SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-K/A

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

[X] AMENDMENT NO. 1 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF 
    THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

                  For the fiscal year ended December 27, 1996
                                                             OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

         For the transition period from            to
                                        ----------    ----------

                         Commission file number 0-16453

                                   HEARx LTD.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as specified in its charter)

                                    Delaware
--------------------------------------------------------------------------------
         (State or other jurisdiction of incorporation or organization)

                                   22-2748248
--------------------------------------------------------------------------------
                       (.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:

                                                   Name of each exchange
         Title of each class                        on which registered
---------------------------------------  ---------------------------------------

Common Stock, par value $0.10 per share           American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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

ITEM 7. MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS AND ANALYSIS OF
        FINANCIAL CONDITION

GENERAL

         Management believes the shift of patients from the Medicare population
to managed care, which has occurred in recent years, will continue and increase
in the future. To the extent the Company is successful in contracting with the
providers of Medicare managed care for the provision of hearing care goods and
services, the Company can enjoy the benefits of this shift.

         To support the requirements of the Company's current and future
participation in such contracts, the Company made a strategic decision to enter
the northeast U.S. market in 1996. To fulfill its contractual requirements
during 1996, sixteen centers were opened in New York, fourteen in New Jersey,
and four in Connecticut for a total of thirty-four centers in the northeast
market. Additionally, five centers were opened in Florida, and two centers
closed for a net increase of three centers in the Company's Florida region.

         In 1996, fourteen new contracts were signed with managed care and
insurance companies in the northeast U.S. market to support the new centers.
These contracts call for the managed care or insurance companies to reimburse
the Company for all, or a portion, of the costs incurred by their members for
hearing care services provided by the Company. The balance of the cost is borne
by the member. The Company is reimbursed by the insurer on either a "fee for
service" basis, or through a "capitated" plan. Capitation contracts are those
contracts which provide for payments to the Company on a per member per month
basis. Under those contracts, a member is entitled to testing services and a
product credit with respect to a hearing aid purchase. These credits (discounted
from published retail prices) are then applied to the member's purchase of
hearing aids. As generally provided in those contracts, the member can receive
this credit once every three years. The price of the services and products
provided on the first visit, above the group discount, as well as any additional
services or products purchased, are the obligation of the member.

         The Company believes that the loss of any single managed care contract
would not have a material adverse effect on its financial condition or results
of operation. Each of the existing insurance contracts are achieving expected
gross profit margins and contributing positively to the Company's results of
operations.

         In 1996, the Company substantially completed its planned corporate
expansion to support the center network expansion and new contract signings.
This included the development, installation and implementation of new computer
information systems; the establishment and staffing of three new departments
(Professional Services, Information Technology and Contract Management); the
upgrade and expansion of existing departments and the relocation to a new
corporate facility.

                                       2
<PAGE>

RESULTS OF OPERATIONS

         1996 COMPARED TO 1995

         Net sales increased $7,320,493, or 65.5%, to $18,490,561 in 1996 from
$11,170,068 in 1995. Net sales in those regions in operation in both 1996 and
1995 increased $2,005,641, or 17.9%, to $13,175,709 in 1996 from $11,170,068 in
1995; and those regions were profitable at center level. The balance of the
increase in net sales, $4,799,348, resulted from those centers opened in the
northeast U.S. market in 1996.

         Cost of products sold increased $3,007,000, or 84.2%, to $6,578,725 in
1996 from $3,571,725 in 1995. The increase in cost of products sold was
primarily the result of increased sales volume in 1996 over 1995. Cost of
products sold, as a percentage of net sales, was higher in 1996 than in 1995
because of a reduction in the Company's retail hearing aid prices; the inclusion
of one year's free batteries with each hearing aid purchased; and a shift toward
lower margin programmable hearing devices. Although there can be no assurance
that the Company will reach its 1997 sales targets, the volume discounts
negotiated with its primary vendors, should it achieve those sales targets, will
bring the cost of products, as a percentage of net sales, to the lower 1995
levels.

         Center operating expenses increased $5,682,471, or 84.4%, to
$12,418,005 in 1996 from $6,735,534 in 1995. This increase is primarily due to
an increase of 132% in the number of centers operating in 1996 (65) compared to
1995 (28).

         General and administrative expenses increased $3,445,359, or 139%, to
$5,917,360 in 1996 from $2,472,001 in 1995. $640,000, or 19% of the increase in
1996 over 1995, was the result of the write off of certain system development
costs, and an increase in the allowance for doubtful accounts. Substantially all
of the remaining increase was attributable to the increase in wages and fringe
benefits associated with the expansion of the corporate administrative
functions.

         Depreciation and amortization expense increased $903,918, or 258%, to
$1,254,055 in 1996 from $350,137 in 1995. The increase was attributable to the
depreciation and amortization of the leasehold improvements, medical and
computer equipment, and furniture associated with the thirty-nine new centers
opened in 1996; the installation of computer systems in existing centers in the
base regions and the corporate office computer systems installed in 1996.


         1995 COMPARED TO 1994

         Net sales increased $6,838,920, or 158%, to $11,170,068 in 1995 from
$4,331,148 in 1994. The increase resulted from the first year of revenue from
the 18 Florida retail hearing aid centers acquired from Hearing Health Services,
Inc. ("HHS"), plus revenues recognized from seven contracts with managed care
companies signed in late 1994.

                                       3
<PAGE>

         Cost of products sold increased $1,980,549, or 124%, to $3,571,725 in
1995 from $1,591,176 in 1994. The increase resulted from the increased sales
volume from the eighteen centers, plus sales generated from the seven new
managed care contracts. Cost of products sold, as a percentage of net sales, was
lower in 1995 mainly due to agreements with vendors in 1995 to reduce costs
based on planned increases in future purchases.

         Center operating expenses increased from $2,736,084, in 1994, to
$6,735,534 in 1995. General and administrative expenses increased from
$1,681,383, in 1994, to $2,472,001 in 1995. Depreciation and amortization
increased from $204,981, in 1994, to $350,137 in 1995. All of these increases
were due primarily to the acquisition of HHS mentioned above.


         FOURTH QUARTER ADJUSTMENTS

         There were no significant fourth quarter adjustments in 1996 or 1994.

         Fourth quarter adjustments for 1995 consisted of an increase in the
allowance for doubtful accounts of $178,101 and the recording of additional
public relations expenses of $284,201.


LIQUIDITY AND CAPITAL RESOURCES

         Working capital increased $13,773,570 to $12,456,391 as of December
27,1996 from a working capital deficit of $1,317,179 as of December 29, 1995.
During 1996, the Company completed two private placements (see Note 6E,
Stockholders' Equity) providing the Company net proceeds of $27,842,590. The
Company also received net proceeds of $2,277,450 from the exercise of warrants
during the year. During 1996, the Company purchased $6,824,065 in property and
equipment and retired long term debt of $4,439,686. The sale of the Company's
securities in 1996 did not individually, or in the aggregate, cause a "change in
control" which would result in an annual limitation of the Company's net
operating loss carry-forward under Section 382 of the Internal Revenue Code of
1986, as amended.

         In the first quarter of 1997, the Company completed a private placement
(see Note 3) and received net proceeds of approximately $9,300,000. The Company
believes that its current working capital and revenues from operations are
sufficient to support the Company's foreseeable capital requirements and
operating needs through 1997 in accordance with its strategic plan, although
there can be no assurance that other cash needs will not arise.

         Net cash used by operating activities increased from $1,486,465, in
1995, to $6,431,112 in 1996. The increase in cash used by operating activities
was primarily the result of operating losses resulting from the Company's
decision to expand its operations to accommodate the new contract signings and
the accompanying expansion into the northeast U.S. market as discussed above.

         Net cash used in investing activities increased from $1,689,455, in
1995, to $18,727,969 in 1996. This increase resulted from the use of cash of
$6,824,065 to fund the construction of leasehold improvements and the related

                                        4
<PAGE>

purchase of property and equipment to equip the new and existing centers so as
to accommodate the expected increase in revenue. Excess cash of $11,903,904,
remaining from the 1996 equity placements, has been invested in marketable
securities until needed.

         The capital costs associated with the start up of a new center vary
depending on the size of the center and its location. Typically, new centers are
leased under operating leases and range from 1,500 to 2,000 square feet in size.
New center property and equipment costs include leasehold build out costs,
furniture and costs of equipment, including diagnostic and computer equipment.
Pre-opening costs, such as training wages, recruiting, advertising, travel, etc.
are expensed as incurred. The Company believes it has the funds to support the
planned expansion of the Company's network of centers through 1997.

         Cash from financing activities increased from $3,780,452, in 1995, to
$26,036,979 in 1996. This increase was primarily of the result of equity
offerings and warrant exercises during 1996 in the amount of $29,558,328, net of
expenses. Long-term debt in the amount of $4,439,686 was retired during the
year.

         During 1995, cash flows from financing activities consisted of a
$1,500,000 private placement; a loan from two investors for $1,100,000; and a
loan from the principal shareholder. These funds were used to pay for the
construction of fifteen new centers in New York and New Jersey and the purchase
and development of new point-of-sale and accounting systems.

         The working capital deficiency increased from $623,200 at December 30,
1994 to $1,317,179 at December 29, 1995. The increase in the deficiency was due
primarily to the loans from the two investors discussed above.
   
         Net cash used in operating activities was $1,486,465, for 1995, as
compared to $1,936,270 for 1994. The decrease in the net cash used in operating
activities was primarily due to the fact that there was no accrual for
restructuring costs in 1995, as compared with the accrual for restructuring
costs of $1,092,205 in 1994.
    
         Net cash used by investing activities was $1,689,455 for 1995 as
compared to cash provided of $175,206 for 1994, a net decrease of $1,864,661.
The decrease was primarily related to the purchase of property and equipment and
computer and accounting systems.

         Net cash provided by financing activities increased to $3,780,452, for
1995, from $1,778,313 for 1994. The increase was related to additional private
placements as well as additional loans of $1,370,000 and the conversion of
certain amounts due an accounts payable vendor into debt.

                                       5
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                                                            Page

INDEX TO FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:

Report of Independent Certified Public Accountants .....................      7
Consolidated Balance Sheets at December 27, 1996 (Pro Forma and Actual)
         and  December 29, 1995 ........................................    8-9
Consolidated Statements of Operations for the years ended
         December 27, 1996, December 29, 1995, and December 30, 1994 ...     10
Consolidated Statements of Changes in Stockholders' Equity (Capital
         Deficit) for the years ended December 27, 1996,
         December 29, 1995, and December 30, 1994 ......................   11-14
Consolidated Statements of Cash Flows for the years ended
         December 27, 1996, December 29, 1995, and December 30, 1994 ...   15-17
Notes to Consolidated Financial Statements .............................   18-23

FINANCIAL STATEMENT SCHEDULES:

For the years ended December 27, 1996, December 29, 1995 and 
         December 30, 1994

         II Valuation Accounts .........................................      34

                                       6
<PAGE>

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. and
Subsidiaries as of December 27, 1996 and December 29, 1995 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 27, 1996. We have
also audited the schedule listed in the accompanying index. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedules are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. 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. and
Subsidiaries at December 27, 1996 and December 29, 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 27, 1996 in conformity with generally accepted accounting
principles.

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


West Palm Beach, Florida                BDO Seidman, LLP
March 25, 1997

                                       7
<PAGE>
<TABLE>
                           HEARX LTD. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
<CAPTION>
                                                                                      Pro Forma
                                                                                       (Note 3)       December 27,     December 29,
                                                                                         1996             1996            1995
                                                                                   ---------------  ---------------  ---------------
<S>                                                                                <C>              <C>              <C>

CURRENT ASSETS:
  Cash and cash equivalents .....................................................  $     1,811,437  $     1,811,437  $       933,539
  Marketable securities (Note 2) ................................................       21,236,025       11,936,025             --
  Accounts and notes receivable, less allowance
    for doubtful accounts of $789,322, and $341,234 .............................        3,021,992        3,021,992        1,227,993
  Inventories ...................................................................          363,978          363,978          395,983
  Prepaid expenses ..............................................................          245,000          245,000          529,418
                                                                                   ---------------  ---------------  ---------------

    Total current assets ........................................................       26,678,432       17,378,432        3,086,933

PROPERTY AND EQUIPMENT - NET (Note 5) ...........................................        8,068,700        8,068,700        2,523,882

OTHER ...........................................................................        1,180,352        1,180,352          839,813
                                                                                   ---------------  ---------------  ---------------

                                                                                   $    35,927,484  $    26,627,484  $     6,450,628
                                                                                   ===============  ===============  ===============

See accompanying notes to consolidated financial statements

</TABLE>
                                       8
<PAGE>
<TABLE>
                           HEARX LTD. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (CONCLUDED)

                      LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
                                                                                     Pro Forma
                                                                                      (Note 3)        December 27,     December 29,
                                                                                        1996              1996            1995
                                                                                   ---------------  ---------------  --------------
<S>                                                                                <C>              <C>              <C>

LIABILITIES:
CURRENT LIABILITIES:
  Accounts payable and other accrued expenses ...................................  $    3,357,422   $     3,357,422  $    2,000,090
  Accrued salaries and other compensation .......................................         812,946           812,946         217,042
  Current maturities of long-term debt (Note 4) .................................         751,673           751,673       2,186,980
                                                                                   ===============  ===============  ===============

      Total current liabilities .................................................       4,922,041         4,922,041       4,404,112
                                                                                   ---------------  ---------------  ---------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (Note 4) ................................         230,258           230,258       2,316,300
                                                                                   ---------------  ---------------  ---------------
COMMITMENTS AND CONTINGENCIES  (Notes 4, 5 & 8)
STOCKHOLDERS' EQUITY:
  Non-redeemable preferred stock:
    (Aggregate liquidation preference $5,114,252)
    $1 par; 2,000,000 shares, authorized, issued and outstanding: (Note 6)
    1992 Senior A        30,000 shares ..........................................             --                --           30,000
    1992 Senior B        22,500 shares ..........................................             --                --           22,500
    1992 Convertible C   10,000 shares ..........................................             --                --           10,000
    1993 Senior D        14,926 shares ..........................................             --                --           14,926
    1993 Senior G        14,926 shares ..........................................             --                --           14,926
    1994 Convertible      5,000 shares ..........................................             --                --            5,000
    1995 Senior E         6,472 shares ..........................................             --                --            6,472
    1996 Convertible B-1  3,500 shares ..........................................           3,500             3,500             --
    1996 Convertible B-2  1,450 shares ..........................................           1,450             1,450             --
    1997 Convertible     10,000 shares ..........................................          10,000              --               --
                                                                                   ---------------  ---------------  ---------------

      Total preferred stock .....................................................          14,950             4,950         103,824

  Common stock, 130,000,000 shares authorized,
    81,969,233 & 47,956,783 shares issued (Notes 4 & 6) .........................       8,196,923         8,196,923       4,795,678
  Additional paid-in capital ....................................................      69,286,480        59,996,480      23,079,016
  Accumulated deficit ...........................................................     (46,130,289)      (46,130,289)    (28,234,803)
  Unrealized gain on marketable securities ......................................          32,121            32,121             --
  Unamortized deferred compensation .............................................             --                --          (13,499)
  Treasury stock, at cost - 250,000 common shares ...............................        (625,000)         (625,000)            --
                                                                                   ---------------  ---------------  ---------------

      Total stockholders' equity ................................................      30,775,185        21,475,185        (269,784)
                                                                                   ---------------  ---------------  ---------------

                                                                                   $   35,927,484   $    26,627,484  $    6,450,628
                                                                                   ===============  ===============  ===============

See accompanying notes to consolidated financial statements

</TABLE>
                                       9
<PAGE>
<TABLE>
                           HEARX LTD. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
                                                                                  Year Ended        Year Ended        Year Ended
                                                                                 December 27,      December 29,      December 30,
                                                                                     1996              1995              1994
                                                                                ---------------   ---------------   ---------------
<S>                                                                             <C>               <C>               <C>

NET SALES ....................................................................  $    18,490,561   $    11,170,068   $     4,331,148
                                                                                ---------------   ---------------   ---------------

COSTS AND EXPENSES:
  Cost of products sold ......................................................        6,578,725         3,571,725         1,591,176
  Center operating expenses ..................................................       12,418,005         6,735,534         2,736,084
  General and administrative expenses ........................................        5,917,360         2,472,001         1,681,383
  Depreciation and amortization ..............................................        1,254,055           350,137           204,981
  Interest expense ...........................................................          181,395           254,124           223,159
                                                                                ---------------   ---------------   ---------------

    Total expenses ...........................................................       26,349,540        13,383,521         6,436,783
                                                                                ---------------   ---------------   ---------------

LOSS BEFORE DIVIDENDS ON PREFERRED STOCK .....................................       (7,858,979)       (2,213,453)       (2,105,635)
DIVIDENDS ON PREFERRED STOCK:
  Deemed dividend (Note 6G) ..................................................       (9,000,000)             --                --
  Dividends ..................................................................       (1,036,507)             --                --
                                                                                ---------------   ---------------   ---------------

    Total dividends ..........................................................      (10,036,507)             --                --
                                                                                ---------------   ---------------   ---------------

NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ...................................  $   (17,895,486)  $    (2,213,453)  $    (2,105,635)
                                                                                ===============   ===============   ===============

NET LOSS PER COMMON SHARE ....................................................  $          (.25)  $          (.05)  $          (.06)
                                                                                ===============   ===============   ===============

WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ................       71,197,115        45,164,091        36,278,205
                                                                                ===============   ===============   ===============

See accompanying notes to consolidated financial statements

</TABLE>
                                       10
<PAGE>
<TABLE>
                           HEARx Ltd. And Subsidiaries
           Consolidated Statements of Changes in Stockholders' Equity
     Years Ended December 27, 1996, December 29, 1995 and December 30, 1994
<CAPTION>
                           Non-Redeemable
                          Preferred Stocks       Common Stock       Additional                           Unamortized      Total
                          ----------------  ----------------------    Paid-In    Accumulated   Treasury    Deferred    Stockholders'
                          Shares   Amount     Shares      Amount      Capital      Deficit       Stock   Compensation     Equity
                          ------  --------  ----------  ----------  -----------  ------------  --------  ------------  ------------
<S>                       <C>     <C>       <C>         <C>         <C>          <C>           <C>       <C>           <C>

Balance at
 December 31, 1993 .....  92,352  $ 92,352  31,250,228  $3,125,023  $18,105,416  $(23,915,715) $   --    $   (30,541)  $ (2,623,465)
Payments from 3M
 to exercise Senior E
 preferred stock
 series ................    --        --          --          --         75,000          --        --           --           75,000
Conversion of debenture
 ($700,000) plus
 accrued interest
 payable ($27,682) to
 common stock ..........    --        --     3,638,414     363,841      363,841          --        --           --          727,682
1994 Private placements,
 net of expenses of
 $51,965, to common
 stock .................    --        --     6,500,000     650,000      598,035          --        --           --        1,248,035
Issuance of common
 stock-Advisory Board ..    --        --        40,985       4,098       20,902          --        --           --           25,000
Executive stock
 bonuses ...............    --        --        22,727       2,273        5,227          --        --           --            7,500
Issuance of common stock
 to officers ...........    --        --        70,000       7,000       30,188          --        --        (37,188)          --
Issuance of common stock
 to public relations
 company ...............    --        --       150,000      15,000       22,500          --        --           --           37,500
Issuance of private
 placement convertible
 preferred stock during
 December, 1994 ........   2,500     2,500        --          --        497,500          --        --           --          500,000
Issuance of convertible
 preferred stock for
 acquisition of centers
 from Hearing Health
 Services, Inc. ........   2,500     2,500        --          --        497,500          --        --           --          500,000
Amortization of deferred
 compensation ..........    --        --          --          --           --            --        --         40,732         40,732
Net loss for the year ..    --        --          --          --           --      (2,105,635)     --           --       (2,105,635)
                          ------  --------  ----------  ----------  -----------  ------------  --------  ------------  ------------
Balance at
 December 30, 1994 .....  97,352  $ 97,352  41,672,354  $4,167,235  $20,216,109  $(26,021,350)  $  --    $   (26,997)  $ (1,567,651)
                          ------  --------  ----------  ----------  -----------  ------------  --------  ------------  ------------

See accompanying notes to consolidated financial statements

</TABLE>
                                      11
<PAGE>
<TABLE>
                                                      HEARx Ltd. And Subsidiaries
                                    Consolidated Statements of Changes in Stockholders' Equity
                                                              (Continued)
                               Years Ended December 27, 1996, December 29, 1995 and December 30, 1994
<CAPTION>
                           Non-Redeemable
                          Preferred Stocks       Common Stock       Additional                           Unamortized      Total
                         -----------------  ----------------------    Paid-In    Accumulated   Treasury    Deferred    Stockholders'
                          Shares   Amount     Shares      Amount      Capital      Deficit       Stock   Compensation     Equity
                         -------  --------  ----------  ----------  -----------  ------------  --------  ------------  ------------
<S>                       <C>     <C>       <C>         <C>         <C>          <C>           <C>       <C>           <C>

Balance at
 December 30, 1994 .....  97,352  $ 97,352  41,672,354  $4,167,235  $20,216,109  $(26,021,350) $   --    $   (26,997)  $ (1,567,651)
1995 Individual private
 placements, net of
 expenses of $63,192 ...     --        --    2,427,184     242,718    1,194,090           --       --            --       1,436,808
1995 Institutional
 private placements,
 net of expenses of
 $297,315 ..............     --        --    2,602,572     260,257    1,172,336           --       --            --       1,432,593
Issuance of common stock
 - Advisory Board ......     --        --       87,419       8,742       26,258           --       --            --          35,000
Executive stock
 bonuses ...............     --        --      115,138      11,514      115,562           --       --            --         127,076
Exercise of employee
 stock options .........     --        --      278,650      27,865       60,233           --       --            --          88,098
Issuance of common stock
 to consultants ........     --        --      373,466      37,347      240,900           --       --            --         278,247
Stock option exercise by
 consultants ...........     --        --      400,000      40,000       60,000           --       --            --         100,000
Issuance of Senior E
 preferred stock
 series ................   6,472     6,472         --          --        (6,472)          --       --            --             --
Amortization of deferred
 compensation ..........     --        --          --          --           --            --       --         13,498         13,498
Net loss for the year ..     --        --          --          --           --     (2,213,453)     --            --      (2,213,453)
                         -------  --------  ----------  ----------  -----------  ------------  --------  ------------  ------------

Balance at
 December 29, 1995 ..... 103,824  $103,824  47,956,783  $4,795,678  $23,079,016  $(28,234,803) $    --   $   (13,499)  $   (269,784)
                         -------  --------  ----------  ----------  -----------  ------------  --------  ------------  ------------

See accompanying notes to consolidated financial statements

</TABLE>
                                        12
<PAGE>
<TABLE>
                                                    HEARx Ltd. And Subsidiaries
                                    Consolidated Statements of Changes in Stockholders' Equity
                                                            (Continued)
                               Years Ended December 27, 1996, December 29, 1995 and December 30, 1994
<CAPTION>
                                                                  Non-Redeemable
                                                                 Preferred Stocks                 Common Stock          Additional
                                                           ---------------------------   ---------------------------      Paid-In
                                                               Shares        Amount         Shares         Amount         Capital
                                                           ------------   ------------   ------------   ------------   ------------
<S>                                                        <C>            <C>            <C>            <C>            <C>

Balance at December 29, 1995 ............................       103,824   $    103,824     47,956,783   $  4,795,678   $ 23,079,016
Exercise of employee stock options ......................          --             --          419,900         41,990        167,861
Exercise of warrants, net of expenses of $134,814 .......          --             --        4,059,650        405,965      1,871,485
Treasury stock received from cashless exercise of
 warrants ...............................................          --             --          250,000         25,000           --
Conversions of preferred stock Senior A,B,D,G, and E ....       (88,824)       (88,824)     8,882,400        888,240       (799,416)
 Series C, Convertible 1992 .............................       (10,000)     1,040,000        104,000        (94,000)          --
   1994, Convertible ....................................        (5,000)        (5,000)     5,000,000        500,000       (495,000)
Preferred dividends paid to principal stockholder .......          --             --             --             --         (214,666)
Purchase and retirement of common stock from
 former officer .........................................          --             --         (120,000)       (12,000)       (33,000)
Issuance of common stock - Advisory Board ...............          --             --           28,900          2,890         22,110
Issuance of private placement 1996 Sr convertible
 preferred stock, net of expenses of $338,345 ...........         6,000          6,000           --             --        5,655,655
Redemption of 1996 Sr. convertible preferred stock ......        (6,000)        (6,000)          --             --       (5,994,000)
Common stock issued for customer list ...................          --             --          150,000         15,000        224,070
Issuance of private placement 1996 Series A convertible
 preferred stock, net of expenses of $306,000 ...........         5,100          5,100           --             --        4,788,900
Conversions of 1996 Series A preferred stock ............        (5,100)        (5,100)     1,955,888        195,589        (54,153)
Issuance of private placement 1996 Series B-1 and B-2
 convertible preferred stock, net of expenses
 of $1,851,410 ..........................................        24,900         24,900           --             --       23,023,690
Conversions of 1996 Series B-1 and B-2 preferred stock ..       (19,950)       (19,950)    12,020,712      1,202,071       (446,203)
Stock option exercise by consultants ....................          --             --          325,000         32,500        252,428
                                                           ------------   ------------   ------------   ------------   ------------

Subtotal ................................................         4,950   $      4,950     81,969,233   $  8,196,923   $ 50,954,777
                                                           ------------   ------------   ------------   ------------   ------------
<CAPTION>
                                                                                          Unamortized     Unrealized       Total
                                                            Accumulated     Treasury        Deferred    Gain on Market Stockholders'
                                                               Deficit        Stock       Compensation    Securities      Equity
                                                            ------------   ------------   ------------   ------------  ------------
<S>                                                         <C>            <C>            <C>            <C>           <C>

Balance at December 29, 1995 .............................  $(28,234,803)  $       --     $    (13,499)  $       --    $   (269,784)
Exercise of employee stock options .......................          --             --             --             --         209,851
Exercise of warrants, net of expenses of $134,814 ........          --             --             --             --       2,277,450
Treasury stock received from cashless exercise of
 warrants ................................................          --         (625,000)          --             --        (600,000)
Conversions of preferred stock Senior A,B,D,G, and E .....          --             --             --             --            --
 Series C, Convertible 1992 ..............................          --             --             --             --
   1994, Convertible .....................................          --             --             --             --            --
Preferred dividends paid to principal stockholder ........          --             --             --             --        (214,666)
Purchase and retirement of common stock from former
 officer .................................................          --             --             --             --         (45,000)
Issuance of common stock - Advisory Board ................          --             --             --             --          25,000
Issuance of private placement 1996 Sr convertible
 preferred stock, net of expenses of $338,345 ............          --             --             --             --       5,661,655
Redemption of 1996 Sr. convertible preferred stock .......          --             --             --             --      (6,000,000)
Common stock issued for customer list ....................          --             --             --             --         239,070
Issuance of private placement 1996 Series A convertible
 preferred stock, net of expenses of $306,000 ............          --             --             --             --       4,794,000
Conversions of 1996 Series A preferred stock .............      (136,336)          --             --             --            --
Issuance of private placement 1996 Series B-1 and B-2
 convertible preferred stock, net of expenses of
 $1,851,410 ..............................................          --             --             --             --      23,048,590
Conversions of 1996 Series B-1 and B-2 preferred stock ...      (900,171)          --             --             --        (164,253)
Stock option exercise by consultants .....................          --             --             --             --         284,928
                                                            ------------   ------------   ------------   ------------  ------------

Subtotal .................................................  $(29,271,310)  $   (625,000)  $    (13,499)  $       --    $ 29,246,841
                                                            ------------   ------------   ------------   ------------  ------------

See accompanying notes to consolidated financial statements

                                       
</TABLE>
                                        13
<PAGE>
<TABLE>
                                                    HEARx Ltd. And Subsidiaries
                                    Consolidated Statements of Changes in Stockholders' Equity
                                                            (Concluded)
                               Years Ended December 27, 1996, December 29, 1995 and December 30, 1994
<CAPTION>
                                                                  Non-Redeemable
                                                                 Preferred Stocks                 Common Stock          Additional
                                                           ---------------------------   ---------------------------      Paid-In
                                                               Shares        Amount         Shares         Amount         Capital
                                                           ------------   ------------   ------------   ------------   ------------
<S>                                                        <C>            <C>            <C>            <C>            <C>


Balance carried forward .................................         4,950   $      4,950     81,969,233   $  8,196,923   $ 50,954,777

Deemed dividend on 1996 Series A, B-1 and
  B-2 private placements ................................           --             --             --             --       9,000,000
Vesting of restricted stock - Officers ..................           --             --             --             --           2,800
Amortization of deferred compensation ...................           --             --             --             --            --
Unrealized gain on marketable securities net of taxes ...           --             --             --             --            --
Non-employee stock option compensation ..................           --             --             --             --          38,903
Net loss for the year ...................................           --             --             --             --            --
                                                           ------------   ------------   ------------   ------------   ------------

Balance at December 27, 1996 ............................         4,950   $      4,950     81,969,233   $  8,196,923   $ 59,996,480
                                                           ------------   ------------   ------------   ------------   ------------
<CAPTION>
                                                                                          Unamortized     Unrealized       Total
                                                            Accumulated     Treasury        Deferred    Gain on Market Stockholders'
                                                               Deficit        Stock       Compensation    Securities      Equity
                                                            ------------   ------------   ------------   ------------  ------------
<S>                                                         <C>            <C>            <C>            <C>           <C>

Balance carried forward .................................   $(29,271,310)  $   (625,000)  $    (13,499)  $       --    $ 29,246,841

Deemed dividend on 1996 Series A, B-1 and
  B-2 private placements ................................     (9,000,000)          --             --             --            --
Vesting of restricted stock - Officers ..................           --             --             --             --           2,800
Amortization of deferred compensation ...................           --             --           13,499           --          13,499
Unrealized gain on marketable securities net of taxes ...           --             --                          32,121        32,121
Non-employee stock option compensation ..................           --             --             --             --          38,903
Net loss for the year ...................................     (7,858,979)          --             --             --      (7,858,979)
                                                            ------------   ------------   ------------   ------------  ------------

Balance at December 27, 1996 ............................   $(46,130,289)  $   (625,000)  $       --     $     32,121  $ 21,475,185
                                                            ------------   ------------   ------------   ------------  ------------

See accompanying notes to consolidated financial statements

</TABLE>
                                        14
<PAGE>
<TABLE>
                                                    HEARx Ltd. And Subsidiaries
                                               Consolidated Statements of Cash Flows
<CAPTION>
                                                                                   Year Ended        Year Ended        Year Ended
                                                                                  December 27,      December 29,      December 30,
                                                                                     1996              1995              1994
                                                                                ---------------   ---------------   ---------------
<S>                                                                             <C>               <C>               <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss before dividends ................................................  $    (7,858,979)  $    (2,213,453)  $    (2,105,635)
    Adjustments to reconcile net loss to net cash used in
      operating activities:
        Depreciation and amortization ........................................        1,254,055           350,137           204,981
        Provision for losses on accounts receivable ..........................          448,088           198,298            51,247
        Loss on disposition of property ......................................          280,187              --                --
        Non-cash expense for consulting services .............................             --             222,530            62,500
        Non-cash expense for executive stock bonuses .........................             --             127,076             7,500

    (Increase) decrease in:
      Accounts and notes receivable ..........................................       (2,242,087)          (63,423)         (105,612)
      Inventories ............................................................           32,005           (58,419)          134,818
      Prepaid expenses .......................................................          284,418          (485,638)           99,184
      Other assets ..........................................................         (582,035)         (414,465)         (141,091)
    Increase (decrease) in:
      Accounts payable .......................................................         (427,008)          733,806           696,541
      Accrued expenses .......................................................        2,380,244           117,086           251,502
      Accrued costs for restructuring and
        discontinued operations ..............................................             --                --          (1,092,205)
                                                                                ---------------   ---------------   ---------------

         Net cash used in operating activities ...............................       (6,431,112)       (1,486,465)       (1,936,270)
                                                                                ---------------   ---------------   ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchase of property and equipment .....................................       (6,824,065)       (1,711,203)          (40,110)
      Proceeds from sale of property and equipment ...........................             --              21,748           132,568
      Purchase of marketable securities ......................................      (11,903,904)             --                --
      Discontinued operations ................................................             --                --              82,748
                                                                                ---------------   ---------------   ---------------

         Net cash (used) provided by investing activities ....................  $   (18,727,969)  $    (1,689,455)  $       175,206
                                                                                ---------------   ---------------   ---------------

See accompanying notes to consolidated financial statements

</TABLE>
                                        15
<PAGE>
<TABLE>
                                                     HEARx Ltd. And Subsidiaries
                                                Consolidated Statements of Cash Flows
                                                             (Continued)
<CAPTION>
                                                                                   Year Ended        Year Ended        Year Ended
                                                                                  December 27,      December 29,      December 30,
                                                                                     1996              1995              1994
                                                                                ---------------   ---------------   ---------------
<S>                                                                             <C>               <C>               <C>

CASH FLOWS FROM FINANCING ACTIVITIES:
    Short-term borrowings ....................................................  $          --     $     1,370,000   $          --
    Proceeds from issuance of:
      Long-term debt - principal stockholder .................................             --                --             500,000
      Long-term debt - other .................................................        1,261,977              --                --
      Convertible subordinated debentures ....................................             --                --             138,750
      Exercise of stock option ...............................................             --                --              75,000
    Principal payments:
        Long-term debt .......................................................       (4,439,686)         (279,255)         (130,972)
        Forgiveness of long-term debt ........................................         (343,640)         (293,843)          (52,500)
      Proceeds from issuance of capital stock ................................       29,558,328         2,983,550         1,248,035
                                                                                ---------------   ---------------   ---------------

        Net cash provided by financing activities ............................       26,036,979         3,780,452         1,778,313
                                                                                ---------------   ---------------   ---------------

Net increase in cash and cash equivalents ....................................          877,898           604,532            17,249

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ...............................          933,539           329,007           311,758
                                                                                ---------------   ---------------   ---------------

CASH AND CASH EQUIVALENTS AT END OF YEAR .....................................  $     1,811,437   $       933,539   $       329,007
                                                                                ===============   ===============   ===============

See accompanying notes to consolidated financial statements

</TABLE>
                                        16
<PAGE>
<TABLE>
                                                     HEARx Ltd. And Subsidiaries
                                                Consolidated Statements of Cash Flows
                                                             (Concluded)
<CAPTION>
                                                                                    Year Ended       Year Ended       Year Ended
                                                                                   December 27,     December 29,     December 30,
                                                                                       1996             1995             1994
                                                                                  ---------------  ---------------  ---------------
<S>                                                                               <C>              <C>              <C>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for interest .........................................................  $       249,097  $       253,479  $       211,490

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
  AND FINANCING ACTIVITIES:

    Deemed dividends on 1996 Series A, B-1,
      B-2 private placements ...................................................        9,000,000             --               --
    Preferred stock dividend paid upon conversion
      in kind by issuance of additional common stock ...........................        1,036,507             --               --
    Forgiveness of note payable by minimum required
      purchases ................................................................          343,640          293,843             --
    Issuance of common stock for services ......................................          309,925          222,530           62,500
    Issuance of common stock to employees ......................................          209,851          127,076           44,688
    Issuance of common stock for customer list .................................          239,070             --               --
    Conversion of accounts payable into notes payable ..........................             --            808,000          721,832
    Issuance of common stock for offering costs and software ...................             --            299,186
    In connection with a business acquisition:
        Convertible preferred stock issued .....................................             --               --            500,000
        Acquisition costs ......................................................             --               --             61,569
        Fair value of assets acquired ..........................................             --               --           (492,224)
        Costs in excess of fair value
         of net assets acquired ................................................             --             55,117           69,345
    Repayment of bank line of credit by principal
        stockholder/officer for a note payable .................................             --               --          1,000,000
    Convertible debentures and accrued interest
      payable exchanged for common stock .......................................             --               --            727,682

See accompanying notes to consolidated financial statements

</TABLE>
                                        17
<PAGE>
                           HEARX LTD. AND SUBSIDIARIES
                   NOTES TO 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 ("HEARx Centers")
to serve the needs of the hearing impaired. The company operates HEARx Centers
in Florida, New York, New Jersey, Connecticut, Virginia, Oregon and
Pennsylvania.

PRINCIPLES OF CONSOLIDATION

The financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.

MARKETABLE SECURITIES

Marketable securities are classified available for sale and are carried at
estimated market value. Unrealized holding gains and losses, net of tax, 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 asset.
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 other assets, primarily represent customer lists
acquired from acquisitions of hearing businesses. These customer lists are being
amortized on a straight-line basis over periods not exceeding 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. Accumulated amortization at December 27, 1996 and December 29,
1995 was $67,305 and $36,342, respectively.

PRE-OPENING COSTS

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

SALES RETURN POLICY

Patients purchasing hearing aids are given a specific return period, usually 30
days, if 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 customer attends the Company's H.E.L.P. program.

                                       18
<PAGE>
                           HEARX LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DEFERRED COMPENSATION

The value in excess of the selling price of shares of common stock issued to
officers has been amortized over the vesting period of such shares.

WARRANTIES

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

CAPITATION REVENUE

The Company has capitation contracts with certain health care organizations
under which the Company is paid an amount, per enrollee of the health
maintenance organization, to provide a once every three years discount on
certain hearing products and services. The amount paid to the Company by the
health-care organization is calculated on a per-capita basis and is referred to
as capitation revenue.

Revenue under capitation contracts is recorded based on actual utilization by
the member populations of the health care organizations with whom the Company
has contracted to provide hearing-care services.

INCOME TAXES

Deferred taxes are provided for temporary differences arising from the
differences between financial statement and income tax bases of assets and
liabilities.

NET LOSS PER SHARE OF COMMON STOCK

Net loss per share of common stock is computed using the weighted average number
of shares outstanding during the year. Convertible preferred stock, convertible
subordinated debentures, stock options and stock warrants are excluded from the
computation of net loss per share because the effect of their inclusion would be
anti-dilutive.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

RECLASSIFICATIONS

Certain amounts in the 1994 and 1995 financial statements have been reclassified
in order to conform to the 1996 presentation.

ESTIMATES

The preparation of the consolidated 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.

                                       19
<PAGE>
                           HEARX LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. MARKETABLE SECURITIES

Marketable securities at December 27, 1996 consist of U.S. Treasury Notes with
an amortized cost of $11,903,904, estimated fair value of $11,936,025 and
estimated unrealized gains of $32,121. Securities with an amortized cost of
$5,916,151 and estimated fair value of $5,932,795 have contractual maturities
within one year. Securities with an amortized cost of $5,987,753 and estimated
fair value of $6,003,230 have contractual maturities of two years through five
years.

3. SUBSEQUENT EVENT AND PRO-FORMA ADJUSTMENT
   
On March 17, 1997, the Company completed a private placement of 10,000 shares,
$1 par, of the 1997 Convertible Preferred Stock. Net proceeds to the Company
after payment of placement fees, legal and accounting expenses is estimated to
be $9,270,000. The pro forma effect of this transaction is presented as a
separate column in the consolidated balance sheet. The additional capital was
raised to enable HEARx to expand its network. The 1997 Convertible Preferred
Stock is convertible into Common Stock at various rates depending upon the date
of conversion and the market price at date of conversion. Management has
estimated that a deemed preferred stock dividend of approximately $1,500,000
will be recognized over the period from the date of issuance to August 15, 1997,
the first date on which the preferred stock may be converted for the discounted 
conversion price.
    
4. DEBT

Long-term debt as of December 27, 1996 and December 29, 1995 consists of the
following:

                                                             1996        1995
                                                          ----------  ----------

Note payable to supplier, collateralized by equipment,
   due December 31, 1997, see (a) below ................  $  683,114  $     --
Note payable collateralized by customer list, see (b)
   below ...............................................     213,515        --
Note payable to principal stockholder,
  paid during 1996 (see note 9) ........................        --     1,675,000
7% notes payable, to investors, due December 11, 1996
  converted to common stock (see note 6D) ..............        --     1,100,000
Note payable to supplier, due January 31, 1999,
  paid in 1996 .........................................        --       808,000
Short term advances from principal stockholder paid in
  1996 (see note 9) ....................................        --       270,000
Other notes payable ....................................      85,302     650,280
                                                          ----------  ----------
                                                             981,931   4,503,280

Less current maturities ................................     751,673   2,186,980
                                                          ----------  ----------

                                                          $  230,258  $2,316,300
                                                          ==========  ==========

The approximate aggregate maturities on long-term debt obligations in years
subsequent to 1996 are as follows: 1997, $752,000; 1998, $72,000; 1999, $72,000;
2000, $72,000; and $14,000 thereafter.

                                       20
<PAGE>
                           HEARX LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(a) On March 5, 1996, the Company completed a $2.5 million trade financing
agreement with a vendor pursuant to which the vendor will provide financing for
the purchase of diagnostic equipment to be utilized by the Company's
distribution network. The financing is collateralized by the equipment financed.
A percentage of all hearing aid purchases by the Company from this vendor will
be applied to repayment of financed amounts under the financing agreement.

(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, 150,000
shares of Common Stock, and a five year note in the amount of $250,000 including
interest. The note payable includes interest at 5.5% and is payable in five
annual installments of $50,000 including interest beginning January 22, 1997.

5. PROPERTY AND EQUIPMENT AND LEASES

Property and equipment consist of the following:

                                                      December 27, December 29,
                                                           1996         1995
                                                      ------------  ------------

Equipment, furniture and fixtures ..................  $  4,840,652  $  2,357,101
Leasehold improvements .............................     3,823,205       729,144
Computer systems ...................................     2,127,770       872,454
Leasehold improvements in progress .................        60,692       436,673
                                                      ------------  ------------

                                                        10,852,319     4,395,372
Less accumulated depreciation and amortization .....     2,783,619     1,871,490
                                                      ------------  ------------

                                                      $  8,068,700  $  2,523,882
                                                      ============  ============

Remaining commitments under contracts in progress related to the northeast
expansion necessary to fulfill the Company's contractual commitments to certain
managed care companies total $295,687 at December 27, 1996.

Approximate future minimum rental commitments under operating leases are as
follows: $2,183,000 in 1997; $2,080,000 in 1998; $1,955,000 in 1999; $1,797,000
in 2000; $1,422,000 in 2001 and $5,624,000 thereafter. These leases are
primarily for hearing centers and are located in retail shopping areas. The
Company believes that it would be able to sublease the space should it have to
close a center due to losing a large contract with a managed care insurance
company.

Equipment and building rent expense for the years ended December 27, 1996,
December 29, 1995 and December 30, 1994 was $1,916,000, $1,267,000 and $930,000,
respectively.

                                       21
<PAGE>
                           HEARX LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. STOCKHOLDERS' EQUITY

   A. SENIOR PREFERRED STOCK, SERIES A, B, C, D, G AND E

   These shares of Senior Preferred Stock had 100 votes per share and, unless
   otherwise required by Delaware law, voted with the holders of other shares of
   Common Stock as one class. The shares of Senior Preferred Stock Series A, B,
   C, D, G and E had no right to dividends except pari passu with the Common
   Stock based on the number of shares of Common Stock into which they were then
   convertible when, as and if a dividend was declared by the Board of
   Directors. The Senior Preferred Stock Series A, B, C, D, G and E were senior
   to the Common Stock and the Series C Preferred Stock and were pari passu with
   the 1994 Convertible Preferred Stock and the 1996 Senior Preferred Stock
   (discussed below). Upon the listing of the Company's Common Stock on the
   American Stock Exchange on March 15, 1996, all of the Senior Preferred Stock
   Series A, B, D, G, and E were automatically converted to common stock.

   (i)    SENIOR SERIES A AND SENIOR SERIES B

          Pursuant to an October 31, 1991 agreement with 3M, the Company agreed
          not to seek capital from any person, other than financial investors or
          through a public offering, as opposed to persons having an interest in
          the hearing aid industry, without 3M's prior written approval. The
          principal stockholder/officer agreed not to sell for five years any
          shares of Common Stock beneficially owned by himself or securities
          convertible into or exchangeable for Common Stock. He agreed to give
          3M (a) a right of first refusal to purchase all or any portion of such
          shares or securities and (b) the right to approve any potential
          purchaser, which approval is not to be withheld unreasonably. The
          principal stockholder/officer's agreement does not apply to sales in
          the open market or gifts of up to five percent of his security
          holdings (on a fully converted basis).

   (ii)   SENIOR SERIES C:

          In February, 1991, the Company and 3M entered into an arrangement
          pursuant to which, among other things, the Company marketed 3M's
          "Memory Mate"tm brand hearing aids and certain other 3M hearing
          related products (on a non-exclusive basis). 3M furnished one of its
          "Master-Fit"[Trademark] hearing aid fitting systems in each of the
          Company's retail locations (valued at $50,000), and 3M paid the
          Company a test marketing fee of $300,000. In connection with these
          transactions, 3M was granted the right, in exchange for transfer of
          title to the fitting systems and agreement to forego repayment of the
          funds advanced as a test marketing fee, to acquire for a nominal
          consideration, 11,000 shares of Senior Series C. This right has been
          converted into the rights to acquire up to 1,100,000 shares of common
          stock and has not been exercised by 3M.

   (iii)  SENIOR SERIES D AND G:

          On June 28, 1993, 3M exercised its right to acquire 14,926 shares of
          Senior Preferred Stock, Series D, par value $1.00 per share ("Senior
          Series D") for $1,000,000 and to acquire 14,926 shares of Senior
          Preferred Stock, Series G, par value $1.00 per share ("Senior Series
          G") for $1,000,000.

   (iv)   SENIOR SERIES E:

          During 1993 and 1994, 3M paid $400,000 as a partial payment towards
          the exercise of Senior Preferred Stock, Series E, par value $1.00 per
          share ("Senior Series E"). On May 1, 1995, the Company and 3M agreed

                                       22
<PAGE>
                           HEARX LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          to and the Company did issue 6,472 shares of Senior Series E Stock in
          consideration for the $400,000.

   B. SERIES C PREFERRED STOCK

   During January, 1996, all of the outstanding shares of the Series C Preferred
   Stock were converted into 1,040,000 shares of Common Stock, and the
   cumulative dividends of $214,666 were converted into a promissory note, which
   the Company paid in August, 1996. The Series C Preferred Stock provided for
   cumulative dividends at the rate of $5.60 per share per annum, payable
   quarterly, commencing June 30 1992, and was junior to the Senior Series
   Preferred Stock discussed above and the 1994 Convertible Preferred stock
   discussed below; it was senior to the Common Stock in the event of the
   liquidation, dissolution or winding up of the Company. The Series C Preferred
   Stock had 104 votes per share (1,040,000 votes total) and, except as
   otherwise required by Delaware law, voted with the holders of shares of
   Common Stock as one class. The Series C Preferred Stock was redeemable at the
   sole option of the Company at a redemption price of $70 per share.

   C. 1994 CONVERTIBLE PREFERRED STOCK

   In connection with the acquisition of certain assets from Hearing Health
   Services, Inc. ("HHS"), the Company issued to HHS 2,500 shares of the
   Company's 1994 Convertible Preferred Stock, par value $1.00 per share. All
   shares were converted to Common Stock by HHS on March 9, 1996. The 1994
   Convertible Preferred Stock had 1,000 votes per share (2,500,000 votes total)
   and voting rights and powers equal to the voting rights and powers of the
   Common Stock. Each share was convertible at any time at the option of the
   holder. In connection with the acquisition, HHS also received warrants to
   purchase 2,500,000 shares of Common Stock at a price of $.25 per share with
   standard anti-dilution rights. These warrants were exercised on January 29,
   1996, in a cashless exercise resulting in the issuance to HHS of 2,250,000
   shares of Common Stock. The Company received 250,000 shares for the cashless
   exercise, which was recorded as treasury stock.

   On December 30, 1994, the Company and three limited partnerships affiliated
   with HHS (collectively the "Investors") entered into a stock purchase
   agreement pursuant to which the Investors purchased 2,500 shares of 1994
   Convertible Preferred Stock, par value $1.00 per share at a total cash
   purchase price of $500,000 ($200 per share), paid on January 4, 1995. These
   shares had the same rights, privileges, and conversion features as the shares
   of 1994 Convertible Preferred Stock issued to HHS. On March 8, 1996, the
   Investors converted all their 1994 Convertible Preferred stock into 2,500,000
   shares of Common Stock.

   D. 1996 SENIOR PREFERRED STOCK

   During 1996 the Company completed a private placement of 6,000 shares, $1
   par, of 1996 Senior Preferred Stock in consideration for $4.9 million of cash
   and the conversion of a $1.1 million note payable. Associated warrants with
   this preferred stock cover an aggregate of 11,070,480 shares of common stock
   at an exercise price of $.55 per share. The 1996 Senior Preferred Stock was
   redeemed by the Company during May, 1996. The warrants remain outstanding.
   Additionally 2,283,278 warrants were issued to an investment banker as a
   placement fee.

   E. 1996 SERIES A, B-1 AND B-2 CONVERTIBLE PREFERRED STOCK

   During May and August, 1996, the Company completed a side-by-side offering
   pursuant to Regulation D and Regulation S, each promulgated under the
   Securities Act of 1933, as amended. In the Regulation D offering, the Company
   sold 15,000 shares of a convertible preferred stock (the "Series B-1
   Preferred Stock") and 9,900 shares of another convertible preferred stock

                                       23
<PAGE>
                           HEARX LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   (the "Series B-2 Preferred Stock"), for net proceeds of $23,048,590. In the
   Regulation S offering, the Company sold 5,100 shares of a convertible
   preferred stock (the "Series A Preferred Stock") for net proceeds of
   $4,794,000. In connection with the Regulation D and Regulation S offerings,
   the Company was required to report a one-time, non-cash charge against loss
   available to common stockholders of $9,000,000 (see Note 6G).

   (i)    1996 SERIES A CONVERTIBLE PREFERRED STOCK

          As of December 27, 1996, all of the 5,100 shares of the 1996 Series A
          Convertible Preferred Stock plus accrued dividends in the amount of
          $136,336 had been converted into 1,955,888 shares of the Company's
          Common Stock. The 1996 Series A 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 1996 Series A 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
          1996 Series A Convertible Preferred. The 1996 Series A Convertible
          Preferred Stock bore dividends of 8%, payable in kind or cash upon
          conversion at the option of the Company. The holders of this stock
          were entitled to convert up to 100 percent of the number of shares
          beginning 60 days following the date of the last closing (May, 1996).

   (ii)   1996 SERIES B-1 CONVERTIBLE PREFERRED STOCK

          The 1996 Series B-1 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 any 1996 Series B-1 Convertible Preferred, pari passau
          with the Company's 1996 Series B-2 Convertible Preferred Stock, 1997
          Convertible Preferred Stock and after any class or series of capital
          stock of the Company thereafter created and specifically ranking by
          its terms senior to the 1996 Series B-1 Convertible Preferred. The
          1996 Series B-1 Convertible Preferred Stock bears dividends of 8%,
          payment in kind or cash upon conversion at the option of the Company.
          Upon conversion of the Preferred Stock, holders will be 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 8% per annum of the stated value from the date of
          issuance (unless the Company chooses to redeem the shares otherwise
          issuable in respect of that premium) by a conversion price equal to
          the lesser of (i) $5.00, and (ii) a percentage (ranging from 100% on
          or before July 7, 1996, to 75% after May 7, 1997) of the average of
          the closing bid prices for shares of Common Stock for the ten

                                       24
<PAGE>
                           HEARX LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          trading day period immediately prior to conversion, subject to
          adjustment upon the occurrence of certain dilutive events. The Series
          B-1 Preferred Stock may be converted by holders at any time prior to
          May 7, 1999 and must be converted on that date. Upon conversion of the
          Series B-1 Preferred Stock, holders will also be entitled to receive
          up to a maximum of 3,750,000 Warrants to acquire shares of Common
          Stock at $6.47. For the year ended December 27, 1996, 11,500 shares of
          the total 15,000 shares of the 1996 Series B-1 Convertible Preferred
          Stock plus accrued dividends of $491,397 were converted into 7,523,849
          shares of the Company's Common Stock, and all 3,750,000 warrants have
          been issued to holders on conversion.

   (iii)  1996 SERIES B-2 CONVERTIBLE PREFERRED STOCK

          The 1996 Series B-2 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 any 1996 Series B-2 Convertible Preferred, pari passau
          with the Company's 1996 Series B-1 Convertible Preferred Stock, 1997
          Convertible Preferred Stock and after any class or series of capital
          stock of the Company, thereafter created and specifically ranking by
          its terms senior to the 1996 Series B-2 Convertible Preferred. The
          1996 Series B-2 Convertible Preferred Stock bears dividends of 8%,
          payment in kind or cash upon conversion at the option of the Company.
          Upon conversion of the Preferred Stock, holders will be 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 8% per annum of the stated value from the date of
          issuance (unless the Company chooses to redeem the shares otherwise
          issuable in respect of that premium) by a conversion price equal to
          the lesser of (i) $5.00, and (ii) a percentage (ranging from 100% on
          or before July 7, 1996, to 75% after May 7, 1997) of the average of
          the closing bid prices for shares of Common Stock for the ten trading
          day period immediately prior to conversion, subject to adjustment upon
          the occurrence of certain dilutive events. The Series B-2 Preferred
          Stock may be converted by holders at any time prior to May 7, 1999 and
          must be converted on that date. For the year ended December 27, 1996,
          8,450 shares of the total 9,900 shares of the 1996 Series B-2
          Convertible Preferred Stock plus accrued dividends of $244,522 were
          converted into 4,496,863 shares of the Company's Common Stock.

   F. 1995 PLACEMENTS

   During 1995, the Company completed a private placement of Common Stock for
   $1,500,000 with individual investors for a total of 2,427,184 shares of
   Common Stock net of associated costs of $63,192.

   The Company completed three Regulation S offerings in 1995 totaling
   $1,600,600. Costs related to the offerings were $297,315. A total of
   2,602,572 shares of Common Stock were issued in the transactions. The

                                       25
<PAGE>
                           HEARX LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   stock purchase agreement provided that the investors' warrants were
   exercisable monthly through October, 1996. The warrants gave the investors
   the right to purchase additional shares (based on a pre-set formula) at $.10
   per share should the market price fall below $.85 per share. None of the
   warrants were exercised.

   G. DEEMED PREFERRED STOCK DIVIDEND

   In connection with the May, 1996 financings (Regulation S and D), the Company
   recorded a deemed preferred stock dividend which is shown as an increase in
   loss available to common stockholders of $9,000,000. This charge was recorded
   during the second quarter of 1996. This charge related to the discounted
   conversion price for the shares of Common Stock issuable on conversion of the
   Preferred Stock and only impacted the calculation of earnings per share
   related to the Common Stock. The amount of the charge was computed as the
   difference between the $5.00 conversion price (as defined) and the per share
   market price of the Common Stock on the date of the first closing ($6.50)
   times the number of shares issuable.

   H. WARRANTS

   As discussed in Note 6E, the Company issued warrants to purchase 3,750,000
   shares of the Company's Common Stock at an exercise price of $6.47 per share
   in connection with the conversion of the Series B-1 Convertible Preferred
   Stock. These warrants expire in 2001. None of these warrants were exercised
   during 1996.

   As disclosed in Note 6C above, during 1996 HHS converted 2,500,000 warrants
   via a cashless exercise and received 2,250,000 shares of the Company's Common
   Stock.

   Other warrants were exercised in 1996 to receive 1,809,650 shares of the
   Company's Common Stock for proceeds of $1,812,264.

   As disclosed in Note 6D, the Company issued 11,070,480 warrants at $.55 per
   share to purchase shares of Common Stock in connection with the January, 1996
   private placement of 6,000 shares of the 1996 Senior Preferred Stock. In
   connection with this private placement, the Company also issued 2,283,278
   warrants at $.63 per share to an investment banker as a placement fee. None
   of these warrants were exercised during 1996. These warrants will expire on
   January 26, 2001.

                                       26
<PAGE>
                          HEARX LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The aggregate number of shares reserved for issuance upon the exercise of
warrants is 21,095,358 as of December 27, 1996. Exercise prices range from $.01
to $6.47 and are exercisable as follows:

                     Number of         Expiration
               Warrants Outstanding       Date       Price
               --------------------  --------------  -----
                     1,100,000       February,1998   $ .01
                         5,000       December, 1998    .50
                         1,500       December,1998     .67
                        12,500       December,1998     .75
                        58,750       December,1998    2.00
                         5,000       November,1999    1.50
                    11,070,480       January, 2001     .55
                     2,283,278       January, 2001     .63
                        75,000       August, 2001     4.00
                        35,000       September, 2001  4.00
                     3,750,000       December, 2001   6.47
                       642,125       February, 2003   1.25
                     2,056,725       January, 2004    1.00
               --------------------
                    21,095,358
               ====================

7. BUSINESS ACQUISITION AND CHANGES IN CONTRACTS

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, 150,000 shares
of Common Stock, and a five year note in the amount of $250,000 including
interest. The note payable bears interest at 5 1/2 % and is payable in five
annual installments of $50,000 beginning January 22, 1997.

Effective May 31, 1996, Humana Health Care Plans of Florida ("Humana") declined
to renew its contract with the Company to provide coverage to Humana Medicare
members on the east coast of Florida (the contract to service Humana Medicare
members living on the west coast of Florida was unaffected). Total revenues from
Humana east coast of Florida members were approximately $2 million in 1995, or
18% of the Company's total revenues. Although there can be no assurance that
other contracts will not be the subject of a non-renewal or early termination,
the Company is aware of no other potential contract non-renewals or terminations
at this time.

8. STOCK OPTION PLANS

At December 27, 1996, the Company has three stock option plans, which are
described below. The Company applies APB Opinion 25, Accounting for Stock Issued
to Employees, and related Interpretations in accounting for the plans. Under APB
Opinion 25, because the exercise price of the

                                       27
<PAGE>
                           HEARX LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation cost is recognized.

   A. EMPLOYEE STOCK OPTION PLANS

      (i)  Under the Company's 1987 plan, the Company's Board of Directors, or a
           committee thereof, is authorized to grant options to purchase up to
           an aggregate of 2,500,000 shares of the Company's Common Stock.
           Officers and other key employees of the Company, other than the
           principal stockholder and individuals who hold ten percent or more of
           the Company's Common Stock, are eligible to receive either incentive
           stock options or non-incentive stock options. The option price for
           non-incentive stock options may be any price determined by the Board
           of Directors or the Committee. The option price for incentive stock
           options may not be less than the fair market value of the shares at
           the time the option is granted.

      (ii) In June, 1995, the Company's stockholders approved the adoption of
           the HEARx Ltd. 1995 Flexible Stock Plan ("Flexible Stock Plan"),
           pursuant to which a committee of the Board of Directors (whose
           members shall not receive awards under the 1995 Flexible Stock Plan
           or any other discretionary grant plans of the Company) may make
           awards to eligible participants in the form of stock options, stock
           appreciation rights, restricted stock, performance shares and other
           stock-based awards. The number of shares of Common Stock which may be
           issued in connection with awards under the 1995 Flexible Stock Plan
           may not exceed 2,500,000, plus an automatic annual increase of ten
           percent of the number of shares subject to the Plan as of the prior
           year.

    As of December 27, 1996, 175 employees of the Company held options under the
    Stock Option Plans permitting them to purchase 4,281,150 shares of Common
    Stock at prices ranging from $.20 to $2.875 per share. Options are
    exercisable for a period of nine years commencing one year following the
    date of grant and are exercisable in cumulative annual installments of 25
    percent per year.

                                       28
<PAGE>
                           HEARX LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    The following table sets forth the option activity for the years ended
    December 27, 1996, December 29, 1995 and December 30, 1994.

<TABLE>
<CAPTION>
                                                      December 27, 1996            December 29, 1995          December 30, 1994
                                                  --------------------------  --------------------------  --------------------------
                                                               Weighted Avg.               Weighted Avg.               Weighted Avg.
                                                    Shares    Exercise Price    Shares    Exercise Price    Shares    Exercise Price
                                                  ----------  --------------  ----------  --------------  ----------  --------------
<S>                                               <C>         <C>             <C>         <C>             <C>         <C>

   Outstanding at beginning of year .............  3,252,950       $0.72       2,390,500      $0.41        1,791,800      $0.63
   Granted ......................................  1,746,800       $2.81       1,391,600      $1.12        1,619,850      $0.30
   Exercised ....................................    423,400       $0.50         278,650      $0.32             none         --
   Forfeited ....................................    295,200       $0.52         250,500      $0.40        1,021,150      $0.65

   Outstanding at end of year ...................  4,281,150       $1.50       3,252,950      $0.72        2,390,500      $0.41
   Options Exerciable at year end ...............  1,200,900                     572,211                     337,625

   Weighted avg. fair value of options granted
     during the year ............................                  $1.49                      $0.00                       $0.00

</TABLE>

   The following table summarizes information about fixed stock options
   outstanding at December 27, 1996.

<TABLE>
<CAPTION>
                                       Weighted
                                       Average          Weighted       Options        Weighted
   Range of exercise    Options       Remaining          Average     Exerciable at     Average
         Price        Outstanding  Contractual Life  Exercise Price   12/27/1996    Exercise Price
   -----------------  -----------  ----------------  --------------  -------------  --------------
   <C>                <C>          <C>               <C>             <C>            <C>

   $ .20                  647,900         7.5            $0.20             323,950      $0.20
   $ .34 - $ .75          681,150         6.8            $0.53             499,725      $0.54
   $ .78 - $ .88          368,100         8.4            $0.85             118,425      $0.84
   $1.21 - $1.49        1,108,200         8.9            $1.23             258,800      $1.21
   $2.88                1,475,800         9.5            $2.88                   0      $0.00
                      -----------                    --------------  -------------
                        4,281,150         8.6            $1.50           1,200,900      $0.62
                       ==========                    ==============  =============
</TABLE>
                                       29
<PAGE>
                           HEARX LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   Statement of Financial Accounting Standard ("SFAS") No. 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. During the initial
   phase-in period of SFAS 123, the effects on pro forma results are not likely
   to be representative of the effects on pro forma results in future years
   since the options vest over several years and additional awards could be made
   each year. 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 1995 and 1996 respectively,
   expected volatility of 35%; risk-free interest rates of 5.79% and 6.59%; and
   expected lives of 10 years.

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

                                                  1996           1995
                                              -------------  ------------

   Net Loss applicable to common stockholder
         As reported .......................  $(17,895,486)  $(2,213,453)
                                              -------------  ------------
         Pro forma .........................  $(18,047,159)  $(2,213,453)
                                              -------------  ------------

   Loss per share
         As reported .......................  $      (0.25)  $     (0.05)
                                              -------------  ------------
         Pro forma .........................  $      (0.25)  $     (0.05)
                                              -------------  ------------

   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 in the Company by granting
   non-qualified stock options that will promote long-term stockholder value.
   Grants under the Directors Plan may not exceed 500,000 shares of Common Stock
   in the aggregate and may be granted until the Annual Meeting of Stockholders
   in 2003.

   Each year, upon election to the Board, each non-employee director shall be
   granted a 10-year non-qualified stock option ("Option") to acquire 15,000
   shares of Common Stock. The exercise price shall be 100 % of the fair market
   value of the shares as of the close of business on the business day
   immediately prior to the date on which the Option is granted. As of December
   27, 1996,

                                       30
<PAGE>
                           HEARX LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   three non-employee directors hold options under the plan allowing them to
   purchase the following shares: 90,000 at $.6875; 45,000 shares at $.78125;
   45,000 shares at $.34; 45,000 shares at $1.25; and 45,000 shares at $5.875.

   C. STOCK BONUS PLAN

   The Board of Directors has adopted a Stock Bonus Plan ("Bonus Plan"). It is
   the purpose of the Bonus Plan to create an incentive for senior management
   personnel to work to the very best of their abilities for the achievement of
   the Company's strategic objectives. To accomplish this purpose, the Board of
   Directors intends to award shares of Common Stock to eligible employees.

   The Bonus Plan is administered by the Board of Directors. Participants in the
   Bonus Plan must be key executives of the Company or its subsidiaries who are
   determined by the Board of Directors to be important to the success of the
   Company. Members of the Board of Directors are not eligible to participate so
   long as the Board is administering the Bonus Plan. There are approximately
   nine persons eligible to participate in the Plan.

   The aggregate number of shares of Common Stock which may be issued under the
   Bonus Plan may not exceed 500,000. A total of 115,138 and 22,727 shares were
   issued under this plan during the years ended December 29, 1995 and December
   30, 1994, respectively. None were issued during the year ended December 27,
   1996.

   D. OTHER

   On July 11, 1995, the Company granted options expiring ten years from date of
   grant to a consultant to purchase 700,000 shares of Common Stock at $1.00 a
   share. Options to purchase 58,333 shares vested immediately, with the
   remaining options vesting at a rate of 58,333 shares per month beginning
   August 1, 1995. A total of 200,000 shares related to the exercise of these
   options were issued during the year ended December 27, 1996.

   On July 1, 1994, the Company granted an option to the same consultant to
   purchase 600,000 shares of Common Stock at $.25 a share. These options vest
   at the rate of 50,000 shares per month beginning October 1, 1994. The
   consultant exercised options to purchase 50,000 shares, 400,000 shares and
   150,000 shares in 1996, 1995 and 1994 respectively. On July 11, 1995, the
   Company granted an option to purchase 144,000 shares of Common Stock to an
   individual in exchange for consulting services to be rendered over a period
   of three years, beginning July 11, 1995. The option price is $1.00 per share,
   and the options vest at the rate of 4,000 shares per month beginning August
   1, 1995. None of these options have been exercised.

9. RELATED PARTY TRANSACTIONS

In addition to the related party transactions described in Note 6, the following
related party transactions occurred during 1996, 1995, and 1994:

In January, 1996, a payment of $100,000 was made to the principal
stockholder/officer on the $270,000 advanced by him to the Company during 1995.
The remaining $170,000 of the advance plus $63,000 of accrued interest were
converted into a three-year note payable bearing interest at prime plus 3%. In
January, 1996, cumulative dividends of $214,666 associated with the conversion
of the Series C Preferred Stock were converted into a promissory note payable to
the principal stockholder/officer. In addition, the principal
stockholder/officer held a note payable of the Company in the amount of
$1,675,000 which was subordinated to all other indebtedness of the Company. The
interest rate was prime plus 3%. During August, 1996, each of the three notes
payable to the principal

                                       31
<PAGE>
                           HEARX LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

stockholder/officer was paid in full. At December 27, 1996 the Company had no
other amounts due to the principal stockholder/officer.

Working capital funds were provided during fiscal 1995, 1994 and 1993 through
periodic loans from the principal stockholder/officer. Interest expense on notes
and advances payable to the principal stockholder/officer was $144,773, $198,181
and $120,139 for 1996, 1995 and 1994, respectively.

10. INCOME TAXES

The Company and its subsidiaries file a consolidated income tax return. It 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 are comprised of the following:

December                                        1996           1995
------------------------------------------  ------------   ------------

Depreciation .............................  $     15,000   $     54,000
Allowance for doubtful accounts ..........       297,000        163,000
Net operating loss carryforward ..........    12,521,000      9,658,000
                                            ------------   ------------

                                              12,833,000      9,875,000
Less valuation allowance .................   (12,833,000)    (9,875,000)
                                            ============   ============

Net deferred tax asset ...................  $       --     $       --
                                            ============   ============

At December 27, 1996, the Company had net operating loss carryforwards of
approximately $33,274,000 for both tax and financial reporting purposes. The
losses are available for carryforward for a fifteen year period and will expire
beginning in 2002. Any future significant changes in the ownership of the
Company or its subsidiaries may limit the annual utilization of the tax net
operating loss carryforwards.

11. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS

There were no significant fourth quarter adjustments for fiscal 1996.
Significant fourth quarter adjustments for 1995 included were an increase in the
allowance for doubtful accounts of $178,101 and the recording of additional
public relations expense of $284,201.

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Financial Accounting Standards Board ("FASB") has issued SFAS No. 107 which
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 unrealized gains or losses should not be
interpreted as a forecast of future earnings and cash flows.

                                       32
<PAGE>
                           HEARX LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SFAS No. 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
disclosures for financial instruments:

Cash and Cash Equivalents - the carrying amounts reported in the balance sheet
approximate those assets' fair value.

Marketable Securities - the carrying amounts reported in the balance sheet
approximate those assets' fair value.

Accounts Receivable - the carrying amounts reported in the balance sheet
approximate those assets' fair value.

Accounts Payable, Accrued Expenses and Notes Payable - the carrying amounts
reported in the balance sheet approximate those liabilities' fair value.

13. RECENT ACCOUNTING PRONOUNCEMENTS

The Company adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of" on January 1, 1996. SFAS No. 121
provides guidance on how and when impairment losses are recognized on long-lived
assets. Adoption of SFAS No. 121 did not have a material impact on the Company's
operations.

14. MAJOR CUSTOMER

During 1996, the Company had sales totaling approximately 15.7% of net sales to
a single customer. In management's opinion the loss of this customer would not
adversely effect future operations of the Company.

                                       33
<PAGE>
<TABLE>
                                   HEARX LTD.
                               VALUATION ACCOUNTS
                                   SCHEDULE II
<CAPTION>
                                   Balance at                             Balance at
                                   Beginning                                 End
                                   of Period   Additions     Deductions   of Period
                                   ---------  -----------  -------------  ----------
<S>                                <C>        <C>          <C>            <C>

December 27, 1996:
  Allowance for doubtful accounts  $ 341,234  $492,774     $ (44,686)     $ 789,322
                                   ---------  -----------  -------------  ----------

December 29, 1995:
  Allowance for doubtful accounts  $ 154,330  $436,971(1)  $(250,067)(3)  $ 341,234
                                   ---------  -----------  -------------  ----------

December 30, 1994:
  Allowance for doubtful accounts  $ 255,755  $180,071(2)  $(281,496)(3)  $ 154,330
                                   ---------  -----------  -------------  ----------

---------------
<FN>
(1) Charged to costs and expense $198,298, transfer from long term notes
    receivable allowance $238,673

(2) Charged to costs and expense $51,247, transfer from long term note
    receivable allowance for $128,824

(3) Write-off to reserves

</TABLE>
                                       34
<PAGE>
                                     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 27, 1996 and
                  December 29, 1995.

         (ii)     Consolidated Statements of Operations for the years ended
                  December 27, 1996, December 29, 1995 and December 30, 1994.

         (iii)    Consolidated Statements of Changes in Stockholders' Equity for
                  the years ended December 27, 1996, December 29, 1995 and
                  December 30, 1994.

         (iv)     Consolidated Statements of Cash Flows for the years ended
                  December 27, 1996, December 29, 1995 and December 30, 1994.

         (v)      Notes to Consolidated Financial Statements.

    (2)  The following financial statement schedules are filed as part of this
         report and are contained on page 49.

         Schedule II  Valuation Accounts

    (3)  Exhibits:

         3.1(a)[1]            Restated Certificate of Incorporation of HEARx
                              Ltd., including certain certificates of
                              designations, preferential and rights of certain
                              preferred stock of the Company. [3]

         3.1A-1[2]            Amendment to Restated Certificate of Incorporation
                              [3.1A]

         3.1A-2[3]            Certificate of Designations, Preference and Rights
                              of the Company's 1997 Convertible Preferred Stock.
                              [3.1A-2]

         3.2[4]               By-Laws of HEARx, Ltd. [3.2]

         4.1[4]               Specimen of Certificate representing Common Stock.
                              [4.1]

                                       35
<PAGE>
         4.2[1]               Securities Purchase Agreement, dated May 3, 1996,
                              among the Company and each of the purchasers set
                              forth on the signature pages thereto, including
                              Exhibit A thereto (form of warrant ). [4.1]

         4.3[1]               Registration Rights Agreement, dated May 3, 1996
                              among the Company and each of the purchasers set
                              forth on the signature pages thereto. [4.2]

         4.4[1]               Securities Subscription Agreement, dated as of the
                              closing thereunder of May 10, 1996, among the
                              Company and the purchasers set forth on the
                              signature pages thereto. [4.3]

         4.5[1]               Registration Rights Agreement, dated May 10,
                              1996, among the Company and the purchasers set
                              forth on the signature pages thereto. [4.4]

         10.1[4]              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]

#        10.2[4]              Form of Directors' Restricted Stock Agreement,
                              dated July 1, 1987, by and between HEARx Ltd. and
                              each of Fred N. Gerard, David J. McLachlan and
                              Daniel J. Miller, M.D. [10.3]

#        10.3[4]              HEARx Ltd. 1987 Stock Option Plan. [10.11]

#        10.4[4]              Form of Restricted Stock Agreement. [10.28(a)*]

#        10.5[5]              (a) HEARx Ltd. Stock Option Plan for
                              Non-Employee Directors and (b) Form of Option
                              Agreement. [10.35] [10.48]

         10.6[6]              Promissory Note dated January 4, 1994 by and
                              between HEARx Ltd. and Audiology Sales & Service,
                              Inc. [10.51]

         10.7[6]              Letter of Intent, dated November 14, 1994, between
                              HEARx Ltd. and Av-Med. [10.62]

                                       36
<PAGE>
         10.8[6]              Agreement, dated January 4, 1995, between
                              CareFlorida HealthCare Plans and HEARx Ltd.
                              [10.65]

         10.9[7]              Consolidated and Amended Loan Agreement by and
                              among the Company, Siemens Hearing Instruments,
                              Inc., and Rexton, Inc., dated effective January 1,
                              1995. [10.17]

         10.10[7]             Care Florida Agreement [10.18]

#        10.11[8]             1995 Flexible Employee Stock Plan

         10.12[7]             Securities Purchase Agreement by and between the
                              Company and Kew Capital Corporation, Ltd., dated
                              as of June 29, 1995. [10.20]

         10.13[7]             Form of Offshore Securities Subscription Agreement
                              entered into by and between the Company and each
                              of Zanett Lombardier, Ltd., Harlow Enterprises,
                              Inc., and Bruno Guazzoni, dated September 29,
                              1995, and October 19, 1995. [10.21]

         10.14[7]             Promissory Note in favor of Bruce M. Langone in
                              the amount of $100,000 dated December 11, 1995.
                              [10.22]

         10.15[7]             Promissory Note in favor of Kenneth G. Langone in
                              the amount of $1,000,000 dated December 11, 1995.
                              [10.23]

         10.16[7]             Agreement between the Company and Oxford Health
                              Plans dated effective January 1, 1996, as amended
                              by letter agreements dated February 21, 1996, and
                              February 29, 1996. [10.24]

         10.17[7]             Stock Purchase Agreement and Registration Rights
                              Agreement, each dated January 26, 1996, by and
                              among the Company, Invemed Associates, Inc., and
                              certain Investors therein named. [10.25]

         10.18[7]             Amended and Restated Promissory Note in favor of
                              Paul A. Brown, M.D., in the amount of $1,675,000
                              dated January 26, 1996. [10.26]

                                       37
<PAGE>
         10.19[7]             Promissory Note in favor of Paul A. Brown, M.D.,
                              in the amount of $214,666 dated January 29, 1996.
                              [10.27]

         22                   List of subsidiaries of HEARx Ltd.*

         23(a)                Consent of Independent Certified Public
                              Accountants.

---------------

[1] Filed as an exhibit to the Company's Current Report on Form 8-K, filed on
    May 17, 1996, 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, 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 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 and incorporated by reference herein.

[6] Filed as an exhibit to the Company's Annual Report on Form 10-K for the year
    ended December 30, 1994, as the exhibit number indicated in brackets and
    incorporated by reference herein.

[7] Filed as an exhibit to the Company's Form 10-K for the year ended December
    27, 1995, and incorporated herein by reference. 8 Filed as an exhibit to the
    Company's 1995 Proxy Statement, and incorporated by reference herein.

*   Previously filed.

#   Denotes plan or arrangement for Company officer or director.


(b) Reports on Form 8-K --  None

                                       38
<PAGE>
                                   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)

Date: June 17, 1997                     By: /s/ Paul A. Brown, M.D.
                                            ------------------------------------
                                            Paul A. Brown, M.D.
                                            Chairman of the Board

                                      39