##### 









SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K/A
(AMENDMENT NO. 1)

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


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

Commission file number 0-16453



---

HEARx LTD.

Exact Name of Registrant as Specified in Its
Charter


|                                                                       |  |                                             
|---------------------------------------------------------------------- |  | --------------------------------------------
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Delaware                                                               |  | 22-2748248                                  
|(State of Other Jurisdiction of
        Incorporation or Organization) |  | (I.R.S. Employer
        Identification No.)
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|1250 Northpoint Parkway, West Palm Beach,
        Florida              |  | 33407                                       
|(Address of Principal Executive
        Offices)                       |  | (Zip Code)                                  

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

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

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

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

None


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



---



##### 



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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrants definitive Proxy Statement for the
2002 Annual Meeting of the Registrants Stockholders
(2002 Proxy Statement), to be filed with the
Securities and Exchange Commission, are incorporated by
reference in Part III hereof.



---






---



##### 



Item 8.     Financial
Statements and Supplementary Data

|                                                                                                                                                          |  |      |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                                                                          |  | Page
|                                                                                                                                                          |  |     
|Index to Financial Statements                                                                                                                             |  |      |      | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Financial Statements:                                                                                                                                     |  |      |      | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Report of Independent Certified Public Accountants                                                                                                        |  |      | 2    | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Consolidated Balance Sheets at December 29,
        2001 and December 29, 2000                                                                            |  |      | 3    | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Consolidated Statements of Operations for the
        years ended December 29, 2001, December 29, 2000, and
        December 31, 1999                     |  |      | 4    | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Consolidated Statements of Changes in
        Stockholders Equity for the years ended December 29,
        2001, December 29, 2000 and December 31, 1999 |  |      | 5-6  | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Consolidated Statements of Cash Flows for the
        years ended December 29, 2001, December 29, 2000, and
        December 31, 1999                     |  |      | 7-8  | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Notes to Consolidated Financial Statements                                                                                                                |  |      | 9-26 | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Financial Statement Schedule:                                                                                                                             |  |      |      | 
|                                                                                                                                                         
|For the years ended December 29, 2001,
        December 29, 2000 and December 31, 1999                                                                    |  |      |      | 
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|II Valuation and Qualifying Accounts                                                                                                                      |  |      | 27   | 

1



---



##### 



Report of Independent Certified Public Accountants

Board of Directors HEARx Ltd. 
 West Palm Beach, Florida

We have audited the accompanying consolidated balance sheets of
HEARx Ltd. as of December 29, 2001 and 2000, and the
related consolidated statements of operations, changes in
stockholders equity and cash flows for each of the three
years in the period ended December 29, 2001. We have also
audited the schedule listed in the accompanying index. These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.

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

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of HEARx Ltd. at December 29, 2001 and 2000, and
the results of its operations and its cash flows for each of the
three years in the period ended December 29, 2001 in
conformity with accounting principles generally accepted in the
United States of America.

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



| |                 
| | ----------------
| | BDO Seidman, LLP

West Palm Beach, Florida 
 February 28, 2002

2



---



##### 



HEARx LTD.

CONSOLIDATED BALANCE SHEETS

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

See accompanying notes to consolidated financial statements

3



---



##### 



HEARx LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

See accompanying notes to consolidated financial statements

4



---



##### 



HEARx LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY

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

See accompanying notes to consolidated financial statements

5



---



##### 



HEARx LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY

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

See notes to accompanying consolidated finanical statements

6



---



##### 



HEARx LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

See accompanying notes to consolidated financial statements

7



---



##### 



HEARx LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

See accompanying notes to consolidated financial statements

8



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

The Company

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

Helix Transaction

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

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

Segments

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

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

9



---



##### 



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

Consolidation and change
in reporting entity

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

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

Fiscal year

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

Investment securities

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

Inventories

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

Property and
equipment

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

Intangible assets

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

10



---



##### 



Pre-opening costs

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

Long-lived
assets  impairments and disposals

The Company reviews the carrying values of its long-lived and
identifiable intangible assets for possible impairment whenever
events or changes in circumstances indicate that the carrying
amounts of the assets may not be recoverable through the
estimated undiscounted future cash flows resulting from the use
of these assets. At December 29, 2001, no long-lived assets
were held for disposal.

Advertising Costs

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

Sales return policy

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

Warranties

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

Revenue Recognition

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

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

Income taxes

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

Net loss per common
share

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

11



---



##### 



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

Statements of Cash
Flows

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

Reclassifications

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

Estimates

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

Stock-based
compensation

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

2. Investment Securities

Investment securities available for sale consist of the
following:

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

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

12



---



##### 



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

3. Debt

Long term debt consists of the following:

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

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



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

13



---



##### 





| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | imposes certain financial and other covenants on HEARx. If HEARx
        cannot maintain compliance with these requirements, Siemens may
        decline to make funds available to HEARx. Furthermore, if HEARx
        and Helix do not complete the merger, approximately
        $6.7 million of the credit facility may not be accessible
        to HEARx at all.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |     | The Tranche A, B and C Loans are payable quarterly over five
years with the outstanding principal and interest at 10% due and
payable on the final maturity date. Principal and interest, at
prime rate (as defined) plus 1%, on the Tranche D Loan is
payable on the final maturity date. Quarterly principal and
interest payments on Tranche A, B and C Loans will be paid
through rebates received from Siemens by HEARx as long as HEARx
purchases certain minimum percentages of its requirements of
hearing aids from Siemens pursuant to the supply agreement
discussed below. HEARx will record a rebate receivable and
reduce cost of goods sold for the rebates earned as it meets
minimum purchase percentages from Siemens. During 2001,
approximately $1,665,000 of earned rebates were recorded as a
reduction of cost of goods sold, and $390,000 of interest and
$625,000 of principal has been repaid upon receipt of such
rebates. The loans may be prepaid in whole or in part at any
time without penalty. The credit facility is secured by a first
priority security interest in substantially all of the assets of
HEARx.
|
| |     | In connection with the credit facility, HEARx and Siemens
entered into a supply agreement dated as of December 7,
2001, pursuant to which HEARx agreed to purchase from Siemens
certain minimum percentages of HEARxs hearing aid
purchases for a period of ten years (an initial five year term
and a five year renewal term) at specified prices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |     | Pursuant to the agreements with Siemens, in the event of a
change of control of the Company (as defined), and the surviving
entity of such change of control does not assume the
Companys obligations under the agreements, the entire
outstanding amount under the credit facility will be immediately
due and payable and the supply arrangements may be terminated
upon payment to Siemens of a $50 million breakup fee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (b) | In January 1996, the Company acquired the customer list and
        selected assets of Suffolk County Hearing Aid Center, Inc. in
        New York for $150,000 in cash, 150,000 shares of Common Stock,
        and a five year note in the amount of $250,000 including
        interest. The note payable included interest at 5.5% was payable
        in five annual installments of $50,000 including interest
        beginning January 22, 1997 and was repaid in January 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (c) | During July 1999, the Company issued a $325,000 promissory note
        payable bearing 8.75% interest to an individual in connection
        with a purchase of an audiological practice in California, (See
        Note 8). The note is payable in four annual installments of
        $81,250 plus accrued interest, beginning July 1, 2000 and
        is collateralized by the equipment and customer list purchased.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

14



---



##### 



4. Property and Equipment and Leases

Property and equipment consists of the following:

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

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

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

5. Stockholders Equity

A. Stock Subscription

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

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

B. Series J Preferred
Stock

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

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

15



---



##### 



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

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

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

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

C. Series I
Convertible Preferred Stock

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

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

16



---



##### 



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

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

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

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

D. Reverse Stock Split

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

E. 1998 Convertible
Preferred Stock

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

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

17



---



##### 



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

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

F. 1997 Convertible
Preferred Stock

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

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

G. Shareholder Rights
Plan

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

18



---



##### 



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

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

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

H. Warrants

No warrants were exercised in 2001.

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

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

I. Aggregate and Per Share
Cumulative Preferred Dividends

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

19



---



##### 



6. Stock Plans

The Company has the following stock plans:

A. Employee Stock Option
Plans

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

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

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

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

20



---



##### 



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

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

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

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

The stock options are exercisable in the following years:

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

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

21



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##### 



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

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

|                                           |             |      |   |             |   |      |   |            |   |  |   |            |  
|------------------------------------------ | ----------- | ---- | - | ----------- | - | ---- | - | ---------- | - |  | - | ---------- | -
|                                           |             | 2001 |   | 2000        |   | 1999
|                                           |             |      |   |             |   |     
|Net Loss applicable to Common Stockholders |             |      |   |             |   |      |   |            |   |  |   |           
|                                          
|                                          
|                                          
|                                          
|                                           | As reported |      | $ | (9,441,736  | ) |      | $ | (4,663,449 | ) |  | $ | (4,825,283 | )
|                                          
|                                          
|                                          
|                                          
|                                           | Pro forma   |      | $ | (10,200,000 | ) |      | $ | (5,591,000 | ) |  | $ | (5,896,000 | )
|Loss per share  basic and diluted         |             |      |   |             |   |      |   |            |   |  |   |           
|                                          
|                                          
|                                          
|                                          
|                                           | As reported |      | $ | (0.72       | ) |      | $ | (0.39      | ) |  | $ | (0.45      | )
|                                          
|                                          
|                                          
|                                          
|                                           | Pro forma   |      | $ | (0.78       | ) |      | $ | (0.47      | ) |  | $ | (0.55      | )

B. Non-Employee Director
Plan

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

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

C. Stock Bonus Plan

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

7. Major Customers and Suppliers

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

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

22



---



##### 



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

8. Related Party Transactions

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

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

9. Income Taxes

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

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

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

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

10. Note Receivable and Subsequent Events

On November 16, 2001, HEARx loaned $700,000 to Helix for
use by Helix as part of the $3.5 million acquisition of
substantially all of the capital stock of Auxiliary Benefits
Corporation, a Colorado corporation doing business as National
Ear Care Plan (NECP). The note is secured by
substantially all of the assets of NECP, bears interest at a
rate of 12% per annum and matures on November 16, 2002. On
January 10, 2002, HEARx loaned to Helix an additional $2
million to complete the NECP transaction. On January 14,
2002 HEARx and Helix entered into a subscription agreement
pursuant to which HEARx purchased 4,853,932 common shares of
Helix for an aggregate purchase price of $2.7 million. The
purchase price was paid using the $2.7 million in loans to
Helix. Upon consummation of the purchase of the 4,853,932 Helix common shares,
HEARx became a greater than 10% owner of Helix common shares. HEARx is accounting
for this investment using the equity method.

23



---



##### 



11. Commitments and Contingencies

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

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

12. Quarterly Financial Data (Unaudited)

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

|                                               |  |         |            |         |  |         |            |         |  |   |            |   |  |   |            |  
|---------------------------------------------- |  | ------- | ---------- | ------- |  | ------- | ---------- | ------- |  | - | ---------- | - |  | - | ---------- | -
|Year Ended                                     |  | First   |            | Second  |  | Third   |            | Fourth 
|December 29, 2000                              |  | Quarter |            | Quarter |  | Quarter |            | Quarter
|                                               |  |         |            |         |  |         |            |        
|Net Revenues (a)                               |  | $       | 13,081,825 |         |  | $       | 15,101,443 |         |  | $ | 13,242,307 |   |  | $ | 14,689,257 |  
|                                              
|                                              
|                                              
|                                              
|Operating Expenses                             |  |         | 13,797,022 |         |  |         | 15,596,502 |         |  |   | 14,306,798 |   |  |   | 15,996,496 |  
|                                              
|                                              
|                                              
|                                              
|Loss from Operations                           |  |         | (715,197   | )       |  |         | (495,059   | )       |  |   | (1,064,491 | ) |  |   | (1,307,239 | )
|                                              
|                                              
|                                              
|                                              
|Interest Income (a)                            |  |         | 39,942     |         |  |         | 72,973     |         |  |   | 104,725    |   |  |   | 76,492     |  
|                                              
|                                              
|                                              
|                                              
|Net Loss applicable to Common stockholders (b) |  |         | (819,495   | )       |  |         | (596,898   | )       |  |   | (1,227,839 | ) |  |   | (2,019,217 | )
|                                              
|                                              
|                                              
|                                              
|Earnings per share                             |  |         | (.07       | )       |  |         | (.05       | )       |  |   | (.10       | ) |  |   | (.17       | )



---



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

13. Fair Value of Financial Instruments

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

24



---



##### 



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

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

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

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

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

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

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

14. Recent Accounting Pronouncements

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

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

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

25



---



##### 



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

26



---



##### 



HEARx Ltd.

Schedule II  Valuation and Qualifying
Accounts

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



---



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

27



---



##### 



SIGNATURES

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



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



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

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

Date: May 22, 2002

28



---



##### 



EXHIBIT INDEX

The following Exhibits are filed as part of this report.



|               |  |                            
|-------------- |  | ---------------------------
|Exhibit Number |  | Description                
|23             |  | Consent of BDO Seidman, LLP

29