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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


|           |  |                                                                                                         
|---------- |  | --------------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                         
|x          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
        OF THE SECURITIES EXCHANGE ACT OF 1934            
|          
|           |  | For the fiscal year ended December 29,
        2001                                                     
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
        15(d)
        OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
        from          to                                                      

Commission file number 0-16453



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HEARx LTD.

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

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

|                                      |  |                                          
|------------------------------------- |  | -----------------------------------------
|Title of each class                   |  | Name of each exchange on which registered
|                                      |  |                                          
|Common Stock, par value .10 per share |  | American Stock Exchange                  

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

None


Indicate by check þ 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 Incorporation or
Organization) filing requirements for the past
90 days.     Yes þ          No o



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Indicate by check þ 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

As of March 18, 2002, the aggregate market value of the
Registrants Common Stock held by non-affiliates (based
upon the closing price of the Common Stockon the American Stock
Exchange) was approximately $17,550,948.

On March 18, 2002, 14,040,759 shares of the Registrants
common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrants definitive Proxy Statement for the
2002 Annual Meeting of the Registrants Stockholders
(2002 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

HEARx Ltd. (HEARx or the Company)
operates a network of owned and operated hearing care centers
that provide a full range of audiological products and services
for the hearing impaired. HEARx serves three geographic markets:
Florida (including Miami, Fort Lauderdale, West Palm Beach,
Tampa and Orlando), the Northeast (including New York
metropolitan area and New Jersey) and California, through its
joint venture HEARx West LLC, (including Los Angeles and San
Diego). The Companys strategy for increasing market
penetration includes advertising to the non-insured self-pay
market and positioning itself as the leading provider of hearing
care to the managed care marketplace in its 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 consumers. HEARx believes that such
success results from its ability to offer convenient
distribution points, a quality assurance program and centers
with standardized credentialing, procedures, policies, testing,
formats, products, prices and ancillary services.

The Company and its subsidiary HEARx West LLC (HEARx
West), a joint venture with Kaiser Permanente, currently
receive a per-member-per-month fee for more than
1.3 million managed care members. In total, HEARx services
over 170 benefit programs for hearing care with various health
maintenance organizations (HMOs), preferred
provider organizations (PPOs), insurers,
benefit administrators, and healthcare providers. In recent
years, the Company has increased its attention to the self-pay
market, focusing on advertising and marketing programs directed
to the uninsured patient. The Company intends to increase its
sales to these patients, introducing competitive price points to
the public through advertising and marketing programs that
include newspaper ads, direct mail, and telemarketing.

HEARx was incorporated in Delaware on April 11, 1986. HEARx
formed its joint venture, HEARx West, with Kaiser Permanente in
1998.

HEARx Canada Inc. is an indirect subsidiary of HEARx. HEARx
Canada was incorporated under the laws of Canada on
November 7, 2001, for the sole purpose of participating in
the pending transaction between HEARx and Helix Hearing Care of
America Corp. (Helix) described below.

HEARx Acquisition ULC is a wholly owned subsidiary of HEARx.
HEARx Acquisition ULC is an unlimited liability company formed
under the laws of the Province of Nova Scotia, on
October 3, 2001, for the sole purpose of participating in
the Helix transaction. HEARx Acquisition ULC holds all the
outstanding common shares of HEARx Canada Inc.

Facilities and Services

Each HEARx center is staffed or supervised by a minimum of one
professionally trained, licensed and certified audiologist and
at least one patient care coordinator. In some cases, HEARx
employs a licensed hearing aid dispenser to staff centers along
with an audiologist and/or under an audiologists
management oversight. The majority of the Companys centers
are located in conveniently accessible strip shopping centers
and are typically 1,500 to 3,000 square feet in size. The
Companys goal is to have all centers virtually identical
in interior space design, exterior marking and signage. This
uniform appearance helps reinforce the consistent service and
quality the Company strives to provide to patients at all
locations. Each center provides comprehensive hearing services
that include:

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| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A facility equipped with soundproof testing booths and
        state-of-the-art testing equipment that meets and sometimes
        exceeds applicable state standards.
|
| |  | A family hearing counseling program available to all patients to
        help them better understand the use of their hearing products
        and their disability.  
|
| |  | A wide variety of hearing aid devices and technology types to
        meet patient needs.                                                                             
|
| |  | A standardized medical reporting system for feedback to the
        referring physicians.                                                                             

In addition, in each market HEARx operates several centers which
offer a full range of diagnostic and auditory-vestibular tests
that assist in the treatment of patients with hearing and
balance disorders. In most cases, HEARx charges for such
diagnostic services are billable to healthcare insurers,
patients, Medicare or state Medicare programs.

Helix Transaction

On July 27, 2001, HEARx and Helix, signed a definitive
merger agreement which was subsequently amended and restated as
of November 6, 2001. Helix owns or manages 128 hearing
healthcare clinics located in Massachusetts, Pennsylvania, New
York, Ohio, Michigan, Wisconsin, Minnesota, Washington and
Missouri as well as in the Provinces of Ontario and Quebec.
Pursuant to the merger agreement, HEARx has agreed, subject to
stockholder, regulatory and other necessary approvals, to issue
shares of HEARx common stock and common stock equivalents (in
the form of exchangeable shares) to the holders of Helix common
shares in exchange for those shares. The transaction would
result in Helix becoming an indirect wholly owned subsidiary of
HEARx. At the effective time of the merger, each outstanding
share of Helix common stock would be converted into the right to
receive .3537 shares of HEARx common stock or .3537 exchangeable
shares of a newly formed wholly owned Canadian subsidiary of
HEARx, HEARx Canada Inc. Based on the number of Helix common
shares outstanding as of March 14, 2002, up to
14.61 million shares of HEARx common stock or exchangeable
shares will be issued to Helix shareholders in connection with
the transaction. The exchangeable shares are initially
exchangeable into one share of HEARx common stock at the
election of the holder.

The boards of directors of both companies have approved the
transaction. The transaction is now subject to approval by the
stockholders of both HEARx and Helix and by the Canadian courts.
HEARx has filed a registration statement/proxy statement on
Form S-4 with the U.S. Securities and Exchange Commission
(SEC) relating to the Helix transaction and the
Form S-4 is currently undergoing the SEC review process.
The transaction is expected to close before the end of the
second quarter of 2002. After the transaction, the Company
intends to change its name to Hear USA, Inc. Hear
USA, Inc. intends to continue to list its common stock on the
American Stock Exchange under the symbol EAR. The Company has
also applied to list its common stock and the exchangeable
shares on the Toronto Stock Exchange.

Siemens Transaction

On April 23, 2001, HEARx and Siemens Hearing Instruments,
Inc. (Siemens) signed a letter of intent pursuant to
which the parties intended to form a marketing and promotional
alliance in the United States. As part of this letter of intent,
Siemens agreed to provide HEARx with a five-year
$7.5 million line of credit with interest at 12%, payable
quarterly. These terms of the letter of intent relating to the
$7.5 million line of credit became binding on
April 27, 2001, when HEARx first drew on the line of
credit. On December 7, 2001, HEARx and Siemens entered into
the credit agreement and supply agreement described below, which
superseded the letter of intent.

The credit agreement executed on December 7, 2001 provides
a $51,875,000 secured credit facility from Siemens. The credit
facility is comprised of (a) a $10,875,000 secured
five-year term loan credit facility; (b) a $25,000,000
secured five-year revolving loan credit facility; (c) a

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$3,000,000 secured five-year term loan facility; and (d) a
$13,000,000 secured five-year term loan credit facility. Each of
the loans contemplated by the credit facility have certain
restrictions and related covenants.

At December 29, 2001, HEARx was in compliance with all such
covenants. If HEARx cannot maintain compliance with these
requirements, Siemens may decline to make funds available to
HEARx. Furthermore, if HEARx and Helix do not complete the
merger arrangement, approximately $6.7 million of the
credit facility may not be accessible to HEARx at all. The
credit facility is secured by a first priority security interest
in substantially all of the assets of HEARx.

In connection with the credit facility, HEARx and Siemens
entered into a supply agreement dated as of December 7,
2001, pursuant to which HEARx agreed to purchase from Siemens
certain minimum percentages of HEARxs hearing aid
purchases for a period of ten years (an initial five year term
and a five year renewal term) at specified prices.

Pursuant to the agreements with Siemens, in the event of a
change of control of the Company (as defined) and the surviving
entity of such change of control does not assume the
Companys obligations under the agreements, the entire
outstanding amounts under the credit facilities will be
immediately due and payable and the supply arrangements may be
terminated upon payment to Siemens of a $50 million breakup
fee.

National Ear Care Plan Transaction

On November 16, 2001, HEARx 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 is secured
by substantially all of the assets of NECP, bears interest at a
rate of 12% per annum and matures on November 16, 2002. On
January 10, 2002, HEARx loaned to Helix an additional
$2 million to complete the NECP transaction. On
January 14, 2002, HEARx and Helix entered into a
subscription agreement pursuant to which HEARx 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. HEARx obtained the $2.7 million
to loan to Helix, and later to convert into the common shares
purchase by taking an advance under the HEARx credit facility
with Siemens. Upon consummation of the purchase of the 4,853,932
Helix common shares, HEARx became a greater than 10% owner of
Helix common shares.

See Operations  Network below for a
description of how the NECP transaction relates to the
implementation of the Companys business plans.

Products

HEARx has selected a range of hearing aids, assistive listening
devices and other products to provide the best possible hearing
care for HEARx patients, including the latest digital
technology. While HEARx may order a hearing aid from any
manufacturer, it is likely the majority of the hearing aids sold
by HEARx will be manufactured by Siemens and its subsidiary
Rexton. HEARx will also sell hearing aids manufactured by Phonak
and Unitron.

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

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Marketing

HEARxs marketing plan focuses on:



| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Newspaper and Broadcast Advertising: HEARx places print ads and
        broadcast commercials in its markets promoting different hearing
        aids at a variety of technology levels and prices. Advertising
        also emphasizes the need to seek help for hearing loss as well
        as the qualitative differences and advantages offered by HEARx.                               
|
| |  | Direct Marketing: Utilizing HEARxs database, HEARx makes
        direct mailings and offers free seminars on hearing and hearing
        loss.                                                                                                                                                                                                                                              
|
| |  | Physician Marketing: HEARx attempts to educate both physicians
        and their patients on the need for regular hearing testing and
        the importance of hearing aids and other assistive listening
        devices. HEARx works to further its image as a provider of
        highly professional services, quality products, and
        comprehensive post-sale consumer education.
|
| |  | Telemarketing: HEARx has developed a national call center, which
        covers all HEARx centers. The national call center is
        responsible for both inbound and outbound telemarketing.                                                                                                                                                                                              

For the fiscal years 2001, 2000 and 1999, HEARx revenues were
$48,796,110, $56,114,832 and $47,476,764, respectively. During
2001 and 1999, the Company did not have sales totaling 10% or
more of total net sales to a single customer. In 2000, the
Company had sales of 10% or more of consolidated revenues to a
single customer of approximately $5.7 million, or 10.2%, to
Kaiser Permanente Health Plan.

Operations

Company-owned Centers

At the end of 2001, the Company operated a total of 80 centers
and 2 part-time centers located in Florida, New York, New Jersey
and through HEARx West in California. The Companys long
term goal, where the population warrants, is to open
clusters of four to six Company-owned centers within
a city or county in the Companys primary markets in order
to take advantage of certain operational and marketing
efficiencies created by having multiple locations within a
particular region. These efficiencies relate principally to
advertising and marketing of the centers as well as to personnel
recruiting and supervision for the centers.

Network

During 2001, the Company began participating with Siemens in the
development of a network of independent hearing care providers.
The development of the network expanded to include Helix once
the Company and Helix had signed their letter of intent to
merge. As part of the merger arrangement with Helix, this
network is to be called the HearUSA Advantage Network
(Network). On November 15, 2001 Helix acquired
NECP, a hearing care benefit administrator for large companies,
insurance providers, employer sponsored plans and affinity
groups with a network of 1,300 affiliated audiologists. The NECP
network has now become part of the HearUSA Advantage Network.
Currently, the Network is comprised of 2000 providers
(audiologists) located in every state throughout the United
States except Alaska and approximately 300 newly recruited
audiologists and hearing aid dispensers. Unlike the
Companys owned and operated hearing centers, the Network
business is comprised of hearing care practices owned by
independent operators with whom the Network (now owned by Helix
and jointly operated by HEARx) has

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contracted to provide certain services. Among the services
offered are group buying, practice management services,
marketing co-op arrangements, and HMO, affinity group and
insurance contracts. Although there is strong interest among
independent practitioners in the network, there can be no
assurance that the Network will generate enough revenue for it
to be an economically viable business.

Joint Venture

During August 1998, HEARx formed HEARx West, a joint venture
with the Permanente Federation LLC (an affiliate of Kaiser
Permanente) to create and operate a network of retail centers to
serve the needs of the hearing impaired principally in
California. The joint venture agreement provides for a 50/50
ownership by HEARx and Kaiser Permanente, with the centers
bearing the HEARx name. HEARx is responsible for the daily
operation of the centers, however all clinical and quality
issues are the responsibility of a joint committee comprised of
HEARx and Permanente clinicians.

During 2001, 2000 and 1999, HEARx West centers concentrated on
providing hearing aids and diagnostic audiology testing to
Kaiser Permanentes members and self-pay patients in the
state of California. At the end of 2001, HEARx operated 20
full-time and 2 part-time HEARx West centers in southern
California.

In September 2001, HEARx and Kaiser Permanente amended their
joint venture agreement. Previously, HEARx West had a right of
first refusal on business opportunities in all U.S. markets
except Florida, New Jersey and Pennsylvania. HEARx West now has
the first right of refusal for any geographic expansion
opportunities for new HEARx centers only in Southern California;
Atlanta, Georgia; Hawaii; Denver, Colorado; Portland, Oregon;
Cleveland, Ohio; Washington, DC and Baltimore, Maryland. In
addition, should HEARx 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 HEARx an equivalent value for any of the centers it
acquires.

Managed Care and
Institutional Contracts

Since the beginning of 1991, the Company has entered into
arrangements with institutional buyers relating to the provision
of hearing care products and services. HEARx believes that
contractual relationships with institutional buyers of hearing
aids are essential. These institutions include managed care
companies, health maintenance organizations, insurance
companies, 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 is the availability of distribution
sites, quality control and the standardization of products and
services. The Company believes its system of high quality,
uniform centers meets the needs of the patients and their
providers.

HEARx enters into provider agreements with health insurance or
managed care organizations for the furnishing of hearing care on
three different basis: (a) fee for service basis based on a
contractual rate offered by HEARx to providers members
(all paid for by the patient); (b) a per capita basis,
which is a fixed payment per patient per month from the provider
to HEARx, determined by the number of patients to be served and
the amount to be paid by the insurance or managed care
organization (the balance is paid by the individual member); or
(c) an encounter basis where HEARx is paid a fixed fee by
the insurance or managed care organization for each hearing aid
sold (with the balance paid to HEARx by the individual member).

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Renewal of Agreements with Health Insurance and Managed Care
Organizations

The terms of most of these agreements are to be renegotiated
annually, and most of these agreements may be terminated by
either party on 90-days notice at any time. 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 which 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 is not
aware of any likely contract terminations at this time.

Effective at the beginning of the calendar year for each 2000,
2001 and 2002, several insurance companies with which the
Company had contracts significantly changed their contract
benefits or service areas. While some insurance companies
increased their Medicare benefits, others either limited or
discontinued hearing benefits for Medicare patients. The Company
believes these changes will not have a long-term material
adverse effect on the Companys financial condition or
results of operations. The Company also believes that the loss
of any single managed care contract will not have a long term
material adverse effect on its financial condition or results of
operations.

Distinguishing Features

Integral to the success of HEARxs strategy is the
strengthening of consumer confidence in the hearing care
industry and the differentiation of HEARx from its competitors.
To that end, the Company has accomplished several unique
objectives, which are highlighted below.

Joint Commission on
Accreditation of Healthcare Organizations (JCAHO)

During 1998, the Company distinguished itself from other hearing
care providers by being awarded a three year accreditation from
the Joint Commission on Accreditation of Healthcare
Organizations (JCAHO). The Company applied and was granted
renewal of this accreditation effective February 13, 2002.
To achieve accreditation, the Company was required to meet
national standards addressing the rights and responsibilities of
persons enrolled in the network; organizational ethics;
providing a continuum of care; educating and communicating with
enrollees; leadership; management of information; and improving
network performance.

Scientific Advisory
Board

HEARx has formed a Scientific Advisory Board consisting of some
of the leading experts in otolaryngology and audiology in an
effort to instill consumer confidence. Each of the five members
of the Scientific Advisory Board is a highly trained
professional with extensive experience in the hearing field and
is affiliated with a prestigious university and/or institution.
Company officials consult with members of this Board to keep the
Company abreast of developments in otolaryngology and audiology
and for advice as to the Companys overall business
strategy. Additionally, the Scientific Advisory Board meets
annually to review corporate planning and discuss improvements
in any of the services or products which the Company offers. The
Scientific Advisory Board also advises the Company with respect
to the introduction of new or improved services or products,
assists the Company in developing and reviewing quality
assurance programs, and advises the Company as to the effect of
any proposed or existing regulatory activity upon customers of
the Company.

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The current members of the Scientific Advisory Board and field
with respect to which each consults with the Company are listed
below:

Hearing Testing

| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | James Jerger, Ph.D. 
         Professor of Audiology 
         University of Texas at Dallas 
         Dallas, TX

Patient Satisfaction and Outcomes

| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | Lucille Beck, Ph.D. 
         Director of Audiology and Speech Pathology Services 
         VA Medical Center 
         Washington, D.C.

Medical Relations

| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | Bruce J. Gantz, M.D. 
         Department Chairman of Otolaryngology 
         University of Iowa Hospitals and Clinics 
         Iowa City, IA

Hearing Aids and Devices

| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Charles I. Berlin, Ph.D. 
         Professor of Otorhinolaryngology & Biocommunications 
         Louisiana State University 
         Director, Kresge Hearing Research Laboratory of the South 
         New Orleans, Louisiana

Professional and Government Relations

| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Derald Brackmann, M.D. 
         House Ear Clinic, Inc. 
         Clinical Professor of Otolaryngology 
         University of Southern California 
         Los Angeles, California

Center Management
System, Medical Reporting and HEARx Data Link

The Company has developed a proprietary center management and
data system called the Center Management System
(CMS). CMS primarily has two functions: to manage
patient information and to process point-of-sale customer
transactions. The CMS system is operated over a wide area
network (installed in 2001) that links all locations with the
corporate office. The Company is developing further capabilities
for the wide area network.

The Companys corporate system is tightly 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
center and at the central facility. The consolidated data
repository is constructed to support revenues in excess of
$550 million to accommodate 200 unique business units and
to manage 500,000 new patients annually.

One of the outputs of CMS is a computerized medical reporting
system that gives referring physicians the results of, and
recommended action for every patient examined by HEARx. To the
Companys knowledge, no other dispenser or audiologist
presently offers any referring physician similar documentation.
The Company believes that as hearing acuity and

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correction become an expected part of an individuals
health profile, accurate records of past audiological test
results, prescriptions and pathology should be available and
accessible to those treating the patients.

Competition

The U.S. hearing care industry is highly fragmented with
approximately 11,000 practitioners providing testing and
dispensing products and services. Roughly 3,000 of these
practitioners are audiologists working for hospitals or
physicians, 3,000 of the practitioners are licensed audiologists
in private practice, and the remaining 5,000 are hearing aid
specialists. Industry surveys estimate that approximately 5% of
all hearing aids are sold in physicians offices, 60% are
dispensed by qualified audiologists in private practice, and the
remaining 35% are sold by hearing aid specialists.

The hearing services arena is a fragmented industry with little
standardization among the independent providers. It is difficult
to determine the precise number of competitors of the Company in
every market where the Company has operations, or the percentage
of market share enjoyed by the Company.

Some competitors are large distributors, including:
(1) Amplifon of Italy, which owns a national network of
over 1,000 franchised stores (Miracle Ear) including 400 located
in Sears Roebuck & Co. stores; and (2) Beltone
Electronics Corp., a hearing aid manufacturer owned by Great
Nordic Corp. that distributes its products primarily through its
network of approximately 700 authorized
distributors. Large discount retailers, such as Costco, also
sell hearing aids and present a competitive threat in
HEARxs markets. A number of these franchises and
distributors are located in the areas HEARx serves. These
networks are owned by companies having greater resources than
HEARx, 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 HEARx. The Company also faces
competition regionally from Sonus Corporation and Newport
Audiology. While the Company has similar resources as these
competitors, there can be no assurance they will not expand
their operations to capture more market share at HEARxs
expense.

The Companys network business will also face competition
by companies offering similar network services, including
Hearingplanet.com, AVADA (47% owned by William Demant, a hearing
aid manufacturer), Beltone Hearing Care Network (owned by Great
Nordic Corp.), and the Sonus Network/ HearPO. These companies
attempt to aggregate demand for hearing products and sell
marketing and other services to the network participants. In
addition, some of these networks are able to offer discounts to
managed care payors, insurers, as well as membership
organizations. This is a highly fragmented business with many
independent hearing care providers belonging to more than one
network. In addition, contract terms for network membership are
typically short and may be terminated at will. However, there is
no assurance 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 HEARxs network and its
company-owned centers.

Reliance on Manufacturers

The Companys agreement with Siemens requires that a
certain portion of the Companys sales will be of Siemens
devices. According to a 1998 survey, Siemens is the worlds
largest manufacturer of hearing devices, producing 21% of the
units sold in the world market. Siemens has a well-diversified
product line (including Rexton and other brands) 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 HEARx and other customers, HEARxs business may
be adversely affected.

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

Qualified Hearing Professionals

The Company currently employs 127 licensed hearing
professionals, of which 108 are audiologists and 19 are Licensed
Hearing Aid Specialists. The inability of the Company to attract
and retain qualified licensed hearing professionals would reduce
the Companys ability to distinguish itself from competing
networks of hearing aid retailers and thus adversely affect its
business. Management believes that it will be able to attract
and retain qualified licensed hearing professionals sufficient
to staff its centers for the foreseeable future.

Regulation

Federal

The practice of audiology and the dispensing of hearing aids are
not presently regulated on the Federal level. 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. HEARx offers all its customers a full
30-day return period and extends the return period to
60 days for patients who participate in the free HEARx
Educational Listening Program (H.E.L.P.) family hearing
counseling program. FDA regulations require hearing aid
dispensers to provide customers with certain warnings and
statements regarding the use of hearing aids. Also, the FDA
requires hearing aid dispensers to review instructional manuals
for hearing aids with patients before the hearing aid is
purchased.

In addition, a portion of the Companys revenues come from
participation in Medicare and Medicaid programs. Federal laws
prohibit the payment of remuneration in order to receive or
induce the referral of Medicare or Medicaid patients, or in
return for the sale of goods or services to Medicare or Medicaid
patients. In addition, Federal law limits physicians and other
healthcare providers from referring patients to providers of
certain designated services in which they have a financial
interest. HEARx believes that none of its managed care or other
provider contracts or its relationship with referring physicians
are violative of these Federal laws.

The Health Insurance Portability and Accountability Act of 1996
(HIPPAA) requires the use of uniform electronic data
transmission standards for health care claims and payment
transactions submitted or received electronically. On
August 17, 2000, the Department of Health and Human
Services (HHS) published final regulations
establishing electronic data transmission standards that all
health care providers must use when submitting or receiving
certain health care transactions electronically. Compliance with
these regulations is required by October 16, 2002. In
addition, HIPPA required HHS to adopt standards to protect the
security and privacy of health-related information. HHS released
final regulations containing privacy standards on
December 28, 2000. As currently drafted, the privacy
regulations will extensively regulate the use and disclosure of
individually identifiable health-related information, whether
communicated electronically, on paper or orally. The regulation
also provides patients with significant new rights related to
controlling how their health information is utilized or
disclosed. The Company cannot predict the impact these
regulations will have on its operations.

The Company cannot predict the effect of future changes in
federal laws, including changes which 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

11



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##### 



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, where they exist, are concerned
primarily with the formal licensure of audiologists and of 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 stricter licensure
requirements for dispensers of hearing aids, inspections of
centers for the dispensing of hearing aids and the regulation of
advertising by dispensers of hearing aids. The Company knows of
no current or proposed state regulations with which it, as
currently operated, could not comply.

State regulation generally includes the oversight of the
Companys advertising and marketing practices 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. However, the Company
believes there is precedent for the employment of audiologists
because the state of Californias Department of Consumer
Affairs has indicated that speech-language pathologists may be
employed by business corporations. The similarity of this
profession 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. HEARx cannot predict
the impact that these regulations will have on operations.

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

Product and Professional Liability

In the ordinary course of its business, HEARx 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.

12



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##### 



Seasonality

The Company is not generally affected by seasonality.

Employees

At December 29, 2001, HEARx Ltd. had approximately 349
full-time employees, of which 82 were employed by HEARx West.

The operations of the Company are dependent in large part upon
the efforts of Paul A. Brown, M.D., Chairman of the
Board and Chief Executive Officer, and Stephen J. Hansbrough,
President, Chief Operating Officer and Director. The loss of the
services of Dr. Brown or Mr. Hansbrough could
adversely affect the conduct and operation of the Companys
business. The Company purchased a key man insurance
policy on Dr. Browns life in the amount of $3,000,000
for the benefit of the Company.

Item 2.     Properties

HEARxs corporate offices and national call center are
located in 19,600 square feet of space in West Palm Beach,
Florida. The leases on these properties are for five years and
expire in 2006. As of December 29, 2001, the Company
operated 32 centers in Florida, 15 in New Jersey and 13 in New
York and 22 HEARx West centers in California. All of the
locations are leased for one to ten year terms pursuant to
generally non-cancelable leases (with renewal options in some
cases). Each center consists of between 700 and 3,000 square
feet with annual base rents ranging from approximately $8,700 to
$90,000.



|                              | 
|----------------------------- | 
|Item 3.     Legal Proceedings | 

None.

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

None

13



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##### 



Executive Officers of the Company

The following sets forth certain information as of the date
hereof with respect to the Companys executive officers.
Each of Dr. Brown and Mr. Hansbrough are serving pursuant
to employment agreements with 5 year terms expiring in 2004
unless renewed or extended. Mr. Peklenk and Ms. Taylor
each has been appointed to a term which will expire at the
annual meeting of Board of Directors held at the time of the
2002 Annual Meeting of Stockholders, or at the time his/her
successor is duly elected and qualified:

|                                                             |  |     |    |                 |  |  |      | 
|------------------------------------------------------------ |  | --- | -- | --------------- |  |  | ---- | 
|                                                             |  |     |    | First Served as
|                                                             |  |     |    | Executive      
|Name and Position                                            |  | Age |    | Officer        
|                                                             |  |     |    |                
|Paul A. Brown, M.D.                                          |  |     | 63 |                 |  |  | 1986 | 
|Chairman of the Board
        Chief Executive Officer        |  |     |    |                 |  |  |      | 
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|Stephen J. Hansbrough                                        |  |     | 54 |                 |  |  | 1993 | 
|President, Chief Operating
        Officer and Director      |  |     |    |                 |  |  |      | 
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|James W. Peklenk                                             |  |     | 56 |                 |  |  | 1996 | 
|Vice President  Finance
        and Chief Financial Officer |  |     |    |                 |  |  |      | 
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|Donna L. Taylor                                              |  |     | 45 |                 |  |  | 2000 | 
|Senior Vice President
        Sales & Operations             |  |     |    |                 |  |  |      | 

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 HEARx in 1986 and has served as Chairman of the Board
and Chief Executive Officer since that time. 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, President, Chief Operating 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 HEARx in December 1993.

14



---



##### 



James W. Peklenk, Vice President  Finance and Chief
Financial Officer, joined the Company in November 1995 as
Controller and became Vice President  Finance and
Chief Financial Officer in June 1996. He has a B.S. in
Accounting from the University of Louisville. From 1991 until
joining HEARx, Mr. Peklenk was Vice President, Finance/
CFO, for Shooters International, Inc., an international
restaurant operator and franchiser of Shooters Waterfront Cafes.
Prior thereto, Mr. Peklenk was Director of Internal Audit
for Chi-Chis Mexican Restaurants, and before that an Audit
Partner with the international accounting firm of Grant Thornton.

Donna L. Taylor, Senior Vice President Sales and Operations,
joined HEARx in July 1987 as an audiologist. She was later
promoted to Area Manager and Director of Operations for the
Company in Florida. She assumed her role as Vice President Sales
and Operations in December 1993 and in October 2000 was promoted
to Senior Vice President  Sales and Operations
Ms. Taylor received her B.S. from the University of Iowa in
May 1979, her M.A. from the University of Iowa in May 1981, and
earned her CCC (Certificate of Clinical Competency) in March
1982.

15



---



##### 



PART II

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

The following table sets forth the high and low sales prices of
the Common Stock as reported by the American Stock Exchange
(AMEX), ticker symbol EAR, for the fiscal quarters indicated.

|               |  |              |      |     |  |   |      | 
|-------------- |  | ------------ | ---- | --- |  | - | ---- | 
|               |  |             
|               |  | Common Stock
|               |  |             
|Fiscal Quarter |  | High         |      | Low
|               |  |              |      |    
|2000           |  |              |      |     |  |   |      | 
|              
|              
|              
|              
|First          |  | $            | 6.44 |     |  | $ | 4.06 | 
|              
|              
|              
|              
|Second         |  |              | 4.25 |     |  |   | 3.56 | 
|              
|              
|              
|              
|Third          |  |              | 3.75 |     |  |   | 2.56 | 
|              
|              
|              
|              
|Fourth         |  |              | 2.81 |     |  |   | 1.06 | 
|              
|              
|              
|              
|              
|2001           |  |              |      |     |  |   |      | 
|              
|              
|              
|              
|First          |  | $            | 2.00 |     |  | $ | 1.20 | 
|              
|              
|              
|              
|Second         |  |              | 2.00 |     |  |   | 1.14 | 
|              
|              
|              
|              
|Third          |  |              | 1.75 |     |  |   | .63  | 
|              
|              
|              
|              
|Fourth         |  |              | 1.28 |     |  |   | .60  | 

As of February 22, 2002, there were 1,786 holders of record
of the Common Stock. The Company estimates that included within
the holders of record are approximately 17,300 beneficial owners
of the Common Stock.

Dividend Policy

HEARx 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.

16



---



##### 



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 have been
derived from the audited consolidated financial statements of
the Company:

17



---



##### 



|                                                                          |  |             |            |             |  |             |            |             |  |             |            |   |  |   |              |   |  |   |             |  
|------------------------------------------------------------------------- |  | ----------- | ---------- | ----------- |  | ----------- | ---------- | ----------- |  | ----------- | ---------- | - |  | - | ------------ | - |  | - | ----------- | -
|Operating Statement Data:                                                 |  |             |            |             |  |             |            |             |  |             |            |   |  |   |              |   | 
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |  | Year Ended 
|                                                                          |  |            
|                                                                          |  | December 29 |            | December 29 |  | December 31 |            | December 25 |  | December 26
|                                                                          |  | 2001        |            | 2000        |  | 1999(1)     |            | 1998        |  | 1997       
|                                                                          |  |             |            |             |  |             |            |             |  |            
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Net Revenues                                                              |  | $           | 48,796,110 |             |  | $           | 56,114,832 |             |  | $           | 47,476,764 |   |  | $ | 26,891,186   |   |  | $ | 23,316,260  |  
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Total operating costs and expenses                                        |  |             | 56,995,460 |             |  |             | 59,696,818 |             |  |             | 52,010,728 |   |  |   | 39,159,599(2 | ) |  |   | 33,359,436  |  
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Loss from operations                                                      |  |             | (8,199,350 | )           |  |             | (3,581,986 | )           |  |             | (4,533,964 | ) |  |   | (12,268,413  | ) |  |   | (10,043,176 | )
|Non-operating income(expense)                                             |  |             |            |             |  |             |            |             |  |             |            |   |  |   |              |   |  |   |             |  
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Interest income                                                           |  |             | 222,349    |             |  |             | 294,132    |             |  |             | 210,104    |   |  |   | 602,663      |   |  |   | 897,619     |  
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Interest expense                                                          |  |             | (652,530   | )           |  |             | (28,723    | )           |  |             | (27,713    | ) |  |   | (62,492      | ) |  |   | (58,444     | )
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Loss before minority interest and equity in loss
        of joint venture |  |             | (8,629,531 | )           |  |             | (3,316,577 | )           |  |             | (4,351,573 | ) |  |   | (11,728,242  | ) |  |   | (9,204,001  | )
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Minority Interest                                                         |  |             |           |             |  |             |           |             |  |             | 347,677    |   |  |   |              |   |  |   |            |  
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Equity in loss of joint venture                                           |  |             |           |             |  |             |           |             |  |             |           |   |  |   | (615,420     | ) |  |   |            |  
|                                                                          |  |             |            |             |  |             |            |             |  |             |            |   |  |   |              |   |  |   |             |  
|Net Loss                                                                  |  |             | (8,629,531 | )           |  |             | (3,316,577 | )           |  |             | (4,003,896 | ) |  |   | (12,343,662  | ) |  |   | (9,204,001  | )
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Dividends on preferred stock                                              |  |             | (812,205   | )           |  |             | (1,346,872 | )           |  |             | (821,387   | ) |  |   | (587,893     | ) |  |   | (1,992,123  | )
|                                                                          |  |             |            |             |  |             |            |             |  |             |            |   |  |   |              |   |  |   |             |  
|Net loss applicable to common stockholders                                |  | $           | (9,441,736 | )           |  | $           | (4,663,449 | )           |  | $           | (4,825,283 | ) |  | $ | (12,931,555  | ) |  | $ | (11,196,124 | )
|                                                                          |  |             |            |             |  |             |            |             |  |             |            |   |  |   |              |   |  |   |             |  
|Loss per common share:                                                    |  |             |            |             |  |             |            |             |  |             |            |   |  |   |              |   |  |   |             |  
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Basic and diluted, including dividends on
        preferred stock         |  | $           | (0.72      | )           |  | $           | (0.39      | )           |  | $           | (0.45      | ) |  | $ | (1.28        | ) |  | $ | (1.25       | )
|                                                                          |  |             |            |             |  |             |            |             |  |             |            |   |  |   |              |   |  |   |             |  
|Weighted average number of common shares
        outstanding              |  |             | 13,120,137 |             |  |             | 11,834,388 |             |  |             | 10,775,006 |   |  |   | 10,126,979   |   |  |   | 8,960,503   |  
|                                                                          |  |             |            |             |  |             |            |             |  |             |            |   |  |   |              |   |  |   |             |  
|Cash dividends per common Share                                           |  |             | None       |             |  |             | None       |             |  |             | None       |   |  |   | None         |   |  |   | None        |  
|                                                                          |  |             |            |             |  |             |            |             |  |             |            |   |  |   |              |   |  |   |             |  



---



|    |                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As discussed in Note 1 to the Consolidated Financial Statements,
        commencing in 1999 the Companys Consolidated Financial
        Statements include the accounts of HEARx West, its 50%
        subsidiary.
|   
|(2) | During December 1998, the Company recorded a restructure charge
        of $2,233,857 in connection with the closing of 12 centers in
        the northeast in January 1999.                                       

18



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##### 



|                                       |  |             |            |             |  |             |            |             |  |             |            |  |  |   |            |  |  |   |            | 
|-------------------------------------- |  | ----------- | ---------- | ----------- |  | ----------- | ---------- | ----------- |  | ----------- | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|Balance Sheet Data:                    |  |             |            |             |  |             |            |             |  |             |            |  |  |   |            |  | 
|                                      
|                                      
|                                      
|                                      
|                                       |  | As of      
|                                       |  |            
|                                       |  | December 29 |            | December 29 |  | December 31 |            | December 25 |  | December 26
|                                       |  | 2001        |            | 2000        |  | 1999        |            | 1998        |  | 1997       
|                                       |  |             |            |             |  |             |            |             |  |            
|Total assets                           |  | $           | 21,341,522 |             |  | $           | 21,872,123 |             |  | $           | 21,377,110 |  |  | $ | 25,208,317 |  |  | $ | 28,359,547 | 
|                                      
|                                      
|                                      
|                                      
|Working capital                        |  |             | (738,562   | )           |  |             | 2,350,832  |             |  |             | 938,815    |  |  |   | 7,614,042  |  |  |   | 13,136,147 | 
|                                      
|                                      
|                                      
|                                      
|Long-term debt, net of current portion |  |             | 8,750,999  |             |  |             | 175,887    |             |  |             | 322,332    |  |  |   | 123,316    |  |  |   | 177,897    | 

19



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##### 





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

General

The Companys strategy for continuing and accelerating
center sales growth and market penetration includes both
aggressively advertising to the non-insured self-pay or retail
market and positioning the Company as the leading provider of
hearing care to the benefited populations covered by managed
care contracts.

HEARx intends, as its long-term goal, to establish a nationwide
network of hearing care centers, located in the metropolitan
areas or regions with concentrations of elderly consumers who
are more likely to need the Companys products and
services. The Company plans on expanding its hearing care center
network through the completion of the Helix merger and the
continuing expansion of HEARx West LLC, its joint venture. In
addition, the Company is participating in the HearUSA Advantage
Network. The Network is comprised of hearing care practices
owned by independent operators with whom the Network has
contracted to provide services.

On July 27, 2001 the Company and Helix signed a definitive
merger agreement, which was subsequently amended and restated as
of November 6, 2001. Helix owns or manages 128 hearing
healthcare clinics located in Massachusetts, Pennsylvania, New
York, Ohio, Michigan, Wisconsin, Minnesota, Washington and
Missouri as well as in the Provinces of Ontario and Quebec. The
boards of directors of both companies have approved the
transaction. The transaction is subject to shareholder, Canadian
court, certain third party and other regulatory approvals. Upon
the closing of the transaction, Helix will become an indirect
wholly owned subsidiary of HEARx. The transaction is expected to
close before the end of the second quarter of 2002.

On April 23, 2001, HEARx and Siemens signed a letter of
intent pursuant to which the parties intended to form a
marketing and promotional alliance in the United States. As part
of this letter of intent, Siemens agreed to provide HEARx with a
five-year $7.5 million line of credit with interest at 12%,
payable quarterly. These terms of the letter of intent relating
to the $7.5 million line of credit became binding on
April 27, 2001, when HEARx first drew on the line of
credit. The letter of intent provided that as HEARx purchased
products from Siemens, Siemens would pay to HEARx certain
rebates that would then be used to pay the quarterly
installments of principal and interest under the five-year line
of credit. On December 7, 2001, HEARx and Siemens entered
into the credit agreement and supply agreement, which superseded
the letter of intent. See Liquidity and Capital
Resources, below.

Critical Accounting Policies

Financial Reporting Release No. 60, which was recently
released by the U.S. Securities and Exchange Commission,
encourages all companies to include a discussion of critical
accounting policies or methods used in the preparation of
financial statements. Note 1 to the HEARx consolidated financial
statements includes a summary of the significant accounting
policies and methods used in the preparation of HEARxs
consolidated financial statements.

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

Revenue Recognition

HEARx 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.

20



---



##### 



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

HEARx 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.

Estimates

Managements discussion and analysis of results of
operations and financial condition is based upon HEARxs
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires management to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities. 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. Actual results
may differ from these estimates.

Results of Operations

2001 Compared to 2000

Net revenues decreased $7,318,722, or 13.0%, to $48,796,110 in
2001 from $56,114,832 in 2000. The decrease in revenues
consisted of decreases in revenues from the Companys
Florida, Northeast and California centers. Net revenues in
Florida, the Northeast and California decreased
$4.0 million, or 16.7%, $2.3 million, or 16.2%, and
$1.0 million, or 5.6% to $20.0 million,
$11.9 million and $16.9 million, respectively, for the
year ended December 29, 2001. Management believes the
decrease in revenues for fiscal year end 2001 as compared with
2000 is the result of the overall downward trend in the
nations economy. Management believes that the slowing
economy has caused the Companys primary market, the
nations elderly population, to reduce discretionary
spending. In response to the slowdown, the Company implemented a
cost reduction program in May 2001. The Companys program
called for a $6 million reduction in annual expenses
exclusive of an expected $1.3 million cost increase
associated with implementation of the Companys national
call center during 2001. During the last three quarters of 2001,
the Company reduced total center operating expenses by
approximately $3.1 million to $20.8 million, from the
$23.9 million it would have incurred had it continued such
costs at the levels incurred in the 1st Quarter of 2001, which
totaled approximately $8.0 million. Further, during the
last three quarters of 2001, the Company reduced total general
and administrative expenses (exclusive of the national call
center expenses) by approximately $600,000 to $6.6 million,
from the $7.2 million (exclusive of the national call
center expenses) it would have incurred had it continued such
costs at the levels incurred in the 1st Quarter of 2001, which
totaled approximately $2.4 million (exclusive of the
national call center costs). The cost reduction program is
continuing into the 1st Quarter of 2002.

21



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##### 



Cost of products sold decreased $3,544,523, or 18.7%, to
$15,421,587 in 2001 from $18,966,110 in 2000. Approximately
$1,665,000 of the decrease in the cost of products sold is the
result of the rebates received from Siemens pursuant to the
supply agreement with the Company. Additionally, the decrease in
the cost of products sold is a direct result of the decrease in
net revenues. The cost of products sold as a percent of net
revenues, which was 31.6% and 33.8% for 2001 and 2000,
respectively, fluctuates from period to period due to retail
pricing and product promotions.

Center operating expenses decreased $605,447, or 2.1%, to
$28,722,667 in 2001 from $29,328,114 in 2000. This decrease is
attributable to the cost reduction program the Company
implemented in May 2001. The Company reduced its marketing
programs, reducing center advertising expense to $5,983,573, or
12.3% of revenue, down from $7,161,400, or 12.8% in 2000. Center
wages expense also decreased $598,941 or 4.3%, to $13,307,920 in
2001 from $13,906,861 in 2000. These decreases were offset by an
increase in center occupancy expense of $617,092, or 16.0%, to
$4,464,738 in 2001 from $3,847,646 in 2000, resulting primarily
from increased operating lease expense from the relocation of
five existing centers during 2001.

General and administrative expenses increased $1,610,500, or
18.2% to $10,441,046 in 2001 from $8,830,546 in 2000. This
increase is partially due to the expansion of corporate
administrative functions, which includes the full implementation
in 2001 of the national call center. The national call center
will be responsible for both inbound and outbound marketing. The
costs associated with the call center were approximately
$1.3 million, which included salaries and wages of $724,000
and occupancy costs, including rent, common area maintenance
charges and utilities of $525,200. In addition, professional
service fees increased $139,289, or 29.0%, to $619,820 in 2001
from $480,531 in 2000. This increase is primarily the result of
additional fees paid to the Companys independent public
accountants and attorneys for additional services. Shareholder
relations expense increased to $392,865 in 2001 from $225,300 in
2000. This increase is primarily the result of the
Companys retention of an investment banking firm to render
services with respect to financial planning and public relations.

Depreciation and amortization expense decreased $161,888, or
6.3%, to $2,410,160 in 2001 from $2,572,048 in 2000, which was
primarily the result of certain equipment becoming fully
depreciated during 2001.

Interest income decreased $71,783, or 24.4%, to $222,349 in 2001
from $294,132 in 2000. This decrease is attributable to the
decline in average interest rates earned primarily on cash and
cash equivalents. Interest expense increased $623,807 to
$652,530 in 2001 from $28,723 in 2000. This increase is
attributable to the addition of interest on the line of credit
with Siemens, beginning in April 2001.

2000 Compared to 1999

Net revenues increased $8,638,068, or 18.2%, to $56,114,832 in
2000 from $47,476,764 in 1999. Net revenues by region for the
Northeast, Florida and California were approximately
$14.2 million, $24.0 million, and $18.0 million,
respectively, in 2000 as compared to $10.1 million,
$25.0 million and $12.4 million, respectively in 1999. On a
comparable center basis (revenue from centers in operation
throughout 1999 and 2000) net revenue for fiscal year 2000
increased 17.2% compared to fiscal year 1999. The increase in
net revenues resulted from the increase of revenues from HEARx
West and the Northeast, and an increase in the retail business
arising from the Companys continued aggressive advertising
campaign resulting in an increase in revenues from the
non-insured self-pay market of $11,818,235, or 46.9% from
$25,158,339 in 1999 to $36,976,574 in 2000.

Cost of products sold increased $4,354,826, or 29.8%, to
$18,966,110 in 2000 from $14,611,284 in 1999. Part of the
increase in the cost of products sold is a direct result of the
46.9% increase in revenues from the self-pay market due to
increased sales of hearing aids with advanced digital technology
which generally resulted in lower margins. During 2000, the

22



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##### 



Company experienced an increase in the sales level of digital
hearing aids. The cost of products sold as a percent of net
revenues, which was 33.6% and 30.6% for the year ended 2000 and
1999, respectively, fluctuates from period to period due to
retail pricing and product promotions.

Center operating expenses increased $2,951,284, or 11.2%, to
$29,328,114 in 2000 from $26,376,830 in 1999. The Company
continued to intensify its aggressive marketing program,
increasing center advertising expense to $7,161,400, or 12.7% of
revenue, up from $5,063,216, or 10.6% of revenue in 1999. In
addition, due to the increase in revenues, the Company increased
its number of employees from 360 in 1999, to 375 in 2000. This
resulted in an increase of salaries and wages of approximately
$763,000. Center operating expenses as a percent of revenue
decreased to 51.9% in 2000, from 55.3% in 1999 as a result of
opening one new center in July 2000 offset by the 17.2% increase
in comparable center sales (sales from centers in operation
throughout 1999 and 2000). Center operating earnings (excluding
corporate general and administrative expenses and depreciation,
amortization) increased $1,415,986, or 21.1%, to $8,114,740 in
2000 from $6,698,754 in 1999.

General and administrative expenses increased $228,823 to
$8,830,546 in 2000 from $8,601,723 in 1999. General and
administrative expenses as a percent of net revenue decreased to
15.7% in 2000 from 18.0% in 1999. This increase is partially due
to the increase of $610,868 in wages and fringe benefits
associated with the expansion of corporate administrative
functions, which includes the implementation of the national
call center, offset by the decrease in shareholder relations and
general insurance expense of approximately $127,000 and
$143,000, respectively.

Depreciation and amortization expense increased $151,157, or
6.2%, to $2,572,048 in 2000 from $2,420,891 in 1999. This
increase is attributable to the increase of depreciable assets
due to the opening of 16 additional HEARx West centers in
California in 1999 and 1 in July 2000, and the relocation of 5
centers within Florida during 2000.

Interest income increased $84,028, or 40.0%, to $294,132 in 2000
from $210,104 in 1999. This increase is attributable to an
increase in average balances of cash and cash equivalents.

Liquidity and Capital Resources

Working capital decreased $3,089,394 to a negative $738,562 as
of December 29, 2001 from $2,350,832 as of
December 29, 2000. The working capital of negative $738,562
includes approximately $1.5 million of dividends payable at
December 29, 2001, which at the option of the Company may
be paid
in shares
of the Companys common stock rather than cash. This
decrease is primarily the result of an increase in current
maturities of long-term debt of approximately $2.3 million,
representing the current portion of the Siemens Tranche A Loan
of $10,875,000, described below.

On December 7, 2001, HEARx obtained a $51,875,000 secured
credit facility from Siemens comprised of (a) a $10,875,000
secured five-year term loan credit facility (the Tranche A
Loan); (b) a $25,000,000 secured five-year revolving loan
credit facility (the Tranche B Loan); (c) a $3,000,000
secured five-year term loan facility (the Tranche C Loan);
and (d) a $13,000,000 secured five-year term loan credit
facility (the Tranche D Loan). At December 29, 2001,
only $10,875,000, representing the Tranche A Loan was
outstanding.

The Tranche A Loan proceeds were used as follows: (i) the
repayment of $6,875,000 owed at December 7, 2001 to Siemens
by the Company under the April 23, 2001 letter of intent;
(ii) a $2,000,000 loan from HEARx to Helix to be used only
for the NECP acquisition (described in the Companys
Form 10-K at Part I, Item 1 
Business) and (iii) $2,000,000 for the exchange
and redemption of all of the outstanding HEARxs
Series I Convertible Preferred Stock. The Tranche B
Loan may be used only for future acquisitions by the Company
subject to guidelines established by the credit facility or
otherwise agreed to by HEARx and Siemens. The parties

23



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##### 



intend that the Tranche C Loan will be used for general
working capital purposes and the Tranche D Loan for general
working capital purposes and, after the Helix transaction is
consummated, the payment of approximately $6,700,000 of debts
belonging to Helix. The credit facility imposes certain
financial and other covenants on the Company. At
December 29, 2001, the Company was in compliance with all
such covenants. If the Company cannot maintain compliance with
these requirements, Siemens may decline to make funds available
to the Company. Furthermore, if the Company and Helix do not
complete the pending merger arrangement, approximately
$6.7 million of the credit facility may not be accessible
to the Company at all.

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. Quarterly principal
and interest payments on the Tranche A, B and C Loans may
be paid through rebates received from Siemens by HEARx as long
as HEARx purchases certain minimum percentages of its
requirements of hearing aids from Siemens.

The Company believes that the funds available under the credit
facility, current cash, investment securities and revenues from
operations will be sufficient to support the Companys
operational needs through the next twelve months, although there
can be no assurance that HEARx can maintain compliance with
Siemens loan covenants, that the Helix merger arrangement
will be consummated or that unexpected capital needs will not
arise for which the credit facility, cash, investments and
revenues from operations will be sufficient.

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 29, 2001.

|                                   |  |                        |            |           |  |             |           |             |  |       |            |  |  |   |           |  |  |   |         | 
|---------------------------------- |  | ---------------------- | ---------- | --------- |  | ----------- | --------- | ----------- |  | ----- | ---------- |  |  | - | --------- |  |  | - | ------- | 
|                                   |  |                       
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                        |            | Less than |  |             |           | After 5    
|Contractual Obligations            |  | Total                  |            | 1 Year    |  | 1  3 Years |           | 4  5 Years |  | Years
|                                   |  |                        |            |           |  |             |           |             |  |      
|Long-Term Debt                     |  | $                      | 11,243,000 |           |  | $           | 2,492,000 |             |  | $     | 4,776,000  |  |  | $ | 3,975,000 |  |  | $ |        | 
|                                  
|                                  
|                                  
|                                  
|Operating Leases                   |  |                        | 15,363,000 |           |  |             | 4,336,000 |             |  |       | 6,952,000  |  |  |   | 3,626,000 |  |  |   | 449,000 | 
|                                   |  |                        |            |           |  |             |           |             |  |       |            |  |  |   |           |  |  |   |         | 
|Total Contractual Cash Obligations |  | $                      | 26,606,000 |           |  | $           | 6,828,000 |             |  | $     | 11,728,000 |  |  | $ | 7,601,000 |  |  | $ | 449,000 | 
|                                   |  |                        |            |           |  |             |           |             |  |       |            |  |  |   |           |  |  |   |         | 

Net cash used by operating activities increased from $798,375 in
2000, to $5,001,007 in 2001. The increase in cash used by
operating activities was primarily the result of the increase of
operating losses of approximately $5,313,000, offset by the
change in current assets including accounts and notes receivable
from net cash used of approximately $238,000 to cash provided of
$1.6 million due primarily to an approximate
$2.1 million decrease in net sales in the fourth quarter of
2001 compared to 2000.

Net cash used by investing activities increased from $1,610,009
in 2000, to $2,473,322 in 2001. In 2001, proceeds from maturity
of investment securities in excess of purchases were
approximately $843,000 versus net purchases of approximately
$93,000 in 2000. In addition, a $700,000 note receivable was
issued to the Company by Helix in November 2001 for the NECP
acquisition and during 2001 approximately $977,000 of
capitalized merger costs (related to the pending Helix
transaction) were incurred.

Net cash provided by financing activities increased from
$3,801,610 in 2000 to $8,785,524 in 2001. This increase is
primarily the result of the net proceeds of the $10,875,000

24



---



##### 



Siemens Tranche A Loan offset by approximately
$2 million of cash paid to exchange and redeem the
Companys Series I Convertible Preferred Stock in
December 2001, compared to net proceeds of approximately
$4.5 million received from a preferred stock offering
during 2000.

Working capital increased $1,412,017 to $2,350,832 as of
December 29, 2000 from $938,815 as of December 31,
1999. On May 9, 2000 HEARx completed a private placement of
convertible preferred stock providing HEARx with net proceeds of
approximately $4.5 million.

Net cash used by operating activities decreased from $2,876,171
in 1999 to $798,375 in 2000. The decrease in cash being used by
operating activities was primarily the result of the change in
current assets including accounts and notes receivables from net
cash used in 1999 of approximately $2.5 million to
approximately $515,000 in 2000 offset against the change in
accounts payable and accrued expenses from net cash provided of
approximately $982,000 to $10,000 in 2000. This is primarily the
result of the Company improving its monitoring and collection
process of accounts receivable.

Net cash provided by investing activities decreased from
$5,418,632 in 1999 to cash used from investing activities of
$1,610,009 in 2000. Proceeds from maturities of investments in
excess of purchases were approximately $6.2 million in 1999
versus net purchases of approximately $93,000 in 2000.

Cash from financing activities increased from cash being used
for financing activities of $2,335,385 in 1999, to cash being
provided from financing activities of $3,801,610 in 2000. This
increase was primarily the result of net proceeds of
approximately $4.5 million from a preferred stock offering
during the second quarter of 2000. In addition, the Company
acquired 129,900 shares of treasury stock for $413,061 in 2000
compared to 1,921,239 shares for $1,820,424 in 1999.

Recent Accounting Pronouncements

In June 2001, the FASB finalized FASB Statements No. 141,
Business Combinations (SFAS 141), and
No. 142, Goodwill and Other Intangible
Assets (SFAS 142). SFAS 141 requires the use
of the purchase method of accounting and prohibits the use of
the pooling-of-interest method of accounting for business
combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible
assets apart from goodwill if the acquired intangible assets
meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for purchase
business combinations completed on or after July 1, 2001.
It also requires, upon adoption of SFAS 142, that the
Company reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS 141.

SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at
least annually. In addition, SFAS 142 requires that the
Company identify reporting units for the purpose of assessing
potential future impairments of goodwill, reassess the useful
lives of other existing recognized intangible assets, and cease
amortization of intangibles assets with an indefinite useful
life. An intangible asset with an indefinite useful life should
be tested for impairment in accordance with the guidance in
SFAS 142. SFAS 142 is required to be applied in fiscal
years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of
when those assets were initially recognized. SFAS 142
requires the Company to complete transitional goodwill
impairment test six months from the date of adoption. The
Company is also required to reassess the useful lives of other
intangible assets within the first interim quarter after
adoption of SFAS 142. The Companys previous business
combinations were accounted for using the purchase method. The
impact of the adoption of SFAS 141 and SFAS 142 on the
Companys financial position and results of operations is
not expected to be material.

25



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##### 



In October 2001, the FASB issued SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets which resolves significant implementation
issues related to FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of,and supersedes
the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a business segment.
SFAS 144 is effective for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. The impact of adoption
of SFAS 144 on the Companys financial position and
results of operations is not expected to be material.

Item 7A.     Quantitative
and Qualitative Disclosure About Market Risk

The Company does not engage in derivative transactions, or issue
variable rate debt, and does not become exposed to foreign
currencies in its business. 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 Debt |   |            
|                                                                      |                     | 10.0% notes     |             | 8.75% note     |   |            
|                                                                      |                     | due December 1, |             | due July 1,    |   |            
|                                                                      |                     | 2006            |             | 2004           |   | Other notes
|                                                                      |                     |                 |             |                |   |            
|As of December 29, 2001:                                              |                     |                 |             |                |   |             |          |          |   |  |          |         
|Estimated cash inflow (outflow) by year of
        principal maturity |                     |                 |             |                |   |             |          |          |   |  |          |         
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2002                |                 | $           | (2,300,000     | ) |             | $        | (81,000  | ) |  | $        | (111,000 | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2003                |                 |             | (2,300,000     | ) |             |          | (81,000  | ) |  |          | (90,000  | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2004                |                 |             | (2,300,000     | ) |             |          |         |   |  |          | (5,000   | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2005                |                 |             | (2,300,000     | ) |             |          |         |   |  |          |         |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2006 and thereafter |                 |             | (1,675,000     | ) |             |          |         |   |  |          |         |  
|                                                                      |                     |                 |             |                |   |             |          |          |   |  |          |         
|                                                                      | Total               |                 |             | (10,875,000    | ) |             |          | (162,000 | ) |  |          | (206,000 | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Estimated fair value                                                  |                     |                 | (10,875,000 | )              |   |             | (162,000 | )        |   |  | (206,000 | )       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Carrying value                                                        |                     |                 | (10,875,000 | )              |   |             | (162,000 | )        |   |  | (206,000 | )       

Except for historical information provided in this discussion
and analysis, the discussion includes forward looking
statements, including the expected closing of the HEAR-Helix
transaction; the Companys goal of establishing a
nationwide center network; expectation concerning the effect of
cost control measures; funds available under credit facility,
current cash, investment securities and revenues from operations
sufficient to support the Companys operational needs; the
Companys belief concerning the effect on its financial
condition or operations of changes in benefits announced by some
insurance companies and the loss of any single contract. 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; the ability of the Company and
Helix to successfully consummate the combination; unforeseen
capital requirements; trends in market sales; and the success of
the HEARx West joint venture with The Permanente Federation.

26



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##### 



Item 8.     Financial
Statements and Supplementary Data

|                                                                                                                                                          |  |      |       | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | 
|                                                                                                                                                          |  | Page
|                                                                                                                                                          |  |     
|Index to Financial Statements                                                                                                                             |  |      |       | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Financial Statements:                                                                                                                                     |  |      |       | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Report of Independent Certified Public Accountants                                                                                                        |  |      | 28    | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Consolidated Balance Sheets at December 29,
        2001 and December 29, 2000                                                                            |  |      | 29    | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Consolidated Statements of Operations for the
        years ended December 29, 2001, December 29, 2000, and
        December 31, 1999                     |  |      | 30    | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Consolidated Statements of Changes in
        Stockholders Equity for the years ended December 29,
        2001, December 29, 2000 and December 31, 1999 |  |      | 31-32 | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Consolidated Statements of Cash Flows for the
        years ended December 29, 2001, December 29, 2000, and
        December 31, 1999                     |  |      | 33-34 | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Notes to Consolidated Financial Statements                                                                                                                |  |      | 35-52 | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Financial Statement Schedule:                                                                                                                             |  |      |       | 
|                                                                                                                                                         
|For the years ended December 29, 2001,
        December 29, 2000 and December 31, 1999                                                                    |  |      |       | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|II Valuation and Qualifying Accounts                                                                                                                      |  |      | 53    | 

27



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##### 



Report of Independent Certified Public Accountants

Board of Directors HEARx Ltd. 
 West Palm Beach, Florida

We have audited the accompanying consolidated balance sheets of
HEARx Ltd. as of December 29, 2001 and 2000, 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 29, 2001. We have also
audited the schedule listed in the accompanying index. These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.

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

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of HEARx Ltd. at December 29, 2001 and 2000, and
the results of its operations and its cash flows for each of the
three years in the period ended December 29, 2001 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 28, 2002

28



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##### 



HEARx LTD.

CONSOLIDATED BALANCE SHEETS

|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           |                                                              |             |          |            |           |             |   |            | 
|----------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ----------- | -------- | ---------- | --------- | ----------- | - | ---------- | 
|                                                      |                                                                                                      | December 29,                                                                                                                |                                                                                                           | December 29,                                                
|                                                      |                                                                                                      | 2001                                                                                                                        |                                                                                                           | 2000                                                        
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           |                                                             
|                                                     
|                                                     
|                                                     
|                                                     
|ASSETS                                               
|                                                     
|                                                     
|                                                     
|                                                     
|Current assets:                                       |                                                                                                      |                                                                                                                             |                                                                                                           |                                                              |             |          |            |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cash and cash equivalents                                                                            |                                                                                                                             | $                                                                                                         | 5,561,608                                                    |             |          | $          | 4,250,413 |            
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Investment securities (Note 2)                                                                       |                                                                                                                             |                                                                                                           | 150,000                                                      |             |          |            | 993,224   |            
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Accounts and notes receivable, less allowance for
        doubtful accounts of $185,814 and $212,657 |                                                                                                                             |                                                                                                           | 3,965,491                                                    |             |          |            | 5,734,497 |            
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Inventories                                                                                          |                                                                                                                             |                                                                                                           | 504,762                                                      |             |          |            | 500,582   |            
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Prepaid expenses and other                                                                           |                                                                                                                             |                                                                                                           | 855,052                                                      |             |          |            | 860,272   |            
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           |                                                              |             |          |            |          
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           | Total current assets                                         |             |          | 11,036,913 |           |             |   | 12,338,988 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Property and equipment  net(Notes 3 & 4)             |                                                                                                      |                                                                                                                             | 6,835,643                                                                                                 |                                                              |             |          | 7,595,991  |          
|                                                     
|                                                     
|                                                     
|                                                     
|Note receivable (Note 10)                             |                                                                                                      |                                                                                                                             | 700,000                                                                                                   |                                                              |             |          |           |          
|                                                     
|                                                     
|                                                     
|                                                     
|Deposits and other(Note 1)                            |                                                                                                      |                                                                                                                             | 2,768,966                                                                                                 |                                                              |             |          | 1,937,144  |          
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           |                                                              |             |          |            |          
|                                                      |                                                                                                      | $                                                                                                                           | 21,341,522                                                                                                |                                                              |             | $        | 21,872,123 |          
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           |                                                              |             |          |            |          
|                                                     
|                                                     
|                                                     
|                                                     
|LIABILITIES AND STOCKHOLDERS
        EQUITY         
|                                                     
|                                                     
|                                                     
|                                                     
|Current liabilities:                                  |                                                                                                      |                                                                                                                             |                                                                                                           |                                                              |             |          |            |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Accounts payable and accrued expenses                                                                |                                                                                                                             | $                                                                                                         | 6,871,124                                                    |             |          | $          | 7,377,495 |            
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Accrued salaries and other compensation                                                              |                                                                                                                             |                                                                                                           | 890,985                                                      |             |          |            | 1,071,208 |            
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Current maturities of long term debt (Note 3)                                                        |                                                                                                                             |                                                                                                           | 2,492,313                                                    |             |          |            | 152,387   |            
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Dividends payable (Notes 5B, 5C, 5E and 5I)                                                          |                                                                                                                             |                                                                                                           | 1,521,053                                                    |             |          |            | 1,387,066 |            
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           | Total current liabilities                                    |             |          | 11,775,475 |           |             |   | 9,988,156  | 
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           |                                                              |             |          |            |          
|Long term debt, less current maturities(Note 3)       |                                                                                                      |                                                                                                                             | 8,750,999                                                                                                 |                                                              |             |          | 175,887    |          
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           |                                                              |             |          |            |          
|Commitments and contingencies(Notes 3,4,6,8, 10 & 11) |                                                                                                      |                                                                                                                             |                                                                                                          |                                                              |             |          |           |          
|                                                     
|                                                     
|                                                     
|                                                     
|Stockholders equity:                                 |                                                                                                      |                                                                                                                             |                                                                                                           |                                                              |             |          |            |          
|                                                      | Preferred stock: (Note 5)                                                                            |                                                                                                                             |                                                                                                           |                                                              |             |          |            |           |            
|                                                      |                                                                                                      |                                                                                                                             | (Aggregate liquidation preference $8,628,053 and
        $11,902,066) $1 par, 2,000,000 shares authorized |                                                              |             |          |            |           |             |   |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           | Series J (233 & 0 shares outstanding)                        |             |          | 233        |           |             |   |           | 
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           | Series I Convertible (0 & 500 shares
        outstanding)    |             |          |           |           |             |   | 500        | 
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           | Series H Junior Participating (0 shares
        outstanding) |             |          |           |           |             |   |           | 
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           | 1998 Convertible (4,777 & 5,515 shares
        outstanding)  |             |          | 4,777      |           |             |   | 5,515      | 
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           |                                                              |             |          |            |          
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           | Total preferred stock                                        |             |          | 5,010      |           |             |   | 6,015      | 
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                                      | Common stock: $.10 par; 20,000,000 shares
        authorized; 14,559,403 and 12,364,139 shares issued (Notes 5
        & 6) |                                                                                                           |                                                              | 1,455,940   |          |            |           | 1,236,414   |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                                      |                                                                                                                             | Stock subscription (Note 5A)                                                                              |                                                              |             | (412,500 | )          |           |             |  |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                                      | Additional paid-in capital                                                                                                  |                                                                                                           |                                                              | 91,438,475  |          |            |           | 92,695,792  |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                                      | Accumulated deficit                                                                                                         |                                                                                                           |                                                              | (89,188,436 | )        |            |           | (79,746,700 | )
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                                      | Treasury stock, at cost:518,660 & 518,660
        common shares                                                             |                                                                                                           |                                                              | (2,483,441  | )        |            |           | (2,483,441  | )
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           |                                                              |             |          |            |          
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           | Total stockholders equity                                   |             |          | 815,048    |           |             |   | 11,708,080 | 
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           |                                                              |             |          |            |          
|                                                      |                                                                                                      | $                                                                                                                           | 21,341,522                                                                                                |                                                              |             | $        | 21,872,123 |          
|                                                      |                                                                                                      |                                                                                                                             |                                                                                                           |                                                              |             |          |            |          

See accompanying notes to consolidated financial statements

29



---



##### 



HEARx LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                               |                                     |                                    |            |              |            |              |            |            |            |   |            |            |            |  
|------------------------------------------------------------------------------ | ----------------------------------- | ---------------------------------- | ---------- | ------------ | ---------- | ------------ | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | -
|                                                                               |                                     |                                   
|                                                                               |                                     | Year Ended                        
|                                                                               |                                     |                                   
|                                                                               |                                     | December 29,                       |            | December 29, |            | December 31,
|                                                                               |                                     | 2001                               |            | 2000         |            | 1999        
|                                                                               |                                     |                                    |            |              |            |             
|Net Revenues                                                                   |                                     | $                                  | 48,796,110 |              |            | $            | 56,114,832 |            |            | $ | 47,476,764 |           
|                                                                               |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Operating costs and expenses:                                                  |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Cost of products sold               |                                    |            | 15,421,587   |            |              |            | 18,966,110 |            |   |            | 14,611,284 |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Center operating expenses           |                                    |            | 28,722,667   |            |              |            | 29,328,114 |            |   |            | 26,376,830 |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | General and administrative expenses |                                    |            | 10,441,046   |            |              |            | 8,830,546  |            |   |            | 8,601,723  |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Depreciation and amortization       |                                    |            | 2,410,160    |            |              |            | 2,572,048  |            |   |            | 2,420,891  |           
|                                                                               |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|                                                                               |                                     | Total operating costs and expenses |            |              | 56,995,460 |              |            |            | 59,696,818 |   |            |            | 52,010,728 |  
|                                                                               |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|                                                                              
|Loss from operations                                                           |                                     |                                    | (8,199,350 | )            |            |              | (3,581,986 | )          |            |   | (4,533,964 | )         
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Non-operating income (expense):                                                |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Interest income                                                                |                                     |                                    | 222,349    |              |            |              | 294,132    |            |            |   | 210,104    |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Interest expense                                                               |                                     |                                    | (652,530   | )            |            |              | (28,723    | )          |            |   | (27,713    | )         
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Loss before minority interest                                                  |                                     |                                    | (8,629,531 | )            |            |              | (3,316,577 | )          |            |   | (4,351,573 | )         
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Minority Interest                                                              |                                     |                                    | -          |              |            |              |           |            |            |   | 347,677    |           
|                                                                               |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Net loss                                                                       |                                     |                                    | (8,629,531 | )            |            |              | (3,316,577 | )          |            |   | (4,003,896 | )         
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Dividends on preferred stock:                                                  |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Deemed dividends (Note 5C)          |                                    |            |             |            |              |            | (571,241   | )          |   |            |           |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Dividends                           |                                    |            | (812,205     | )          |              |            | (775,631   | )          |   |            | (821,387   | )         
|                                                                               |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|                                                                               |                                     | Total dividends on preferred stock |            |              | (812,205   | )            |            |            | (1,346,872 | ) |            |            | (821,387   | )
|                                                                               |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Net loss applicable to common
        stockholders                             |                                     | $                                  | (9,441,736 | )            |            | $            | (4,663,449 | )          |            | $ | (4,825,283 | )         
|                                                                               |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Net loss per common share  basic
        and diluted (Note 1)                 |                                     | $                                  | (.72       | )            |            | $            | (.39       | )          |            | $ | (.45       | )         
|                                                                               |                                     |                                    |            |              |            |              |            |            |            |   |            |           
|Weighted average number of shares of common
        stock outstanding (Note 1) |                                     |                                    | 13,120,137 |              |            |              | 11,834,388 |            |            |   | 10,775,006 |           
|                                                                               |                                     |                                    |            |              |            |              |            |            |            |   |            |           

See accompanying notes to consolidated financial statements

30



---



##### 



HEARx LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY

|                            |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |            |            |            |  
|--------------------------- | -------------------------- | ---------------------------------------- | ---------------------------------------- | ----------------- | ------- | ----------------- | ---------- | ---------- | ---------- | ------- | ---------- | ---------- | -------- | ------- | ---------- | ---------- | --------- | ------ | ---------- | ----------- | ---------- | ----------- | ---------- | ---------- | ---------- | ---------- | -
|                            |                            |                                          |                                          |                   |         |                  
|                            |                            | Year Ended                               |                                          | Year Ended        |         | Year Ended       
|                            |                            | December 29, 2001                        |                                          | December 29, 2000 |         | December 31, 1999
|                            |                            |                                          |                                          |                   |         |                  
|                            |                            | Shares                                   |                                          | Amount            |         | Shares            |            | Amount     |            | Shares  |            | Amount    
|                            |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |           
|Preferred Stock:            |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |           
|                           
|                           
|                           
|                           
|                            | Balance, beginning of year |                                          |                                          | 6,015             |         |                   | $          | 6,015      |            |         |            | 8,315      |          |         | $          | 8,315      |           |        |            | 12,709      |            |             | $          | 12,709     |           
|                           
|                           
|                           
|                           
|                            |                            | Exchange/redemption of preferred stock   |                                          |                   | (285    | )                 |            |            | (285       | )       |            |            |         |         |            |            |          |        |            |             |           |             |            |            |           |           
|                           
|                           
|                           
|                           
|                            |                            | Issuance of preferred stock              |                                          |                   |        |                   |            |            |           |         |            |            | 500      |         |            |            | 500       |        |            |             |           |             |            |            |           |           
|                           
|                           
|                           
|                           
|                            |                            | Conversion of preferred stock            |                                          |                   | (720    | )                 |            |            | (720       | )       |            |            | (2,800   | )       |            |            | (2,800    | )      |            |             | (4,394     | )           |            |            | (4,394     | )         
|                            |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |           
|                            | Balance, end of year       |                                          |                                          | 5,010             |         |                   | $          | 5,010      |            |         |            | 6,015      |          |         | $          | 6,015      |           |        |            | 8,315       |            |             | $          | 8,315      |           
|                            |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |           
|Common Stock:               |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |           
|                           
|                           
|                           
|                           
|                            | Balance, beginning of year |                                          |                                          | 12,364,139        |         |                   | $          | 1,236,414  |            |         |            | 11,547,337 |          |         | $          | 1,154,734  |           |        |            | 104,023,643 |            |             | $          | 10,402,364 |           
|                           
|                           
|                           
|                           
|                            |                            | Exchange/redemption of preferred stock   |                                          |                   | 606,710 |                   |            |            | 60,671     |         |            |            |         |         |            |            |          |        |            |             |           |             |            |            |           |           
|                           
|                           
|                           
|                           
|                            |                            |                                          | Conversion of preferred stock            |                   |         | 1,388,519         |            |            |            | 138,852 |            |            |          | 817,202 |            |            |           | 81,720 |            |             |            | 5,414,400   |            |            |            | 541,440    |  
|                           
|                           
|                           
|                           
|                            |                            |                                          | Exercise of employee stock options       |                   |         | 35                |            |            |            | 3       |            |            |          | 1,600   |            |            |           | 160    |            |             |            | 13,600      |            |            |            | 1,360      |  
|                           
|                           
|                           
|                           
|                            |                            |                                          | Exercise of stock options by consultants |                   |         |                  |            |            |            |        |            |            |          | (2,000  | )          |            |           | (200   | )          |             |            |            |            |            |            |           |  
|                           
|                           
|                           
|                           
|                            |                            |                                          | Stock subscription                       |                   |         | 200,000           |            |            |            | 20,000  |            |            |          |        |            |            |           |       |            |             |            |            |            |            |            |           |  
|                           
|                           
|                           
|                           
|                            |                            |                                          | Reverse stock split                      |                   |         |                  |            |            |            |        |            |            |          |        |            |            |           |       |            |             |            | (97,904,306 | )          |            |            | (9,790,430 | )
|                            |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |           
|Balance, end of year        |                            |                                          | 14,559,403                               |                   |         | $                 | 1,455,940  |            |            |         | 12,364,139 |            |          | $       | 1,236,414  |            |           |        | 11,547,337 |             |            | $           | 1,154,734  |           
|                            |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |           
|Treasury Stock:             |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |           
|                           
|                           
|                           
|                           
|                            | Balance, beginning of year |                                          |                                          | (518,660          | )       |                   | $          | (2,483,441 | )          |         |            | (388,760   | )        |         | $          | (2,070,380 | )         |        |            | (405,311    | )          |             | $          | (249,956   | )         
|                           
|                           
|                           
|                           
|                            |                            | Purchase of treasury stock               |                                          |                   |        |                   |            |            |           |         |            |            | (129,900 | )       |            |            | (413,061  | )      |            |             | (1,921,239 | )           |            |            | (1,820,424 | )         
|                           
|                           
|                           
|                           
|                            |                            | Reverse Stock Split                      |                                          |                   |        |                   |            |            |           |         |            |            |         |         |            |            |          |        |            |             | 1,937,790  |             |            |            |           |           
|                            |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |           
|Balance, end of year        |                            |                                          | (518,660                                 | )                 |         | $                 | (2,483,441 | )          |            |         | (518,660   | )          |          | $       | (2,483,441 | )          |           |        | (388,760   | )           |            | $           | (2,070,380 | )         
|                            |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |           
|Stock Subscription:         |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |           
|                           
|                           
|                           
|                           
|                            | Balance, beginning of year |                                          |                                          |                   |         |                   | $          |           |            |         |            |            |          |         | $          |           |           |        |            |             |            |             | $          |           |           
|                           
|                           
|                           
|                           
|                            |                            | Stock Subscription                       |                                          |                   |         |                   |            |            | (412,500   | )       |            |            |          |         |            |            |          |        |            |             |            |             |            |            |           |           
|                            |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |           
|                            | Balance, End of Year       |                                          |                                          |                   |         |                   | $          | (412,500   | )          |         |            |            |          |         |            |           |           |        |            |             |            |             |            |           |           
|                            |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |           
|Additional Paid-in Capital: |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |           
|                           
|                           
|                           
|                           
|                            | Balance, beginning of year |                                          |                                          |                   |         |                   | $          | 92,695,792 |            |         |            |            |          |         | $          | 87,307,886 |           |        |            |             |            |             | $          | 77,531,270 |           
|                           
|                           
|                           
|                           
|                            |                            | Exchange/redemption of preferred stock   |                                          |                   |         |                   |            |            | (1,707,930 | )       |            |            |          |         |            |            |          |        |            |             |            |             |            |            |           |           
|                           
|                           
|                           
|                           
|                            |                            | Issuance of preferred stock              |                                          |                   |         |                   |            |            |           |         |            |            |          |         |            |            | 4,999,500 |        |            |             |            |             |            |            |           |           
|                           
|                           
|                           
|                           
|                            |                            | Cost of issuing preferred stock          |                                          |                   |         |                   |            |            |           |         |            |            |          |         |            |            | (479,617  | )      |            |             |            |             |            |            |            |           
|                           
|                           
|                           
|                           
|                            |                            | Conversion of preferred stock            |                                          |                   |         |                   |            |            | 58,046     |         |            |            |          |         |            |            | 313,402   |        |            |             |            |             |            |            | 31,852     |           
|                           
|                           
|                           
|                           
|                            |                            | Stock subscription                       |                                          |                   |         |                   |            |            | 392,500    |         |            |            |          |         |            |            |           |        |            |             |            |             |            |            |            |           
|                           
|                           
|                           
|                           
|                            |                            | Exercise of employee stock options       |                                          |                   |         |                   |            |            | 67         |         |            |            |          |         |            |            | 3,180     |        |            |             |            |             |            |            | 1,500      |           
|                           
|                           
|                           
|                           
|                            |                            | Exercise of stock options by consultants |                                          |                   |         |                   |            |            |           |         |            |            |          |         |            |            | (19,800   | )      |            |             |            |             |            |            |           |           
|                           
|                           
|                           
|                           
|                            |                            | Deemed dividend                          |                                          |                   |         |                   |            |            |           |         |            |            |          |         |            |            | 571,241   |        |            |             |            |             |            |            |           |           
|                           
|                           
|                           
|                           
|                            |                            | Reverse stock split                      |                                          |                   |         |                   |            |            |           |         |            |            |          |         |            |            |          |        |            |             |            |             |            |            | 9,743,264  |           
|                            |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |           
|Balance, end of year        |                            |                                          |                                          |                   |         | $                 | 91,438,475 |            |            |         |            |            |          | $       | 92,695,792 |            |           |        |            |             |            | $           | 87,307,886 |           
|                            |                            |                                          |                                          |                   |         |                   |            |            |            |         |            |            |          |         |            |            |           |        |            |             |            |             |            |           

See accompanying notes to consolidated financial statements

31



---



##### 



HEARx LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY

|                                                                         |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |             |            |  
|------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------ | ----------------------------------- | ---------- | ----------------- | ---------- | ----------------- | ---------- | ----------- | ---------- | - | ---------- | ----------- | ---------- | -
|                                                                         |                                                                                            | Year Ended                          |            | Year Ended        |            | Year Ended       
|                                                                         |                                                                                            | December 29, 2000                   |            | December 31, 1999 |            | December 29, 2001
|                                                                         |                                                                                            |                                     |            |                   |            |                  
|                                                                         |                                                                                            | Amount                              |            | Amount            |            | Amount           
|                                                                         |                                                                                            |                                     |            |                   |            |                  
|Accumulated Deficit:                                                     |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |            
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Balance, beginning of year                                                                 |                                     | $          | (79,746,700       | )          |                   | $          | (75,083,251 | )          |   | $          | (70,257,968 | )         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                            | Net loss for the year               |            |                   | (8,629,531 | )                 |            |             | (3,316,577 | ) |            |             | (4,003,896 | )
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                            | Deemed dividends on preferred stock |            |                   |           |                   |            |             | (571,241   | ) |            |             |           |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                            | Preferred stock dividends           |            |                   | (812,205   | )                 |            |             | (775,631   | ) |            |             | (821,387   | )
|                                                                         |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |            
|                                                                         | Balance, end of year                                                                       |                                     | $          | (89,188,436       | )          |                   | $          | (79,746,700 | )          |   | $          | (75,083,251 | )         
|                                                                         |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |            
|Unamortized Deferred Compensation:                                       |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |            
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Balance, beginning of year                                                                 |                                     | $          |                  |            |                   | $          | (37,813     | )          |   | $          | (75,625     | )         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                            | Amortization                        |            |                   |           |                   |            |             | 37,813     |   |            |             | 37,812     |  
|                                                                         |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |            
|                                                                         | Balance, end of year                                                                       |                                     | $          |                  |            |                   | $          |            |            |   | $          | (37,813     | )         
|                                                                         |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |            
|Accumulated Other Comprehensive
        Income:                          |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |            
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Balance, beginning of year                                                                 |                                     | $          |                  |            |                   | $          |            |            |   | $          | 58,263      |           
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Unrealized gains on securities net of
        reclassification adjustment (see disclosure) |                                     |            |                  |            |                   |            |            |            |   |            | (58,263     | )         
|                                                                         |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |            
|                                                                         | Balance, end of year                                                                       |                                     | $          |                  |            |                   | $          |            |            |   | $          |            |           
|                                                                         |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |            
|Comprehensive Income (Loss):                                             |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |            
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Net loss for the year                                                    |                                                                                            | $                                   | (8,629,531 | )                 |            | $                 | (3,316,577 | )           |            | $ | (4,003,896 | )          
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Other comprehensive income (loss)                                        |                                                                                            |                                     |           |                   |            |                   |           |             |            |   | (58,263    | )          
|                                                                         |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |            
|Comprehensive income(loss)                                               |                                                                                            | $                                   | (8,629,531 | )                 |            | $                 | (3,316,577 | )           |            | $ | (4,062,159 | )          
|                                                                         |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |            
|Disclosure of reclassification amount:                                   |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |            
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Unrealized holding losses arising during period                          |                                                                                            | $                                   |           |                   |            | $                 |           |             |            | $ | (84,022    | )          
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Less: reclassification adjustment for gains
        included in net loss |                                                                                            |                                     |           |                   |            |                   |           |             |            |   | 25,759     |            
|                                                                         |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |            
|Net unrealized losses on securities                                      |                                                                                            | $                                   |           |                   |            | $                 |           |             |            | $ | (58,263    | )          
|                                                                         |                                                                                            |                                     |            |                   |            |                   |            |             |            |   |            |            

See notes to accompanying consolidated finanical statements

32



---



##### 



HEARx LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                    |                                                                        |              |            |              |   |              |            |             |   |   |            |            |  
|----------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------ | ---------- | ------------ | - | ------------ | ---------- | ----------- | - | - | ---------- | ---------- | -
|                                                                                    |                                                                        |             
|                                                                                    |                                                                        | Year Ended  
|                                                                                    |                                                                        |             
|                                                                                    |                                                                        | December 29, |            | December 29, |   | December 31,
|                                                                                    |                                                                        | 2001         |            | 2000         |   | 1999        
|                                                                                    |                                                                        |              |            |              |   |             
|Cash flows from operating
        activities:                                       |                                                                        |              |            |              |   |              |            |             |   |   |            |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Net loss                                                                            |                                                                        | $            | (8,629,531 | )            |   | $            | (3,316,577 | )           |   | $ | (4,003,896 | )         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Adjustments to reconcile net loss to net cash
        used in operating activities: |                                                                        |              |            |              |   |              |            |             |   |   |            |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Depreciation and amortization                                          |              |            | 2,410,160    |   |              |            | 2,572,048   |   |   |            | 2,420,891  |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Provision for doubtful accounts                                        |              |            | 125,206      |   |              |            | 377,500     |   |   |            | 568,135    |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Loss on disposition of equipment                                       |              |            | 105,127      |   |              |            | 72,005      |   |   |            | 40,325     |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Minority Interest                                                      |              |            |             |   |              |            |            |   |   |            | (347,677   | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|(Increase) decrease in:                                                             |                                                                        |              |            |              |   |              |            |             |   |   |            |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Accounts and notes receivable                                          |              |            | 1,643,800    |   |              |            | (237,711    | ) |   |            | (2,395,711 | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Inventories                                                            |              |            | (4,180       | ) |              |            | 50,878      |   |   |            | (21,265    | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Prepaid expenses and other                                             |              |            | 35,005       |   |              |            | (326,485    | ) |   |            | (119,092   | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Increase (decrease) in:                                                             |                                                                        |              |            |              |   |              |            |             |   |   |            |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Accounts payable and accrued expenses                                  |              |            | (506,371     | ) |              |            | 463,470     |   |   |            | 1,372,605  |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Accrued salaries and other                                             |              |            | (180,223     | ) |              |            | (453,503    | ) |   |            | (390,486   | )
|                                                                                    |                                                                        |              |            |              |   |              |            |             |   |   |            |           
|Net cash used in operating activities                                               |                                                                        |              | (5,001,007 | )            |   |              | (798,375   | )           |   |   | (2,876,171 | )         
|                                                                                    |                                                                        |              |            |              |   |              |            |             |   |   |            |           
|Cash flow from investing activities:                                                |                                                                        |              |            |              |   |              |            |             |   |   |            |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Purchase of property and equipment                                     |              |            | (1,640,464   | ) |              |            | (1,519,764  | ) |   |            | (1,450,107 | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Proceeds from sale of equipment                                        |              |            | 600          |   |              |            | 2,979       |   |   |            |           |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Purchase of investments                                                |              |            | (10,129,206  | ) |              |            | (10,375,928 | ) |   |            | (2,750,000 | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Proceeds from maturities of investments                                |              |            | 10,972,430   |   |              |            | 10,282,704  |   |   |            | 8,962,516  |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Issuance of note receivable                                            |              |            | (700,000     | ) |              |            |            |   |   |            |           |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Cost of pending merger                                                 |              |            | (976,682     | ) |              |            |            |   |   |            |           |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Net cash from consolidating HEARx West                                 |              |            |             |   |              |            |            |   |   |            | 656,223    |  
|                                                                                    |                                                                        |              |            |              |   |              |            |             |   |   |            |           
|Net cash (used in) provided by investing
        activities                         |                                                                        |              | (2,473,322 | )            |   |              | (1,610,009 | )           |   |   | 5,418,632  |           
|                                                                                    |                                                                        |              |            |              |   |              |            |             |   |   |            |           
|Cash flows from financing activities:                                               |                                                                        |              |            |              |   |              |            |             |   |   |            |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Proceeds from issuance of:                                             |              |            |              |   |              |            |             |   |   |            |            |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Long-term debt                                                         |              |            | 11,790,434   |   |              |            |            |   |   |            | 35,250     |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Principal payments: Long-term debt                                     |              |            | (875,396     | ) |              |            | (289,051    | ) |   |            | (505,905   | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Acquisition of treasury stock                                          |              |            |             |   |              |            | (413,061    | ) |   |            | (1,820,424 | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Exchange & redemption of capital stock                                 |              |            | (2,129,584   | ) |              |            |            |   |   |            |           |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Proceeds from exercise of employee stock options                       |              |            | 70           |   |              |            |            |   |   |            |           |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Proceeds from issuance of capital stock, net of
        offering costs |              |            |             |   |              |            | 4,503,722   |   |   |            | (44,306    | )
|                                                                                    |                                                                        |              |            |              |   |              |            |             |   |   |            |           
|Net cash provided by (used in) financing
        activities                         |                                                                        |              | 8,785,524  |              |   |              | 3,801,610  |             |   |   | (2,335,385 | )         
|                                                                                    |                                                                        |              |            |              |   |              |            |             |   |   |            |           
|Net increase in cash and cash equivalents                                           |                                                                        |              | 1,311,195  |              |   |              | 1,393,226  |             |   |   | 207,076    |           
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Cash and cash equivalents at beginning of year                                      |                                                                        |              | 4,250,413  |              |   |              | 2,857,187  |             |   |   | 2,650,111  |           
|                                                                                    |                                                                        |              |            |              |   |              |            |             |   |   |            |           
|Cash and cash equivalents at end of year                                            |                                                                        | $            | 5,561,608  |              |   | $            | 4,250,413  |             |   | $ | 2,857,187  |           
|                                                                                    |                                                                        |              |            |              |   |              |            |             |   |   |            |           

See accompanying notes to consolidated financial statements

33



---



##### 



HEARx LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                                 |  |              |         |              |  |              |         |  |  |   |         | 
|---------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ------------ |  | ------------ | ------- |  |  | - | ------- | 
|                                                                                                                 |  |             
|                                                                                                                 |  | Year Ended  
|                                                                                                                 |  |             
|                                                                                                                 |  | December 29, |         | December 29, |  | December 31,
|                                                                                                                 |  | 2001         |         | 2000         |  | 1999        
|                                                                                                                 |  |              |         |              |  |             
|Supplemental disclosure of cash flow information:                                                                |  |              |         |              |  |              |         |  |  |   |         | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Cash paid for interest                                                                                           |  | $            | 414,516 |              |  | $            | 32,251  |  |  | $ | 7,419   | 
|                                                                                                                 |  |              |         |              |  |              |         |  |  |   |         | 
|Supplemental schedule of non-cash investing and
        financing activities                                     |  |              |         |              |  |              |         |  |  |   |         | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Preferred stock dividend paid upon conversion in
        kind by issuance of additional common stock             |  | $            | 196,178 |              |  | $            | 392,323 |  |  | $ | 568,898 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Preferred stock dividend paid through exchange/
        redemption by issuance of new preferred and common stock |  |              | 451,093 |              |  |              |        |  |  |   |        | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Deemed dividends                                                                                                 |  |              |        |              |  |              | 571,241 |  |  |   |        | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Issuance of note payable and assumption of
        accounts payable in exchange for customer list and equipment  |  |              |        |              |  |              |        |  |  |   | 482,496 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Issuance of Common Stock to employees                                                                            |  |              |        |              |  |              | 3,340   |  |  |   | 2,860   | 

See accompanying notes to consolidated financial statements

34



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

The Company

HEARx Ltd. (HEARx or the Company), a
Delaware corporation, was organized for the purpose of creating
a nationwide chain of retail centers to serve the needs of the
hearing impaired. At the end of 2001, the Company operated a
total of 82 centers, including 2 part-time centers. Those
included 32 in Florida, 13 in New York, 15 in New Jersey and the
22 HEARx West centers in California.

Helix Transaction

On July 27, 2001, HEARx and Helix, signed a definitive
merger agreement, which was subsequently amended and restated as
of November 6, 2001. Helix owns or manages 128 hearing
healthcare clinics located in Massachusetts, Pennsylvania, New
York, Ohio, Michigan, Wisconsin, Minnesota, Washington and
Missouri as well as in the Provinces of Ontario and Quebec.
Pursuant to the merger agreement, HEARx has agreed, subject to
stockholder, regulatory and other necessary approvals, to issue
shares of HEARx common stock and common stock equivalents to the
holders of Helix common shares in exchange for those shares. The
transaction would result in Helix becoming an indirect wholly
owned subsidiary of HEARx. At the effective time of the merger,
each outstanding share of Helix common stock would be converted
into the right to receive .3537 shares of HEARx common stock or
..3537 exchangeable shares of a newly formed wholly owned
Canadian subsidiary of HEARx. The exchangeable shares are
initially exchangeable into one share of HEARx common stock at
the election of the holder. Based on the number of shares of
Helix common stock outstanding at November 30, 2001, up to
14.61 million new shares of HEARx common stock or
exchangeable shares will be issued to Helix stockholders in
connection with the merger upon consummation assuming all
approvals are obtained and there are no significant dissenting
Helix shareholders. See Note 10, which describes certain
significant transactions between HEARx and Helix.

The boards of directors of both companies have approved the
transaction. The transaction is now subject to approval by the
stockholders of both HEARx and Helix and by the Canadian courts.
HEARx has filed a registration statement/proxy statement on
Form S-4 with the U.S. Securities and Exchange Commission
relating to the Helix transaction and the Form S-4 is
currently undergoing the SEC review process. The transaction is
expected to close before the end of the second quarter of 2002.
After the transaction, the Company intends to change its name to
Hear USA, Inc. As of December 29, 2001, the
Company had incurred legal and professional fees of
approximately $976,000 in connection with the pending merger,
which are included in Deposits and other in the accompanying
consolidated balance sheet.

Segments

The Companys operations are organized by centers into
three geographic regions, the Northeast, Florida and California.
These regions comprise one operating segment. Net revenues and
income (loss) from operations at center level by region are
as follows:

|                              |      |           |   |            |   |            |   |            |  |       |   |            |  |  |  |             |   |  |   |            |  
|----------------------------- | ---- | --------- | - | ---------- | - | ---------- | - | ---------- |  | ----- | - | ---------- |  |  |  | ----------- | - |  | - | ---------- | -
|                              |      | Northeast |   | Florida    |   | California |   | Corporate  |  | Total
|                              |      |           |   |            |   |            |   |            |  |      
|Net Revenues                  |      |           |   |            |   |            |   |            |  |       |   |            |  |  |  |             |   |  |   |           
|                             
|                             
|                             
|                             
|                              | 2001 |           | $ | 11,900,000 |   |            | $ | 20,000,000 |  |       | $ | 16,900,000 |  |  |  |            |   |  | $ | 48,800,000 |  
|                             
|                             
|                             
|                             
|                              | 2000 |           |   | 14,200,000 |   |            |   | 24,000,000 |  |       |   | 17,900,000 |  |  |  |            |   |  |   | 56,100,000 |  
|                             
|                             
|                             
|                             
|                              | 1999 |           |   | 10,100,000 |   |            |   | 25,000,000 |  |       |   | 12,400,000 |  |  |  |            |   |  |   | 47,500,000 |  
|Income (Loss) from Operations |      |           |   |            |   |            |   |            |  |       |   |            |  |  |  |             |   |  |   |           
|                             
|                             
|                             
|                             
|                              | 2001 |           |   | (228,000   | ) |            |   | 2,985,000  |  |       |   | 1,894,000  |  |  |  | (12,850,000 | ) |  |   | (8,199,000 | )
|                             
|                             
|                             
|                             
|                              | 2000 |           |   | 861,000    |   |            |   | 4,529,000  |  |       |   | 2,430,000  |  |  |  | (11,402,000 | ) |  |   | (3,582,000 | )
|                             
|                             
|                             
|                             
|                              | 1999 |           |   | (680,000   | ) |            |   | 5,199,000  |  |       |   | 1,970,000  |  |  |  | (11,023,000 | ) |  |   | (4,534,000 | )

35



---



##### 



Income (loss) from operations at the center level are
computed before general and administrative expenses and
depreciation/amortization. Center operations depreciation
amounted to $1,666,000, $1,863,000 and $1,793,000 in 2001, 2000
and 1999 respectively. Center operations capital
expenditures amounted to $870,000, $952,000 and $1,450,000 in
2001, 2000 and 1999, respectively. Aggregate identifiable assets
of center operations at December 29, 2001 and
December 29, 2000 were $ 6,172,000 and $7,159,000,
respectively.

Consolidation and change
in reporting entity

On August 10, 1998, HEARx formed a joint venture, HEARx
West LLC, with the Permanente Federation LLC to create and
operate a network of retail hearing care centers (HEARx
West Centers). The joint venture agreement provides for a
50/50 ownership by HEARx and the Permanente Federation, with
centers bearing the HEARx name. The agreement provides for net
income and losses, tax credits and tax preference items to be
allocated according to the members percentage interests.

Prior to March 1999, HEARx Ltd. accounted for its investment in
HEARx West using the equity method because HEARx did not control
HEARx West due to certain provisions in the joint venture
agreement. In March 1999, as a result of amendments to the
agreement, HEARx obtained control of HEARx West. Accordingly,
HEARx has included the financial position and results of
operations of HEARx West in the accompanying consolidated
financial statements.

Fiscal year

The Companys fiscal year ends on the last Saturday in
December and customarily consists of four 13-week quarters for a
total of 52 weeks. Every sixth year includes 53 weeks.

Investment securities

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

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.

Intangible assets

Intangible assets, included in deposits and other, primarily
represent customer lists acquired from acquisitions of hearing
businesses. These customer lists are being amortized on a
straight-line basis over periods ranging from nine to fifteen
years. Intangible assets also include the excess purchase price
of acquisitions over the fair value of assets acquired. Such
excess costs are being amortized over fifteen years. Total costs
of intangible assets were approximately $1,567,000 at both
December 29, 2001 and 2000, and accumulated amortization at
December 29, 2001 and 2000 was approximately $575,000 and
$463,000, respectively.

36



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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 29, 2001, no long-lived assets
were held for disposal.

Advertising Costs

Costs for newspaper, television, and other media advertising are
expensed as incurred and were $6,781,000, $7,757,000 and
$5,470,000 in 2001, 2000, and 1999, respectively.

Sales return policy

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

Warranties

Hearing aids sold by the Company are covered by
manufacturers warranties.

Revenue Recognition

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

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

Income taxes

Deferred taxes are provided for temporary differences arising
from the differences between financial statement and income tax
bases of assets and liabilities. A valuation allowance is
provided for the amount of deferred tax assets which are not
considered more likely than not to be realized.

Net loss per common
share

Net loss per common share is calculated in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 128 Earnings Per Share which requires
companies to present basic and diluted earnings per share. Net
loss per 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. Convertible preferred
stock, stock options and stock warrants are excluded from the
computations of net loss per share because the effect of their
inclusion would be anti-dilutive.

37



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Excluded from the computation of net loss per common share
 diluted at December 29, 2001, December 29, 2000
and December 31, 1999 were convertible preferred stock,
outstanding options and warrants to purchase 6,613,368,
3,457,296 and 2,693,885 shares, respectively, of the
Companys Common Stock at exercise prices less than average
market price because to not do so would be anti-dilutive. In
addition, outstanding options and warrants to purchase
1,615,045, 1,568,560 and 889,941 shares of common stock were
excluded because the options and warrants exercise
prices were greater than the average market price of the common
shares.

Statements of Cash
Flows

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

Reclassifications

Certain amounts in the 2000 and 1999 financial statements have
been reclassified in order to conform to the 2001 presentation.

Estimates

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

Stock-based
compensation

The Company has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and related interpretations in
accounting for its employee stock options. Under APB 25, because
the exercise price of employee stock options equals the market
price of the underlying stock on the date of grant, no
compensation expense is recorded. The Company has adopted the
disclosure only provisions of SFAS No. 123, (SFAS
123) Accounting for Stock-Based Compensation.

2. Investment Securities

Investment securities available for sale consist of the
following:

|                        |  |           |         |                |  |           |   |  |  |   |         | 
|----------------------- |  | --------- | ------- | -------------- |  | --------- | - |  |  | - | ------- | 
|                        |  |           |         | Gross          |  | Estimated
|                        |  | Amortized |         | Unrealized     |  | Market   
|                        |  | Cost      |         | Gains/(Losses) |  | Value    
|                        |  |           |         |                |  |          
|December 29, 2001       |  |           |         |                |  |           |   |  |  |   |         | 
|                       
|                       
|                       
|                       
|                       
|Certificate of Deposit  |  | $         | 150,000 |                |  | $         |  |  |  | $ | 150,000 | 
|                        |  |           |         |                |  |           |   |  |  |   |         | 
|                       
|December 29, 2000       |  |           |         |                |  |           |   |  |  |   |         | 
|                       
|                       
|                       
|                       
|                       
|Asset-Backed Securities |  | $         | 750,000 |                |  | $         |  |  |  | $ | 750,000 | 
|                       
|                       
|                       
|                       
|Certificates of Deposit |  |           | 243,224 |                |  |           |  |  |  |   | 243,224 | 
|                        |  |           |         |                |  |           |   |  |  |   |         | 
|Total                   |  | $         | 993,224 |                |  | $         |  |  |  | $ | 993,224 | 
|                        |  |           |         |                |  |           |   |  |  |   |         | 

At December 29, 2001, the $150,000 certificate of deposit
had a contractual maturity of one year.

38



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The asset-backed securities were Taxable Student Loan
Asset-Backed Notes, with a floating interest rate, which was
reset every 28 days. The fair market value was estimated
using the quoted market price, based on the most recent auction,
which occurred on the 28-day interest reset date. The market
price generally approximated amortized cost due to the floating
interest rate. The 20-year contractual maturity was the maturity
of the underlying assets.

3. Debt

Long term debt consists of the following:

|                                                                          |  |             |            |             |  |   |          |  
|------------------------------------------------------------------------- |  | ----------- | ---------- | ----------- |  | - | -------- | -
|                                                                          |  | December 29 |            | December 29
|                                                                          |  | 2001        |            | 2000       
|                                                                          |  |             |            |            
|Note payable to supplier, see (a) below                                   |  | $           | 10,875,000 |             |  | $ |         |  
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Note payable collateralized by customer list, see
        (b) & (c) below |  |             | 162,500    |             |  |   | 291,144  |  
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Other                                                                     |  |             | 205,812    |             |  |   | 37,130   |  
|                                                                          |  |             |            |             |  |   |          |  
|                                                                          |  |             | 11,243,312 |             |  |   | 328,274  |  
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Less current maturities                                                   |  |             | (2,492,313 | )           |  |   | (152,387 | )
|                                                                          |  |             |            |             |  |   |          |  
|                                                                          |  | $           | 8,750,999  |             |  | $ | 175,887  |  
|                                                                          |  |             |            |             |  |   |          |  

The approximate aggregate maturities on long term debt
obligations in years subsequent to 2001 are as follows:
2002  $2,492,000; 2003  $2,471,000;
2004  $2,305,000; 2005  $2,300,000 and
2006  $1,675,000.



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | On April 23, 2001, the Company and Siemens Hearing
        Instruments, Inc. (Siemens) signed a letter of
        intent pursuant to which the parties intended to form a
        marketing and promotional alliance in the United States. As part
        of this letter of intent, Siemens agreed to provide HEARx with a
        five-year $7.5 million line of credit with interest at 12%,
        payable quarterly. These terms of the letter of intent relating
        to $7.5 million line of credit became binding on
        April 27, 2001, when HEARx first drew on the line of
        credit. Under the letter of intent, HEARx agreed to purchase
        from Siemens a certain percentage of HEARxs total hearing
        aid requirements over the next five years. The letter of intent
        provided that as HEARx purchased products from Siemens, Siemens
        would pay to HEARx certain rebates that would then be used to
        pay the quarterly installments of principal and interest under
        the five-year line of credit. On December 7, 2001, HEARx
        and Siemens entered into the credit agreement and supply
        agreement described below, which superseded the letter of intent.
|
| |    | On December 7, 2001, HEARx entered into a credit agreement
with Siemens pursuant to which Siemens agreed to provide a
$51,875,000 secured credit facility. The credit facility is
comprised of (a) a $10,875,000 secured five-year term loan
credit facility (the Tranche A Loan); (b) a $25,000,000
secured five-year revolving loan credit facility (the
Tranche B Loan); (c) a $3,000,000 secured five-year
term loan facility (the Tranche C Loan); and (d) a
$13,000,000 secured five-year term loan credit facility (the
Tranche D Loan).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |    | The Tranche A Loan proceeds have been drawn and were used as
follows: (i) the repayment of $6,875,000 owed to Siemens by
HEARx under the April 23, 2001 letter of intent;
(ii) a $2,000,000 loan from HEARx to Helix (see
note 10); and (iii) $2,000,000 for the exchange and
redemption of all of the outstanding shares of HEARxs
Series I Convertible Preferred Stock. The Tranche B Loan
may be used only for future acquisitions by HEARx subject to the
guidelines established by the credit facility or as otherwise
agreed to by HEARx and Siemens. The parties intend that the
Tranche C Loan will be used for general working capital
purposes, and the Tranche D Loan for general working
capital purposes and, after the Helix transaction is
consummated, the payment of approximately $6.7 million of
debts belonging to Helix. The credit facility                                                                                                                                                                                                                                                                                                                                                                              

39



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| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | imposes certain financial and other covenants on HEARx. If HEARx
        cannot maintain compliance with these requirements, Siemens may
        decline to make funds available to HEARx. Furthermore, if HEARx
        and Helix do not complete the merger, approximately
        $6.7 million of the credit facility may not be accessible
        to HEARx at all.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |    | 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
prime rate (as defined) plus 1%, on the Tranche D Loan is
payable on the final maturity date. Quarterly principal and
interest payments on Tranche A, B and C Loans will be paid
through rebates received from Siemens by HEARx as long as HEARx
purchases certain minimum percentages of its requirements of
hearing aids from Siemens pursuant to the supply agreement
discussed below. HEARx will record a rebate receivable and
reduce cost of goods sold for the rebates earned as it meets
minimum purchase percentages from Siemens. During 2001,
approximately $1,665,000 of earned rebates were recorded as a
reduction of cost of goods sold, and $390,000 of interest and
$625,000 of principal has been repaid upon receipt of such
rebates. The loans may be prepaid in whole or in part at any
time without penalty. The credit facility is secured by a first
priority security interest in substantially all of the assets of
HEARx.
|
| |    | In connection with the credit facility, HEARx and Siemens
entered into a supply agreement dated as of December 7,
2001, pursuant to which HEARx agreed to purchase from Siemens
certain minimum percentages of HEARxs hearing aid
purchases for a period of ten years (an initial five year term
and a five year renewal term) at specified prices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |    | Pursuant to the agreements with Siemens, in the event of a
change of control of the Company (as defined), and the surviving
entity of such change of control does not assume the
Companys obligations under the agreements, the entire
outstanding amount under the credit facility will be immediately
due and payable and the supply arrangements may be terminated
upon payment to Siemens of a $50 million breakup fee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | b) | In January 1996, the Company acquired the customer list and
        selected assets of Suffolk County Hearing Aid Center, Inc. in
        New York for $150,000 in cash, 150,000 shares of Common Stock,
        and a five year note in the amount of $250,000 including
        interest. The note payable included interest at 5.5% was payable
        in five annual installments of $50,000 including interest
        beginning January 22, 1997 and was repaid in January 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | c) | During July 1999, the Company issued a $325,000 promissory note
        payable bearing 8.75% interest to an individual in connection
        with a purchase of an audiological practice in California, (See
        Note 8). The note is payable in four annual installments of
        $81,250 plus accrued interest, beginning July 1, 2000 and
        is collateralized by the equipment and customer list purchased.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

40



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4. Property and Equipment and Leases

Property and equipment consists of the following:

|                                               |  |              |             |              |  |              |            |  |  |   |            | 
|---------------------------------------------- |  | ------------ | ----------- | ------------ |  | ------------ | ---------- |  |  | - | ---------- | 
|                                               |  | Range of     |             | December 29, |  | December 29,
|                                               |  | Useful Lives |             | 2001         |  | 2000        
|                                               |  |              |             |              |  |             
|Equipment, furniture and fixtures              |  |              | 5 -10 years |              |  | $            | 8,567,807  |  |  | $ | 7,922,131  | 
|                                              
|                                              
|                                              
|                                              
|Leasehold Improvements                         |  |              | 5 -10 years |              |  |              | 6,892,273  |  |  |   | 6,554,421  | 
|                                              
|                                              
|                                              
|                                              
|Computer systems                               |  |              | 3 years     |              |  |              | 3,720,120  |  |  |   | 3,363,613  | 
|                                              
|                                              
|                                              
|                                              
|Leasehold improvements in progress             |  |              | N/A         |              |  |              | 223,855    |  |  |   | 147,050    | 
|                                               |  |              |             |              |  |              |            |  |  |   |            | 
|                                               |  |              |             |              |  |              | 19,404,055 |  |  |   | 17,987,215 | 
|                                               |  |              |             |              |  |              |            |  |  |   |            | 
|Less accumulated depreciation and amortization |  |              |             |              |  |              | 12,568,412 |  |  |   | 10,391,224 | 
|                                               |  |              |             |              |  |              |            |  |  |   |            | 
|                                               |  |              |             |              |  | $            | 6,835,643  |  |  | $ | 7,595,991  | 
|                                               |  |              |             |              |  |              |            |  |  |   |            | 

Approximate future minimum rental commitments under operating
leases are as follows: $4,336,000 in 2002; $3,857,000 in 2003;
$3,095,000 in 2004; $2,742,000 in 2005; $884,000 in 2006 and
$449,000 thereafter. These leases are primarily for hearing
centers and are located in retail shopping areas.

Equipment and building rent expense for the years ended
December 29, 2001, December 29, 2000 and
December 31, 1999 was $3,759,000, $3,181,000 and
$2,956,000, respectively.

5. Stockholders Equity

A. Stock Subscription

On April 1, 2001 the Company sold 200,000 shares of the
Companys common stock, par value $.10 per share
(Common Stock) to an investment banker, for $2.0625
per share, and received a secured, nonrecourse promissory note
for the principal amount of $412,500. The secured, nonrecourse
promissory note is collateralized by the Common Stock purchased
which is held in escrow. The principal amount of the note and
accrued interest is payable on April 1, 2006. The note
bears interest at the prime rate published by the Wall Street
Journal adjusted annually. At December 29, 2001, the
interest rate of the note was 8%. The $412,500 note has been
recorded as Stock Subscription in stockholders equity in
the accompanying balance sheet.

Under the terms of a consulting agreement with the investment
banker, beginning December 1, 2000 the Company paid the
investment banker approximately $188,000 for financial
consulting services, which was recorded as consulting expense of
approximately $38,000 and $150,000 during 2000 and 2001,
respectively. The agreement was terminated in August 2001.

B. Series J Preferred
Stock

On December 13, 2001, the Company completed an exchange and
redemption of all of the 418 shares of outstanding Series I
Convertible Preferred Stock (see Note 5C below) and 203,390
associated common stock purchase warrants for $1,951,000 in
cash, 233 shares of newly created Series J Preferred Stock,
and 470,530 shares of Common Stock. The cost of the transaction
included legal and broker fees of approximately $47,500 in cash
and 136,180 shares of Common Stock issued to the broker. The
fair value of the cash, shares of Series J Preferred Stock,
and Common Stock transferred to the holders of the Series I
Convertible Preferred Stock approximated the carrying value of
the Series I Convertible Preferred Stock and the related
dividends payable of approximately $4.7 million.

The Series J Preferred Stock has a stated value of $10,000
per share and is non-convertible and non-voting. The holders of
the Series J Preferred Stock are entitled to receive
cumulative dividends,

41



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##### 



in cash, at a rate of 6% per year. Dividends earned but not paid
on the applicable dividend payment date will bear interest at a
rate of 18% per year payable in cash unless the holders and the
Company agree that such amounts may be paid in shares of Common
Stock.

At any time the Company has the right to redeem all or a portion
of the Series J Preferred Stock for a redemption price
equal to the stated value plus accrued and unpaid dividends. If
there is a change in control of the Company, only upon or after
the approval thereof by the Companys Board of Directors,
the holders of the Series J Preferred Stock have the right
to require the Company to redeem the Series J Preferred
Stock at a price of 120% of the stated value plus any accrued
and unpaid dividends. The parties have agreed that the
transaction pending with of Helix shall not be deemed to be a
change in control for this purpose.

In the event of liquidation, dissolution or winding up of the
Company prior to the redemption of the Series J Preferred
Stock, holders of the Series J Preferred Stock will be
entitled to receive the stated value per share plus any accrued
and unpaid dividends before any distribution or payment is made
to the holders of any junior securities but after payment is
made to the holders of the 1998 Convertible Preferred Stock, if
any. In the event that the assets of the Company are
insufficient to pay the full amount due the holders of the
Series J Preferred Stock and any holders of securities
equal in ranking, such holders will be entitled to share ratably
in all assets available for distribution.

In connection with this transaction, the Company also entered
into a Registration Rights Agreement with the holder under which
the Company is required to file a registration statement on
Form S-3 covering the resale of the 470,530 shares of
Common Stock issued in this transaction no later than 180 days
from December 13, 2001. The 470,530 shares of Common Stock
issued in the transaction, together with 129,470 shares of
Common Stock currently held by the same holder, have been placed
in escrow and are subject to resale restrictions based on the
trading price of the common stock and appropriate resale
registration. During 2001, approximately $5,000 of the 6%
dividend is included in the caption Dividends under Dividends on
Preferred Stock in the accompanying consolidated statements of
operations.

C. Series I
Convertible Preferred Stock

On May 9, 2000, the Company completed a private placement
of 500 shares of the Companys 7% Series I Convertible
Preferred Stock, par value $1.00 per share (the
Series I Preferred Stock) and warrants to
acquire 203,390 shares Common Stock, for an aggregate purchase
price of $5.0 million. The net proceeds to the Company
after payment of finders fees, placement fees, legal and
accounting expenses was approximately $4.5 million. In
connection with the placement of the Series I Preferred
Stock, the Company also issued finders warrants to purchase an
aggregate of 131,695 shares of Common Stock at an exercise price
equal to $4.46.

The Series I Preferred Stock was convertible into Common
Stock after August 6, 2000. Upon conversion, holders were
entitled to receive a number of shares of Common Stock
determined by dividing the sum of the stated value of the
Series I Preferred Stock ($10,000 per share), plus accrued
and unpaid dividends (unless the Company elected to pay
dividends in cash) by $4.46 (subject to adjustments upon
occurrence of certain dilutive events). The dividends payable
upon conversion were equal to 7% of the stated value of the
Series I Preferred Stock per annum in cash or by accretion
to the Stated Value, at the Companys discretion subject to
limited exceptions. The Series I Preferred Stock could not
be converted until after August 6, 2000 and then at the
fixed conversion price of $4.46 per share until January 2001.
From January 2001 until May 2001, the holders could request
redemption of the shares of preferred stock at 110% of the
stated value plus accrued dividends. If the Company elected not
to redeem the shares, the conversion price converted to the
lesser of $4.46 or the market price (defined as the average of
the 5 lowest closing prices for the 30 trading days preceding
the conversion date) at the time of conversion. The
Series I Preferred Stock could be converted by holders in
accordance with these terms any time prior to May 9, 2003,
and would automatically convert on such date. In the event of
liquidation, dissolution or winding up of the Company prior to
the conversion of the Series I Preferred Stock, holders of
the Series I Preferred Stock would be entitled to receive
an amount equal to the stated value per share before any
distribution could be made to the holders of any junior
securities but after any distribution was made to holders of
senior securities. During 2001, 82 shares of the Series I
Convertible Preferred Stock were converted into 689,106 shares of

42



---



##### 



Common Stock, prior to the exchange and redemption of the
remaining 418 shares in December 2001. During 2001 and 2000,
approximately $283,000 and $224,000, respectively, of the 7%
dividends payable upon conversion had been accreted and is
included in the caption Dividends under Dividends on Preferred
Stock in the accompanying consolidated statements of operations.

The related common stock purchase warrants issued to the
investor in connection with the Series I Preferred Stock
private placement, were exercisable for shares of Common Stock
for an exercise price of $4.46 per share. The warrants would
have expired on May 9, 2005.

During the year ended December 29, 2000, the Company
recorded a deemed dividend of approximately $571,000 for the
intrinsic value of the beneficial conversion option under the
terms of the Series I Preferred Stock. The deemed dividend
includes an allocation of the proceeds to the relative fair
value of the warrants of approximately $285,500, and the
intrinsic value of the beneficial conversion of approximately
$285,500.

All of the shares of the Series I Convertible Preferred
Stock and the related common stock purchase warrants were
redeemed and exchanged on December 13, 2001 as described
above, and no shares of the series remain outstanding.

D. Reverse Stock Split

On June 30, 1999 the Company effectuated a one for ten
reverse common stock split. The reverse stock split and a
reduction in the authorized shares of common stock to twenty
million were approved at the June 7, 1999 Annual Meeting of
Stockholders. Each stockholder of ten shares of common stock on
June 30, 1999 was entitled to one share of common stock in
connection with the reverse split. A cash payment was paid in
lieu of fractional shares. Accordingly, except for the
presentation in the accompanying consolidated balance sheets and
statements of changes in stockholders equity, the Company
has restated all share and per share data for all periods
presented to reflect the change in capital structure.

E. 1998 Convertible
Preferred Stock

On August 27, 1998, the Company completed a private
placement of 7,500 units of $1 par, 1998 Convertible Preferred
Stock and related common stock purchase warrants. Net proceeds
to the Company after the payment of placement fees, legal and
accounting expenses was $6,975,000. The additional capital was
primarily raised to fund construction and start-up costs of the
HEARx West centers.

The 1998 Convertible Preferred Stock ranks prior to all of the
Companys Common Stock, prior to any class or series of
capital stock of the Company thereafter created specifically
ranking by its terms junior to 1998 Convertible Preferred,
junior to the Companys 1997 Convertible Preferred Stock
(none of which remains outstanding) and after any class or
series of capital stock of the Company thereafter created and
specifically ranking by its terms senior to the 1998 Convertible
Preferred. Upon conversion the 1998 Convertible Preferred
holders are entitled to receive a number of shares of Common
Stock determined by dividing the sum of the stated value of the
1998 Convertible Preferred ($1,000 per share) so converted plus
a premium (unless the Company elects to pay that premium in
cash), by a conversion price equal to the lesser of the average
closing bid prices for the Common Stock five of twenty days
prior to conversion, and $18.00 ( the closing bid price at the
date of issuance, subject to adjustment upon occurrence of
certain dilutive events including the reverse split described
above). The premium payable upon conversion is equal to 8% of
the stated value of 1998 Convertible Preferred from the date of
issuance until one year following such date, and increased by
0.5% each year, commencing on the date which was one year
following the date of issuance. The 1998 Convertible Preferred
may be converted by holders in accordance with these terms at
any time prior to August 27, 2003, and automatically
converts on such date. In the event of liquidation, dissolution
or winding up of the Company prior to conversion of the 1998
Convertible Preferred, holders of 1998 Convertible Preferred
will be entitled to share ratably in all assets available for
distribution prior to distributions to holders of Common Stock.
In addition, no distributions may be made to holders of Common

43



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##### 



Stock until holders of 1998 Convertible Preferred shall have
received a liquidation preference equal to the sum of the stated
value of the 1998 Preferred Stock ($1,000 per share) plus an
amount equal to ten percent (10%) per annum of such stated value
for the period from the date of issuance until the date of final
distribution. During 2001, 2000 and 1999, 638, 1,800 and 185
shares of the 1998 Convertible Preferred, respectively, plus
accrued dividends of $ 140,255, $216,926 and $16,156,
respectively, were converted into 699,413, 517,989 and 44,712
shares of the Companys Common Stock, respectively. In
addition, during 2001, 100 shares of the 1998 Convertible
Preferred plus accrued dividends of $30,947 was redeemed for
cash of approximately $139,000. During 2001, 2000 and 1999
approximately $524,000, $543,000 and $655,000, respectively, of
the conversion premium has been accreted and is included in the
caption Dividends under Dividends on Preferred Stock in the
accompanying consolidated statements of operations.

For each unit of 1998 Convertible Preferred purchased, each
investor received warrants to acquire 7.5 shares of Common Stock
of the Company. Upon exercise, holders will be entitled to
receive shares of Common Stock for an exercise price of $18.00
per share. The warrants will expire on August 27, 2003. In
connection with this transaction, the Company issued an
additional 56,250 warrants with an exercise price of $18.00 to
certain individuals as finders fees for the placement of
the 1998 Convertible Preferred with investors. All related
warrants remain outstanding as of December 29, 2001.

F. 1997 Convertible
Preferred Stock

The 1997 Convertible Preferred Stock ranked prior to all of the
Companys Common Stock, prior to any class or series of
capital stock of the Company thereafter created specifically
ranking by its terms junior to 1997 Convertible Preferred, and
after any class or series of capital stock of the Company
thereafter created and specifically ranking by its terms senior
to the 1997 Convertible Preferred. The 1997 Convertible
Preferred Stock bore a cumulative premium of 6%, payable in kind
or cash upon conversion at the option of the Company. Upon
conversion of the Preferred Stock, holders were entitled to
receive a number of shares of Common Stock determined by
dividing the stated value of the Preferred Stock ($1,000 per
share), plus a premium in the amount of 6% per annum of the
stated value from the date of issuance (unless the Company chose
to redeem the shares otherwise issuable in respect of that
premium) by a conversion price equal to the lesser of
(i) $50.00, or (ii) 85% of the average of the closing
bid prices for shares of Common Stock for the ten day trading
period immediately prior to conversion. The 1997 Convertible
Preferred Stock was convertible by holders beginning
August 15, 1997 and at any time prior to March 17,
2000 and must have been converted on that date. During 2000 and
1999 1,000 and 4,209, shares of the 1997 Convertible Preferred
Stock plus accrued dividends of $175,397 and $552,743, were
converted into 299,214 and 1,098,906, shares of the
Companys Common Stock, respectively. All shares of the
1997 Convertible Preferred Stock had been converted before
December 29, 2000. During 2000 and 1999 approximately
$9,000 and $166,000, respectively, of the 6% conversion premium
had been accreted and is included in the caption Dividends under
Dividends on Preferred Stock in the accompanying consolidated
statements of operations.

In connection with the 1997 Convertible Preferred Stock, the
Company issued 85,000 warrants with an exercise price of $50.00
and 75,000 five-year warrants with an exercise price of $20.00
to purchase shares of the Companys Common Stock. These
warrants were issued to certain individuals as finders
fees for the placement of the preferred shares with investors.
As of December 29, 2001 59,500 warrants remain outstanding.

G. Shareholder Rights
Plan

On December 14, 1999, the Board of Directors approved the
adoption of a Shareholder Rights Plan, in which a dividend of
one preferred share purchase right (a Right) for
each outstanding share of Common Stock was declared, and payable
to the stockholders of record on December 31, 1999. The
Rights will be exercisable only if a person or group acquires
15% or more of the Companys Common Stock or announces a
tender offer which would result in ownership of 15% or more of
the Common Stock. The Rights entitle the holder to purchase one
one-hundredth of a

44



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##### 



share of Series H Junior Participating Preferred Stock at
an exercise price of $28.00 and will expire on December 31,
2009.

Following the acquisition of 15% or more of the Companys
Common Stock by a person or group without the prior approval of
the Board of Directors, the holders of the Rights (other than
the acquiring person) will be entitled to purchase shares of
Common Stock (or Common Stock equivalents) at one-half the then
current market price of the Common Stock, or at the election of
the Board of Directors, to exchange each Right for one share of
the Companys Common Stock (or Common Stock equivalent). In
the event of a merger or other acquisition of the Company
without the prior approval of the Board of Directors, each Right
will entitle the holder (other than the acquiring person), to
buy shares of common stock of the acquiring entity at one-half
of the market price of those shares. The Company will be able to
redeem the Rights at $0.01 per Right at any time until a person
or group acquires 15% or more of the Companys Common
Stock. The Board of Directors specifically exempted the pending
Helix transaction from the operation of the Plan.

The Series H Junior Participating Preferred Stock is
subject to the rights of the holders of any shares of any series
of preferred stock of the Company ranking prior and superior to
the Series H Junior participating Preferred Stock with
respect to dividends. The holders of shares of Series H
Junior Participating Preferred; in preference to the holders of
shares of Common Stock, and any other junior stock, shall be
entitled to receive dividends, when, as and if declared by the
Board of Directors out of funds legally available therefore.

H. Warrants

No warrants were exercised in 2001.

The aggregate number of common shares reserved for issuance upon
the exercise of warrants is 462,383 as of December 29,
2001. The expiration date and exercise prices of the outstanding
warrants are as follows:

|            |         |            |  |          |      |  |  |   |       | 
|----------- | ------- | ---------- |  | -------- | ---- |  |  | - | ----- | 
|Outstanding |         | Expiration |  | Exercise
|Warrants    |         | Date       |  | Price   
|            |         |            |  |         
|            | 59,500  |            |  |          | 2002 |  |  | $ | 50.00 | 
|           
|           
|           
|           
|            | 57,712  |            |  |          | 2003 |  |  |   | 12.50 | 
|           
|           
|           
|           
|            | 30,000  |            |  |          | 2001 |  |  |   | 6.30  | 
|           
|           
|           
|           
|            | 65,975  |            |  |          | 2003 |  |  |   | 20.00 | 
|           
|           
|           
|           
|            | 112,501 |            |  |          | 2003 |  |  |   | 18.00 | 
|           
|           
|           
|           
|            | 5,000   |            |  |          | 2002 |  |  |   | 30.00 | 
|           
|           
|           
|           
|            | 131,695 |            |  |          | 2005 |  |  |   | 2.46  | 
|            |         |            |  |          |      |  |  |   |       | 
|            | 462,383 |            |  |          |      |  |  |   |       | 
|            |         |            |  |          |      |  |  |   |       | 

I. Aggregate and Per Share
Cumulative Preferred Dividends

As of December 29, 2001 and 2000, the aggregate and per
share amount of arrearages in cumulative preferred
dividends/premiums were $1,521,000 and $1,387,000 and $.11/share
and $.12/share, respectively.

45



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##### 



6. Stock Plans

The Company has the following stock plans:

A. Employee Stock Option
Plans

In 1987, the Company established the 1987 Stock Option Plan. It
is administered by the Companys Board of Directors. A
maximum of 250,000 shares of Common Stock were authorized for
issuance under this plan. All employees of the Company, other
than its then principal stockholder (Dr. Paul A.
Brown) were eligible to receive options under this plan at the
sole discretion of the Board of Directors. Both incentive and
non-incentive stock options could be granted. This plan expired
June 2, 1997 and no further option grants can be made under
this plan. The expiration of the plan did not affect the
outstanding options which shall remain in full force as if the
plan had not expired.

In 1995, the Company established the 1995 Flexible Stock Plan.
It is also administered by the Companys Board of
Directors. An original maximum of 250,000 shares of the
Companys Common Stock were authorized for issuance under
this plan. On June 6, 2000 the shareholders approved an
increase of 500,000 shares of the Companys stock available
under this plan. The plan authorizes an annual increase in
authorized shares equal to 10% of the number of shares
authorized as of the prior year. Currently an aggregate of 4,895
shares remain as authorized but not yet subject to a plan grant
under the plan. All employees of the Company are eligible to
receive incentive stock options, non-qualified stock options,
stock appreciation rights, restricted shares, performance
shares, and other stock-based awards under this plan at the sole
discretion of the Board of Directors.

On October 24, 2001 and December 14, 1999 the Board of
Directors approved the issuance of non-qualified stock options
to purchase 300,000 and 213,246 shares of the Companys
Common Stock for $.77 and $3.88 per share, respectively, to
certain officers of the Company. These grants are independent of
the Companys 1987 and 1995 stock option plans and are to
be funded on exercise from shares of treasury stock.

As of December 29, 2001, 338 employees of the Company held
options permitting them to purchase an aggregate of 1,574,222
shares of Common Stock at prices ranging from $.77 to $30.00 per
share. Options are exercisable for periods ranging from four to
nine years commencing one year following the date of grant and
are generally exercisable in cumulative annual installments of
25 percent per year.

46



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##### 



The following table summarizes the transactions of the
Companys employee stock option plans:

|                                                                   |  |                   |           |                   |  |                   |      |          |  |        |         |          |  |   |      |  |  |   |         |  |  |   |      | 
|------------------------------------------------------------------ |  | ----------------- | --------- | ----------------- |  | ----------------- | ---- | -------- |  | ------ | ------- | -------- |  | - | ---- |  |  | - | ------- |  |  | - | ---- | 
|                                                                   |  |                  
|                                                                   |  | Year Ended       
|                                                                   |  |                  
|                                                                   |  |                   |           |                   |  |                  
|                                                                   |  | December 29, 2001 |           | December 29, 2000 |  | December 31, 1999
|                                                                   |  |                   |           |                   |  |                  
|                                                                   |  |                   |           | Weighted          |  |                   |      | Weighted |  |        |         | Weighted
|                                                                   |  |                   |           | Average           |  |                   |      | Average  |  |        |         | Average 
|                                                                   |  |                   |           | Exercise          |  |                   |      | Exercise |  |        |         | Exercise
|                                                                   |  | Shares            |           | Price             |  | Shares            |      | Price    |  | Shares |         | Price   
|                                                                   |  |                   |           |                   |  |                   |      |          |  |        |         |         
|Outstanding at beginning of year                                   |  |                   | 873,957   |                   |  | $                 | 5.42 |          |  |        | 764,194 |          |  | $ | 5.78 |  |  |   | 464,718 |  |  | $ | 7.19 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Granted                                                            |  |                   | 758,830   |                   |  | $                 | 1.04 |          |  |        | 152,360 |          |  | $ | 4.12 |  |  |   | 342,256 |  |  | $ | 4.17 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Exercised                                                          |  |                   | 35        |                   |  | $                 | 2.00 |          |  |        | 1,600   |          |  | $ | 2.09 |  |  |   | 1,360   |  |  | $ | 2.10 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Forfeited and cancelled                                            |  |                   | 58,530    |                   |  | $                 | 5.17 |          |  |        | 40,997  |          |  | $ | 7.42 |  |  |   | 41,420  |  |  | $ | 8.45 | 
|                                                                   |  |                   |           |                   |  |                   |      |          |  |        |         |          |  |   |      |  |  |   |         |  |  |   |      | 
|Outstanding at end of year                                         |  |                   | 1,574,222 |                   |  | $                 | 3.32 |          |  |        | 873,957 |          |  | $ | 5.42 |  |  |   | 764,194 |  |  | $ | 5.78 | 
|                                                                   |  |                   |           |                   |  |                   |      |          |  |        |         |          |  |   |      |  |  |   |         |  |  |   |      | 
|Exercisable at end of year                                         |  |                   | 862,388   |                   |  |                   |      |          |  |        | 452,214 |          |  |   |      |  |  |   | 345,921 |  |  |   |      | 
|                                                                   |  |                   |           |                   |  |                   |      |          |  |        |         |          |  |   |      |  |  |   |         |  |  |   |      | 
|Weighted average fair value of options granted
        during year |  | $                 | 0.80      |                   |  |                   |      |          |  | $      | 3.43    |          |  |   |      |  |  | $ | 2.96    |  |  |   |      | 
|                                                                   |  |                   |           |                   |  |                   |      |          |  |        |         |          |  |   |      |  |  |   |         |  |  |   |      | 

The following table summarizes information about fixed employee
stock options outstanding at December 29, 2001:

|                        |  |             |           |             |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 
|----------------------- |  | ----------- | --------- | ----------- |  | -------- | --- | ----------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                        |  |             |           | Weighted    |  |          |     |             |  |         
|                        |  |             |           | Average     |  | Weighted |     | Options     |  | Weighted
|                        |  |             |           | Remaining   |  | Average  |     | Exercisable |  | Average 
|                        |  | Options     |           | Contractual |  | Exercise |     | At December |  | Exercise
|Range of Exercise Price |  | Outstanding |           | Life        |  | Price    |     | 29, 2001    |  | Price   
|                        |  |             |           |             |  |          |     |             |  |         
|$ .77  $ 2.00          |  |             | 794,880   |             |  |          | 7.4 |             |  | $        | 1.09  |  |  |  | 346,230 |  |  | $ | .93   | 
|                       
|                       
|                       
|                       
|$2.10  $ 5.40          |  |             | 442,171   |             |  |          | 5.2 |             |  | $        | 4.00  |  |  |  | 208,950 |  |  | $ | 4.10  | 
|                       
|                       
|                       
|                       
|$5.41  $ 8.75          |  |             | 320,491   |             |  |          | 4.8 |             |  | $        | 7.27  |  |  |  | 291,448 |  |  | $ | 7.38  | 
|                       
|                       
|                       
|                       
|$8.75  $30.00          |  |             | 16,680    |             |  |          | 5.0 |             |  | $        | 15.69 |  |  |  | 15,760  |  |  | $ | 15.70 | 
|                        |  |             |           |             |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 
|                        |  |             | 1,574,222 |             |  |          |     |             |  |          |       |  |  |  | 862,388 |  |  |   |       | 
|                        |  |             |           |             |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 

The stock options are exercisable in the following years:

|     |  |  |           | 
|---- |  |  | --------- | 
|    
|    
|    
|    
|2002 |  |  | 1,095,831 | 
|    
|    
|    
|    
|2003 |  |  | 222,110   | 
|    
|    
|    
|    
|2004 |  |  | 144,370   | 
|    
|    
|    
|    
|2005 |  |  | 111,911   | 
|     |  |  |           | 
|     |  |  | 1,574,222 | 
|     |  |  |           | 

SFAS 123, Accounting for Stock-Based Compensation, requires the
Company to provide pro forma information regarding net loss and
loss per share as if compensation cost for the Companys
employee stock option plans had been determined in accordance
with the fair value based method prescribed in SFAS 123. The
Company estimates the fair value of each option at the grant
date by using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 2001,
2000, and 1999, respectively, no dividends,

47



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##### 



expected volatility of 93%, 89% and 89%; risk-free interest
rates of 4.66%, 5.12% and 6.65% and expected lives ranging from
5 to 10 years.

Under accounting provisions of SFAS 123, the Companys net
loss and loss per share would have been increased to pro forma
amounts indicated below:

|                                           |             |      |   |             |   |      |   |            |   |  |   |            |  
|------------------------------------------ | ----------- | ---- | - | ----------- | - | ---- | - | ---------- | - |  | - | ---------- | -
|                                           |             | 2001 |   | 2000        |   | 1999
|                                           |             |      |   |             |   |     
|Net Loss applicable to Common Stockholders |             |      |   |             |   |      |   |            |   |  |   |           
|                                          
|                                          
|                                          
|                                          
|                                           | As reported |      | $ | (9,441,736  | ) |      | $ | (4,663,498 | ) |  | $ | (4,825,283 | )
|                                          
|                                          
|                                          
|                                          
|                                           | Pro forma   |      | $ | (10,200,000 | ) |      | $ | (5,591,000 | ) |  | $ | (5,896,000 | )
|Loss per share  basic and diluted         |             |      |   |             |   |      |   |            |   |  |   |           
|                                          
|                                          
|                                          
|                                          
|                                           | As reported |      | $ | (0.72       | ) |      | $ | (0.39      | ) |  | $ | (0.45      | )
|                                          
|                                          
|                                          
|                                          
|                                           | Pro forma   |      | $ | (0.78       | ) |      | $ | (0.47      | ) |  | $ | (0.55      | )

B. Non-Employee Director
Plan

In April 1993, the stockholders of the Company approved the
adoption of the HEARx Ltd. Non-qualified Stock Option Plan for
Non-Employee Directors (Directors Plan). The purpose
of the Directors Plan is to increase the proprietary interest of
non-employee directors and promote long-term stockholder value
by granting stock options to non-employee directors. Grants
cannot exceed 50,000 shares of Common Stock in the aggregate and
may be granted until the Annual Meeting of Stockholders in 2003.
Under the plan, each non-employee director may be granted 1,500
options each year. The option price is the fair market value of
the Companys shares at the date of grant.

As of December 29, 2001, three directors hold options as
follows: 3,000 shares at $ 3.40, 4,500 at $4.00, 4,500 shares at
$5.00, 4,500 shares at $ 6.875, 16,500 at $7.50, and 4,500
shares at prices ranging from $12.50 to $58.75 per share.

C. Stock Bonus Plan

The Board of Directors adopted a Stock Bonus Plan (Bonus
Plan). The number of shares of Common Stock which can be
issued under the Bonus Plan cannot exceed 50,000. It is
administered by the Board of Directors. The purpose of the Bonus
Plan is to provide an incentive to senior management to achieve
the Companys strategic objectives. At present there are
nine senior management personnel eligible to participate. No
shares were issued in 2001, 2000, or 1999.

7. Major Customers and Suppliers

During 2001 and 1999, the Company did not have sales totaling
10% or more of the total net sales to a single customer. In
2000, the Company had sales totaling $ 5.7 million or 10.2%
of net sales to a single customer, Kaiser Permanente Health Plan.

During 2001, 2000 and 1999, the Company purchased approximately
94.9%, 79.2%, and 70.8% of all hearing aids sold by HEARx from
Siemens. As described in Note 3, on December 7, 2001,
the Company entered into a supply agreement with Siemens with an
initial five year term, whereby, the Company agreed to minimum
purchase levels from Siemens. Although there are a limited
number of manufacturers of hearing aids, management believes
that other suppliers could provide similar hearing aids on
comparable terms. In the event of a disruption of supply from
Siemens, the Company could obtain comparable products from other
manufacturers. Few

48



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##### 



manufacturers offer dramatic product differentiation. The
Company has not experienced any significant disruptions in
supply in the past.

8. Related Party Transactions

On January 6, 1999 HEARx West entered into a capitation
contract with an affiliate (the Kaiser Plan) of its
minority owner, the Permanente Federation LLC. Under the terms
of the contract, HEARx West is paid an amount per enrollee of
the Kaiser Plan, to provide a once every three years benefit on
certain hearing products and services. During 2001, 2000 and
1999 approximately $1,943,000, $5,722,000 and $4,308,000 of
capitation revenue from this contract is included in net revenue
in the accompanying consolidated statements of operations.

On July 31, 1999, the Company entered into an asset
purchase agreement with an individual who is employed as the
Companys California Division Manager. Under the terms of
this agreement, the Company purchased equipment for
consideration of approximately $100,000 and a customer list for
consideration of approximately $382,000. Consideration included
cash of $75,000, a $325,000 promissory note payable to the
individual, and assumed trade payables of approximately $82,000.

9. Income Taxes

The Company has accounted for certain items (principally
depreciation and the allowance for doubtful accounts) for
financial reporting purposes in periods different from those for
tax reporting purposes.

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

|                                |  |          |             |      |  |   |             |  
|------------------------------- |  | -------- | ----------- | ---- |  | - | ----------- | -
|                                |  |         
|                                |  | December
|                                |  |         
|                                |  | 2001     |             | 2000
|                                |  |          |             |     
|Depreciation                    |  | $        | 422,000     |      |  | $ | 37,000      |  
|                               
|                               
|                               
|                               
|Allowance for doubtful accounts |  |          | 93,000      |      |  |   | 103,000     |  
|                               
|                               
|                               
|                               
|Joint venture                   |  |          | (931,000    | )    |  |   | (207,000    | )
|                               
|                               
|                               
|                               
|Other                           |  |          | 269,000     |      |  |   | 370,000     |  
|                               
|                               
|                               
|                               
|Net operating loss carryforward |  |          | 26,463,000  |      |  |   | 25,112,000  |  
|                                |  |          |             |      |  |   |             |  
|                                |  |          | 26,316,000  |      |  |   | 25,415,000  |  
|                               
|                               
|                               
|                               
|Less valuation allowance        |  |          | (26,316,000 | )    |  |   | (25,415,000 | )
|                                |  |          |             |      |  |   |             |  
|Net deferred tax asset          |  | $        |            |      |  | $ |            |  
|                                |  |          |             |      |  |   |             |  

At December 29, 2001 the Company had net operating loss
carryforwards of approximately $ 70,000,000 for tax reporting
purposes. The losses are available for carryforward for fifteen
and twenty year periods and will expire beginning in 2002. Any
future significant changes in ownership of the Company may limit
the annual utilization of the tax net operating loss
carryforwards.

10. Note Receivable and Subsequent Events

On November 16, 2001, HEARx loaned $700,000 to Helix for
use by Helix as part of the $3.5 million acquisition of
substantially all of the capital stock of Auxiliary Benefits
Corporation, a Colorado corporation doing business as National
Ear Care Plan (NECP). The note is secured by
substantially all of the assets of NECP, bears interest at a
rate of 12% per annum and matures on November 16, 2002. On
January 10, 2002, HEARx loaned to Helix an additional $2
million to complete the NECP transaction. On January 14,
2002 HEARx and Helix entered into a subscription agreement
pursuant to which HEARx 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.

49



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##### 



11. Commitments and Contingencies

The Company established the HEARx Ltd. 401(k) plan in October
1998. All employees who have attained age 21 with at least three
months of service are eligible to participate in the plan. The
Companys contribution to the plan is determined from year
to year by the Board of Directors. The Companys
contributions to the plan were approximately $45,800, $45,400
and $42,400 for the years ended December 29, 2001,
December 29, 2000 and December 31, 1999, respectively.

Effective December 14, 1999 the Company entered into five
year employment agreements with certain of its executive
officers that provide for annual salaries, severance payments,
and accelerated vesting of stock options upon termination of
employment under certain circumstances or a change in control,
as defined.

12. Quarterly Financial Data (Unaudited)

|                                           |  |         |            |         |  |         |            |         |  |   |            |   |  |   |            |  
|------------------------------------------ |  | ------- | ---------- | ------- |  | ------- | ---------- | ------- |  | - | ---------- | - |  | - | ---------- | -
|Year Ended                                 |  | First   |            | Second  |  | Third   |            | Fourth 
|December 29, 2001                          |  | Quarter |            | Quarter |  | Quarter |            | Quarter
|                                           |  |         |            |         |  |         |            |        
|Net Revenues (a)                           |  | $       | 12,488,191 |         |  | $       | 11,341,188 |         |  | $ | 12,370,798 |   |  | $ | 12,595,933 |  
|                                          
|                                          
|                                          
|                                          
|Operating Expenses                         |  |         | 15,436,835 |         |  |         | 14,037,415 |         |  |   | 13,100,630 |   |  |   | 14,420,580 |  
|                                          
|                                          
|                                          
|                                          
|Loss from Operations                       |  |         | (2,948,644 | )       |  |         | (2,696,227 | )       |  |   | (729,832   | ) |  |   | (1,824,647 | )
|                                          
|                                          
|                                          
|                                          
|Interest Income (a)                        |  |         | 46,574     |         |  |         | 54,290     |         |  |   | 73,919     |   |  |   | 47,566     |  
|                                          
|                                          
|                                          
|                                          
|Net Loss applicable to Common stockholders |  |         | (3,113,224 | )       |  |         | (2,995,535 | )       |  |   | (1,157,723 | ) |  |   | (2,175,254 | )
|                                          
|                                          
|                                          
|                                          
|Earnings per share                         |  |         | (.25       | )       |  |         | (.23       | )       |  |   | (.09       | ) |  |   | (.15       | )

|                                               |  |         |            |         |  |         |            |         |  |   |            |   |  |   |            |  
|---------------------------------------------- |  | ------- | ---------- | ------- |  | ------- | ---------- | ------- |  | - | ---------- | - |  | - | ---------- | -
|Year Ended                                     |  | First   |            | Second  |  | Third   |            | Fourth 
|December 29, 2001                              |  | Quarter |            | Quarter |  | Quarter |            | Quarter
|                                               |  |         |            |         |  |         |            |        
|Net Revenues (a)                               |  | $       | 13,081,825 |         |  | $       | 15,101,443 |         |  | $ | 13,242,307 |   |  | $ | 14,689,257 |  
|                                              
|                                              
|                                              
|                                              
|Operating Expenses                             |  |         | 13,797,022 |         |  |         | 15,596,502 |         |  |   | 14,306,798 |   |  |   | 15,996,496 |  
|                                              
|                                              
|                                              
|                                              
|Loss from Operations                           |  |         | (715,197   | )       |  |         | (495,059   | )       |  |   | (1,064,491 | ) |  |   | (1,307,239 | )
|                                              
|                                              
|                                              
|                                              
|Interest Income (a)                            |  |         | 39,942     |         |  |         | 72,973     |         |  |   | 104,725    |   |  |   | 76,492     |  
|                                              
|                                              
|                                              
|                                              
|Net Loss applicable to Common stockholders (b) |  |         | (819,495   | )       |  |         | (596,898   | )       |  |   | (1,227,839 | ) |  |   | (2,019,217 | )
|                                              
|                                              
|                                              
|                                              
|Earnings per share                             |  |         | (.07       | )       |  |         | (.05       | )       |  |   | (.10       | ) |  |   | (.17       | )



---



|    |                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Net revenues for the first, second, and third quarters of both
        2001 and 2000 differ from net revenues reported in the
        corresponding quarterly financial statements in Form 10-Q
        due to the reclassification of interest income from net revenues
        to non-operating income.
|   
|(b) | net loss applicable to common stockholders for the fourth
        quarter of 2000 includes a deemed dividend of approximately
        $571,000 recorded as a result of implementing EITF 00-27
        Application of Issue 98-5 to Certain Convertible
        Instruments.                           

13. Fair Value of Financial Instruments

SFAS 107 requires the disclosure of fair value of financial
instruments. The estimated fair value amounts have been
determined by the Companys management using available
market information and other valuation methods. However,
considerable judgment is required to interpret market data in
developing the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange.
The use of different market assumptions and/or estimation
methods may have a material effect on the estimated fair value
amounts. Furthermore, the Company does not intend to dispose of
a significant portion of its financial instruments and thus, any
aggregate

50



---



##### 



unrealized gains or losses should not be interpreted as a
forecast of future earnings and cash flows. SFAS 107 excludes
certain financial instruments from its disclosure requirements,
such as leases. In addition, disclosure of fair value estimates
are not required for nonfinancial assets and liabilities, such
as fixed assets, intangibles and anticipated future business. As
a result, the following fair values are not comprehensive and
therefore do not reflect the underlying value of the Company.

The following methods and assumptions were used in estimating
fair value disclosure for financial instruments:

Cash and Cash Equivalents  the carrying
amounts reported in the consolidated balance sheets approximate
those assets fair value due to the short term nature of
these assets.

Investment Securities  the carrying amounts
reported in the consolidated balance sheets approximate those
assets fair value (Note 2).

Accounts and Notes Receivable  the carrying
amounts reported in the consolidated balance sheets approximate
those assets fair value due primarily to the short term
nature of these assets.

Accounts Payable and Accrued Expenses  the
carrying amounts reported in the consolidated balance sheets
approximate those liabilities fair value, due primarily to
the short term nature of these liabilities.

Long-Term Debt  the carrying amounts reported
in the consolidated balance sheets approximate those liabilities
fair value, as current borrowing rates approximate the actual
fixed interest rates of these liabilities.

14. Recent Accounting Pronouncements

In June 2001, the FASB finalized FASB Statements No. 141,
Business Combinations (SFAS 141), and
No. 142, Goodwill and Other Intangible
Assets (SFAS 142). SFAS 141 requires the use
of the purchase method of accounting and prohibits the use of
the pooling-of-interest method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also
requires that the Company recognize acquired intangible assets
apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations
initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company
reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS 141.

SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at
least annually. In addition, SFAS 142 requires that the Company
identify reporting units for the purpose of assessing potential
future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease
amortization of intangibles assets with an indefinite useful
life. An intangible asset with an indefinite useful life should
be tested for impairment in accordance with the guidance in SFAS
142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when
those assets were initially recognized. SFAS 142 requires the
Company to complete transitional goodwill impairment test six
months from the date of adoption. The Company is also required
to reassess the useful lives of other intangible assets within
the first interim quarter after adoption of SFAS 142. The
Companys previous business combinations were accounted for
using the purchase method. The impact of the adoption of SFAS
141 and SFAS 142 on the Companys financial position and
results of operations is not expected to be material.

In October 2001, the FASB issued SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets which resolves significant implementation
issues related to FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be

51



---



##### 



Disposed Of, and supersedes the accounting and
reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the
disposal of a business segment. SFAS 144 is effective for fiscal
years beginning after December 15, 2001, and interim
periods within those fiscal years, with early application
encouraged. The impact of adoption of SFAS 144 on the
Companys financial position and results of operations is
not expected to be material.

52



---



##### 



HEARx Ltd.

Schedule II  Valuation and Qualifying
Accounts

|                                |  |            |         |           |  |            |         |            |  |   |          |      |  |   |         | 
|------------------------------- |  | ---------- | ------- | --------- |  | ---------- | ------- | ---------- |  | - | -------- | ---- |  | - | ------- | 
|                                |  | Balance at |         |           |  |            |         | Balance at
|                                |  | Beginning  |         |           |  |            |         | End Of    
|                                |  | Of Period  |         | Additions |  | Deductions |         | Period    
|                                |  |            |         |           |  |            |         |           
|December 29, 2001               |  |            |         |           |  |            |         |            |  |   |          |      |  |   |         | 
|                               
|                               
|                               
|                               
|Allowance for doubtful accounts |  | $          | 212,657 |           |  | $          | 125,206 |            |  | $ | (152,049 | )(1) |  | $ | 185,814 | 
|                               
|                               
|                               
|                               
|Allowance for sales returns     |  | $          | 772,976 |           |  |            |         |            |  | $ | (272,196 | )    |  | $ | 500,780 | 
|                               
|                               
|                               
|                               
|                               
|December 29, 2000               |  |            |         |           |  |            |         |            |  |   |          |      |  |   |         | 
|                               
|                               
|                               
|                               
|Allowance for doubtful accounts |  | $          | 535,609 |           |  | $          | 377,500 |            |  | $ | (700,452 | )(1) |  | $ | 212,657 | 
|                               
|                               
|                               
|                               
|Allowance for sales returns     |  | $          | 497,412 |           |  | $          | 275,564 |            |  |   |          |      |  | $ | 772,976 | 
|                               
|                               
|                               
|                               
|                               
|December 31, 1999               |  |            |         |           |  |            |         |            |  |   |          |      |  |   |         | 
|                               
|                               
|                               
|                               
|Allowance for doubtful accounts |  | $          | 588,509 |           |  | $          | 568,135 |            |  | $ | (621,035 | )(1) |  | $ | 535,609 | 
|                               
|                               
|                               
|                               
|Allowance for sales returns     |  | $          | 300,708 |           |  | $          | 196,704 |            |  |   |          |      |  | $ | 497,412 | 



---



|    |                                                       
|--- | ------------------------------------------------------
|(1) | Uncollectible accounts written off, net of recoveries.

53



---



##### 





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

None.

54



---



##### 



PART III

Item 10.     Directors and
Executive Officers

The information required by this Item for directors is set forth
in the Companys 2002 Proxy Statement under the heading
Election of Directors and is incorporated herein by
this reference as if set forth in full.

The information required by this Item for executive officers is
set forth in Part I of this report under the heading
Executive Officers of the Company.

Item 11.     Executive
Compensation

The information required by this Item is set forth in the
Companys 2002 Proxy Statement under the heading
Election of Directors and is incorporated herein by
this reference as if set forth in full.

Item 12.     Security
Ownership of Certain Beneficial Owners and Management

The information required by this Item is set forth in the
Companys 2002 Proxy Statement under the heading
Election of Directors and is incorporated herein by
this reference as if set forth in full.

Item 13.     Certain
Relationships and Related Transactions

The information required by this item is set forth in the
Companys 2002 Proxy Statement under the heading
Election of Directors and is incorporated herein by
this reference as if set forth in full.

55



---



##### 



PART IV

Item 14.     Exhibits,
Financial Statement Schedules, and Report on
Form 8-K

(a) (1) The following financial statements are filed
as part of this report:

(i) Consolidated Balance Sheets as of
December 29, 2001 and December 29, 2000.



| |      |                                                                                                                                      
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------
| | (ii) | Consolidated Statements of Operations for the years ended
        December 29, 2001, December 29, 2000 and
        December 31, 1999.



| |       |                                                                                                                                                           
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | (iii) | Consolidated Statements of Changes in Stockholders Equity
        for the years ended December 29, 2001, December 29,
        2000 and December 31, 1999.



| |      |                                                                                                                                      
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------
| | (iv) | Consolidated Statements of Cash Flows for the years ended
        December 29, 2001, December 29, 2000 and
        December 31, 1999.

(v) Notes to Consolidated Financial Statements

(2) The following financial statement schedules are filed
as part of this report and are contained on page 53.

|             |       |                                               |  |                                                                                                                                                                                          
|------------ | ----- | --------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|             |       | Schedule II Valuation and Qualifying Accounts
|             |       |                                              
|            
|            
|            
|            
|(3) Exhibits
|            
|             | 2.111 |                                               |  | Amended and Restated Merger Agreement, dated
        November 6, 2001 between HEARx Ltd. and Helix Hearing Care
        of America Corp. [2.1]                                           
|            
|             | 3.11  |                                               |  | Restated Certificate of Incorporation of HEARx
        Ltd., including certain certificates of designations, preference
        and rights of certain preferred stock of the Company. [3]
|            
|             | 3.22  |                                               |  | Amendment to Restated Certificate of
        Incorporation [3.1A]                                                                                                                        
|            
|             | 3.33  |                                               |  | Certificate of Designations, Preference and
        Rights of the Companys 1997 Convertible Preferred Stock [3]                                                                         
|            
|             | 3.4   |                                               |  | Amended and Restated By-Laws of HEARx, Ltd.                                                                                                                                              
|            
|             | 3.56  |                                               |  | Certificate of Designations, Preferences and
        Rights of the Companys 1998 Convertible Preferred Stock.
        [3]                                                               
|            
|             | 3.68  |                                               |  | Amendment to Restate Certificate of Incorporation
        including one for ten reverse stock split and reduction of
        authorized shares.                                          
|            
|             | 3.79  |                                               |  | Certificate of Designations, Preferences and
        Rights of the Companys 1999 Series H Junior
        Participating Preferred Stock[4]                                               

56



---



##### 



| |        |  |  |                                                                                                                                                                                                                                                              
| | ------ |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.810  |  |  | Certificate of Designations, Preferences and
        Rights of the Companys 2000 Series I Convertible
        Preferred Stock. [3]                                                                                                                          
|
| | 3.1011 |  |  | Certificate of Designations, Preferences and
        Rights of the Companys Special Voting Preferred Stock.
        [3.10]                                                                                                                                  
|
| | 3.1112 |  |  | Certificate of Designations, Preferences and
        Rights of the Companys Series J Preferred Stock. [4.1]                                                                                                                                                 
|
| | 4.11   |  |  | Securities Purchase Agreement, dated
        March 17, 1997, between HEARx Ltd. and each of the
        purchasers set forth on the signature pages thereto. [4.1]                                                                                           
|
| | 4.23   |  |  | Registration Rights Agreement, dated
        March 17, 1997, between HEARx Ltd. and each of the
        purchasers set forth on the signature pages thereto. [4.2]                                                                                           
|
| | 4.33   |  |  | Form of Placement Agent Warrant (to purchase up
        to 850,000 shares of Common Stock at an exercise price equal to
        $5.00 per share). [4.3]                                                                                                      
|
| | 4.54   |  |  | Specimen of Certificate representing Common
        Stock. [4.1]                                                                                                                                                                                             
|
| | 4.16   |  |  | Securities Purchase Agreement, dated
        August 27, 1998, between HEARx Ltd. and each of the
        purchasers set forth on the signature pages thereto. [4.1]                                                                                          
|
| | 4.26   |  |  | Registration Rights Agreement, dated
        August 27, 1998, between HEARx Ltd. and each purchaser set
        forth on the signature pages thereto. [4.2]                                                                                                  
|
| | 4.36   |  |  | 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). [4.3]                                                                                                    
|
| | 4.49   |  |  | Rights Agreement, dated December 14, 1999,
        between HEARx and the Rights Agent, which includes the
        Certificate of Designations, Preferences and Rights of the
        Companys 1999 Series H Junior Participating Preferred
        Stock [4]
|
| | 4.110  |  |  | Securities Purchase Agreement, dated May 9,
        2000, between HEARx Ltd. and each of the purchasers set forth on
        the signature pages thereto. [4.1]                                                                                              

57



---



##### 



| |         |  |  |                                                                                                                                                                                                      
| | ------- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.210   |  |  | Registration Rights Agreement, dated May 9,
        2000 between HEARx Ltd. and each purchaser set forth on the
        signature pages thereto. [4.2]                                               
|
| | 4.310   |  |  | 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). [4.3]                                              
|
| | 9.111   |  |  | Form of Voting and Exchange Trust Agreement among
        HEARx Ltd., HEARx Canada Inc., HEARx Acquisition ULC and
        Computer Share Trust Company of Canada. [9.1]                             
|
| | 10.14   |  |  | Form of Consulting Agreement, dated
        January 1, 1987, as of June 1, 1986, by and between
        HEARx Ltd. and each of the members of the Companys
        Scientific Advisory Board. [10.1]
|
| | 10.24   |  |  | HEARx Ltd. 1987 Stock Option Plan. [10.11]#                                                                                                                                                          
|
| | 10.35   |  |  | (a) HEARx Ltd. Stock Option Plan for
        Non-Employee Directors and (b) Form of Option Agreement.
        [10.35] [10.48]#                                                                       
|
| | 10.97   |  |  | 1995 Flexible Employee Stock Plan [4]#                                                                                                                                                               
|
| | 10.109  |  |  | Executive Employment Agreement, dated
        December 14, 1999, with Dr. Paul A Brown#                                                                                                              
|
| | 10.119  |  |  | Executive Employment Agreement, dated
        December 14, 1999, with Stephen J. Hansbrough#                                                                                                         
|
| | 10.1213 |  |  | Letter of Intent dated April 23, 2001 by and
        between HEARx Ltd. and Siemens Hearing Instruments, Inc. [10.1]                                                                                 
|
| | 10.1311 |  |  | Stockholders Agreement, dated July 27, 2001
        between each stockholder set forth on the signature pages
        thereto. [10.8]                                                                
|
| | 10.1414 |  |  | Credit Agreement, dated December 7, 2001,
        between HEARx ltd. and Siemens Hearing Instruments, Inc. [10.1]                                                                                    
|
| | 10.1514 |  |  | Security Agreement, dated December 7, 2001,
        between HEARx Ltd. and Siemens Hearing Instruments, Inc. [10.2]                                                                                  
|
| | 10.1614 |  |  | Supply Agreement, dated December 7, 2001
        between HEARx Ltd. and Siemens Hearing Instruments, Inc. [10.3]                                                                                     

58



---



##### 



| |         |  |  |                                                                                                                                                                                
| | ------- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1712 |  |  | Exchange and Redemption Agreement, dated
        December 4, 2001 between HEARx Ltd. and Advantage Fund II
        Ltd. [10.1]                                                 
|
| | 10.1812 |  |  | Escrow Agreement, dated December 13, 2001,
        by and among HEARx Ltd., Advantage Fund II Ltd. and American
        Stock Transfer & Trust Company, as Escrow Agent. [10.2]
|
| | 10.1912 |  |  | Registration Rights Agreement, dated
        December 13, 2001, between HEARx Ltd and Advantage Fund II
        Ltd. [10.3]                                                    
|
| | 10.2012 |  |  | Release, dated December 13, 2001, between
        HEARx Ltd. and Advantage Fund II Ltd. [10.4]                                                                                 
|
| | 21      |  |  | List Subsidiaries                                                                                                                                                              
|
| | 23      |  |  | Consent of Independent Certified Public
        Accountants.                                                                                                                   



---



| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1 | Filed as an exhibit to the Companys Current Report on Form
        8-K, filed May 17, 1996,as the exhibit number indicated in
        brackets, and incorporated herein by reference.                                
|
| | 2 | Filed as an exhibit to the Companys Quarterly Report on
        Form 10-Q for the period ended June 28, 1996, as the
        exhibit number indicated in brackets, and incorporated herein by
        reference.     
|
| | 3 | Filed as an exhibit to the Companys Current Report on Form
        8-K, filed on March 26, 1997, as the exhibit number
        indicated in brackets, and incorporated herein by reference.                          
|
| | 4 | Filed as an exhibit to the Companys Registration Statement
        on Form S-18 (Registration No. 33-17041-NY) as the
        exhibit number indicated in brackets, and incorporated by
        reference herein.    
|
| | 5 | Filed as an exhibit to Post-Effective Amendment No. 1 to
        the Companys Registration Statement on Form S-18, as
        the exhibit number indicated in brackets, and incorporated by
        reference herein.
|
| | 6 | Filed as an exhibit to the Companys Current Report on Form
        8-K, filed August 27, 1998, as the exhibit number indicated
        in brackets, and incorporated herein by reference.                            
|
| | 7 | Filed as an exhibit to the Companys 1995 Proxy Statement,
        as the exhibit number indicated in brackets, and incorporated by
        reference herein.                                                         
|
| | 8 | Filed as an exhibit to the Companys Quarterly Report on
        Form 10Q for the period ending July 2, 1999, as the exhibit
        number indicated in brackets, and incorporated herein by
        reference.      

59



---



##### 





| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 9 | Filed as an exhibit to the Companys Current Report on Form
        8-K, December 17,1999, as the exhibit number indicated in
        brackets, and incorporated herein by reference.



|   |                                                                                                                                                                                                                    
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10 | Filed as an exhibit to the Companys Current Report on Form
        8-K, May 9, 2000 as the exhibit number indicated in
        brackets, and incorporated herein by reference.                                    
|  
|11 | Filed as an exhibit to the Companys Joint Proxy Statement/
        Prospectus on Form S-4 as the exhibit number indicated in
        brackets, and incorporated by reference herein.                              
|  
|12 | Filed as an exhibit to the Companys Current Report on Form
        8-K, December 26, 2001, as the exhibit number indicated in
        brackets, and incorporated herein by reference.                             
|  
|13 | Filed as an exhibit to the Companys Quarterly Report on
        Form 10-Q for the period ending March 31, 2001, as the
        exhibit number indicated in brackets, and incorporated herein by
        reference.
|  
|14 | Filed as an exhibit to the Companys Current Report on Form
        8-K, December 26, 2001, as the exhibit number indicated in
        brackets, and incorporated herein by reference.                             
|  
|#  | Denotes compensatory plan or arrangement for Company Officer or
        Director.                                                                                                                                  

(b) Reports on Form 8-K :



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A current report on Form 8-K, dated December 13, 2001,
        was filed with the Securities and Exchange Commission on
        December 26, 2001, in which the Company reported it
        completed a transaction involving an exchange and redemption of
        certain of its outstanding convertible preferred stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | A current report on Form 8-K, dated December 7, 2001,
        was filed with the Securities and Exchange Commission on
        December 26, 2001, in which the Company reported it entered
        into a Credit Agreement with Siemens Hearing Instruments, Inc
        pursuant to which the Company obtained a $51,875,000 secured
        credit facility from Siemens. In connection with the Credit
        Facility, the Company and Siemens entered into a Supply
        Agreement dated as of December 7, 2001 pursuant to which
        the Company agreed to purchase from Siemens a certain portion of
        the Companys requirements of hearing aids for a period of
        ten years (an initial five year term and a five year renewal
        term) at specified prices.

60



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.



| |             
| | ------------
| | HEARX LTD.  
| | (Registrant)



| |     |                        
| | --- | -----------------------
| | By: | /s/ PAUL A. BROWN, M.D.

| |                      
| | ---------------------
| | Paul A. Brown, M.D.  
| | Chairman of the Board

Date: March 29, 2002

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.

|                                                   |  |                                                                    |  |               
|-------------------------------------------------- |  | ------------------------------------------------------------------ |  | --------------
|Signature                                          |  | Title                                                              |  | Date          
|                                                   |  |                                                                    |  |               
|                                                  
|/s/ PAUL A. BROWN, M.D.Paul A. Brown, M.D.         |  | Chairman of the Board Chief Executive Officer And
        Director |  | March 29, 2002
|                                                  
|/s/ STEPHEN J. HANSBROUGHStephen J. Hansbrough     |  | President, Chief Operating Officer and Director                    |  | March 29, 2002
|                                                  
|/s/ JAMES W. PEKLENKJames W. Peklenk               |  | Vice President  Finance and Chief
        Financial Officer       |  | March 29, 2002
|                                                  
|/s/ DAVID J. MCLACHLANDavid J. McLachlan           |  | Director                                                           |  | March 29, 2002
|                                                  
|/s/ THOMAS W. ARCHIBALDThomas W. Archibald         |  | Director                                                           |  | March 29, 2002
|                                                  
|/s/ JOSEPH L. GITTERMAN IIIJoseph L. Gitterman III |  | Director                                                           |  | March 29, 2002

61