, is included in accrued expenses in the accompanying consolidated balance sheet. Equipment and building rent expense under operating leases in 2004, 2003 and 2002 was approximately $6,198,000, $6,237,000 and $5,351,000, respectively.

      Approximate future minimum rental commitments under operating leases are as follows: $5,977,000 in 2005; $3,857,000 in 2006; $2,489,000 in 2007; $1,807,000 in 2008; $849,000 in 2009 and $ 394,000 thereafter.

4.     Goodwill and Intangible Assets

      A summary of changes in the Company’s goodwill during the years ended December 25, 2004 and December 27, 2003, by business segment are as follows:

HearUSA, Inc.

Notes to Consolidated Financial Statements — (Continued)

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