<PAGE>   1


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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


(MARK ONE)
               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      [ X ]    SECURITIES EXCHANGE ACT OF 1934

          FOR THE FISCAL YEAR ENDED         DECEMBER 29, 2000
                                        --------------------------
                                       OR

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

          FOR THE TRANSITION PERIOD FROM                     TO
                                         -------------------    ----------------

                         COMMISSION FILE NUMBER 0-16453
                                                -------

                                   HEARx LTD.
      --------------------------------------------------------------------------
              EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER

             DELAWARE                                        22-2748248
      --------------------------------------------------------------------------
         (STATE OF OTHER JURISDICTION                       (I.R.S. EMPLOYER
          INCORPORATION OR ORGANIZATION)                     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:

<TABLE>
<CAPTION>
       TITLE OF EACH CLASS                   NAME OF EACH EXCHANGE ON WHICH REGISTERED
       --------------------                  ------------------------------------------
<S>                                          <C>
COMMON STOCK, PAR VALUE .10 PER SHARE              AMERICAN STOCK EXCHANGE
</TABLE>


SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:      NONE


               INDICATE BY CHECK  X  WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS   YES   X      NO
                                              -------      ------



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<PAGE>   2

INDICATE BY CHECK  X  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. [ ]

AS OF MARCH 21, 2001, THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON
STOCK HELD BY NON-AFFILIATES (BASED UPON THE CLOSING PRICE OF THE COMMON STOCK
ON THE AMERICAN STOCK EXCHANGE) WAS APPROXIMATELY $21,161,690.

               ON MARCH 21, 2001, 12,825,267 SHARES OF THE REGISTRANT'S COMMON
STOCK WERE OUTSTANDING.

                       DOCUMENTS INCORPORATED BY REFERENCE

               PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE 2001
ANNUAL MEETING OF THE REGISTRANT'S STOCKHOLDERS ("2001 PROXY STATEMENT"), TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, ARE INCORPORATED BY REFERENCE
IN PART III HEREOF.



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<PAGE>   3




                                     PART I

ITEM 1. BUSINESS

        HEARx Ltd. ("HEARx" or the "Company") operates a network of hearing care
centers which provide a full range of audiological products and services for the
hearing impaired. The Company's strategy for continuing and accelerating the
centers' sales growth and market penetration includes aggressively advertising
to the non-insured self-pay market and positioning the Company as the leading
provider of hearing care to the managed care marketplace. The Company believes
it is well positioned to successfully address the concerns of access, quality
and cost for the patients of managed care and other health insurance companies,
diagnostic needs of referring physicians and, ultimately, the hearing health
needs of consumers. HEARx believes that such success requires the Company to
offer convenient distribution points, uniform centers (meaning standardized
personnel qualification, testing, formats, products, prices and ancillary
services) and a documented quality control program.

        HEARx and its subsidiary HEARx West LLC, a joint venture with the
Permanente Federation LLC, currently receive a per-member-per-month fee for more
than 1.3 million managed care members. In total, HEARx has over 170 contracts
for hearing care with various healthcare providers. The Company has increased
its attention to the self-pay market, focusing an aggressive advertising and
marketing program directed to the uninsured patient. The Company intends to
increase its sales to these patients, while creating greater awareness of the
Company by the managed care patients covered by contracts with HEARx. To the
extent the Company is successful in contracting with the providers of Medicare
managed care for the provision of hearing care goods and services, the Company
can enjoy the benefits of the continuing shift of Medicare patients to managed
care.

        HEARx was incorporated in Delaware on April 11, 1986.

FACILITIES AND SERVICES

        Each HEARx center is staffed or supervised by a minimum of one
professionally trained, licensed and certified audiologist and at least one
patient care coordinator. The majority of the Company's centers are located in
conveniently accessible strip shopping centers and are typically 1,500 to 2,500
square feet in size. The Company's goal is to have all centers virtually
identical in interior space design, exterior marking and signage. This uniform
appearance helps reinforce the consistent service and quality the Company
strives to provide to patients at all locations. Each center provides
comprehensive hearing services that include:

       -   A facility equipped with soundproof testing booths and
           state-of-the-art testing equipment that meets or exceeds all state
           standards.

       -   A full range of diagnostic and auditory-vestibular tests that assist
           the physician in the treatment of patients with hearing and balance
           disorders. Some of these services include auditory brainstem evoked
           potentials, electronystagmography and immittance audiometry.

       -   A family hearing counseling program available to all patients to help
           them better understand the use of their hearing products and their
           disability.

       -   A wide variety of hearing aid brands to meet patient needs.

       -   A standardized medical reporting system for feedback to the referring
           physicians.

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<PAGE>   4




PRODUCTS

        HEARx has selected an assortment of major worldwide manufacturers'
products to make available through the HEARx network in order to provide the
best possible hearing care for HEARx patients, including the latest digital
technology.

        In addition, all HEARx centers offer a large selection of other hearing
enhancement devices including telephone and television amplifiers,
telecaptioners and decoders, pocket talkers, specially adapted telephones, alarm
clocks, doorbells and fire alarms.

CUSTOMERS AND MARKETING

        The Company believes that its future growth depends in part on its
ability to inform hearing impaired consumers of the importance of professional
hearing testing and of the availability of quality hearing devices. The Company
expects to continue to establish relationships with health organizations and
physicians that promote HEARx to the hearing impaired.

        Because HEARx believes that hearing loss is a medical problem and not
simply a retail opportunity, the Company encourages all patients to see a
physician prior to purchasing a hearing aid. The Company believes it has
established strong relationships with area physicians, which represent a
significant source of continuing patient referrals. HEARx further maintains
these relationships using its computerized medical reporting system to provide
each referring physician a full report on each of their patients' visits to
HEARx.

        HEARx's marketing plan focuses on educating both physicians and patients
on the need for regular hearing testing and the importance of hearing aids and
other assistive listening devices in improving the quality of life for hearing
impaired individuals. The Company works to further its image as a provider of
highly professional services, quality products, and comprehensive post-sale
consumer education. In connection with its marketing program, HEARx has
developed a direct consumer marketing campaign, which utilizes television,
radio, newspaper and magazine advertisements, direct mailings, and
company-operated free seminars on hearing and hearing loss.

        During the year ended December 29, 2000, the Company formed two
strategic marketing partnerships, one with TIME Magazine and one with Reader's
Digest. As part of each program, patients visiting HEARx centers will be offered
an opportunity to take advantage of a special promotion of these magazines.
Subscribers of each of these magazines will receive a discount at HEARx when
purchasing a hearing aid in addition to a free one-year subscription to TIME or
a two year subscription to Reader's Digest Large Print Edition.

        HEARx will be promoting Reader's Digest Large Print Edition in the HEARx
network of hearing care centers and in its patient mailings. Reader's Digest
Large Print will be including a special offer from HEARx to current subscribers
of Reader's Digest Large Print Edition. HEARx will also receive a special credit
for use in advertising in Reader's Digest Large Print Edition. Reader's Digest
Large Print currently reaches over 500,000 people each month, with more than 35
percent residing in areas currently serviced by HEARx.

        The Company also launched a new website, HEARx.com, which was designed
to increase patient referrals to HEARx centers. The website contains educational
material regarding hearing loss and the different types of hearing aids directed
to the adult children of potential patients. The Company plans to offer for
purchase on the website various hearing enhancement devices designed for the
hearing impaired, such as smoke detectors and alarm clocks.

        The Company has developed a national call center, which began beta
testing for five Florida centers in mid-November 2000. As of March 19, 2001
there are nineteen centers utilizing the call center. The national call center
will be responsible for both inbound and outbound



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<PAGE>   5

marketing. The call center was designed to increase the effectiveness of
advertising, and is expected to be fully operational by July 2001.

        For the fiscal years 2000, 1999 and 1998, HEARx reported revenues of
$56,408,964, $47,686,868 and $27,493,849, respectively. During 1999, the Company
did not have sales totaling 10% or more of total net sales to a single customer.
In 2000 and 1998, the Company had sales of 10% or more of consolidated revenues
to a single customer of approximately $5.7 million and $3.3 million, or 10.1%
and 12.7%, respectively, to Kaiser Permanente Health Plan and Health Options.

OPERATIONS

Company-owned Centers

        At the end of 2000, the Company operated a total of 80 centers located
in Florida, New York, New Jersey and in California (through HEARx West). The
Company's long term goal, where the population warrants, is to open "clusters"
of four to six Company-owned centers within a city or county in the Company's
primary markets in order to take advantage of certain operational and marketing
efficiencies created by having multiple locations within a particular region.
These efficiencies relate principally to advertising and marketing of the
centers as well as to personnel recruiting and supervision for the centers.

Joint Venture

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

         During 2000 and 1999, HEARx West centers concentrated on providing
hearing aids and diagnostic audiology testing to Kaiser Permanente's members and
self- pay patients in the state of California. During 2001, HEARx West will also
seek contracts to provide services to members of other managed care
organizations and self-pay patients. At the end of 2000, HEARx operated 19 HEARx
West centers in southern California. HEARx West has the first right of refusal
for any geographic expansion opportunities for new HEARx centers, excluding
expansion in the states of Florida, New Jersey and Pennsylvania, which shall
remain exclusively with HEARx Ltd.

Managed Care and Institutional Contracts

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

        HEARx enters into provider agreements with health insurance or managed
care organizations for the furnishing of hearing care on three different bases:
(a) fee for service basis based on a contractual rate offered by HEARx to
provider's members (all paid for by the patient); (b) a per capita basis, which
is a fixed payment per patient per month from the provider to HEARx,



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<PAGE>   6

determined by the number of patients to be served and the amount to be paid by
the insurance or managed care organization (the balance is paid by the
individual member); or (c) an encounter basis where the Company is paid a fixed
fee by the insurance or managed care organization for each hearing aid sold
(with the balance paid to HEARx by the individual member).

RENEWAL OF AGREEMENTS WITH HEALTH INSURANCE AND MANAGED CARE ORGANIZATIONS

        The terms of most of these agreements are to be renegotiated annually,
and most of these agreements may be terminated by either party on 90-days notice
at any time. The early termination of or failure to renew the agreements could
adversely affect the operation of the hearing care centers located in the
related market area. In addition, the early termination of or failure to renew
the agreements which provide for payment to the Company on a per capita basis
would cause the Company to lower its estimates of revenues to be received over
the life of the agreements and could have an adverse effect on the Company's
results of operations. The Company is not aware of any likely contract
terminations at this time.

      Effective for both January 1, 2000 and 2001, several insurance companies
with which the Company has contracts significantly changed their contract
benefits or service areas. While some insurance companies increased their
Medicare benefits, others either limited or discontinued hearing benefits for
Medicare patients. The Company believes these changes will not have a long-term
material adverse effect on the Company's financial condition or results of
operations. The Company also believes that the loss of any single managed care
contract will not have a long term material adverse effect on its financial
condition or results of operations.

DISTINGUISHING FEATURES

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

Joint Commission on Accreditation of Healthcare Organizations (JCAHO)

        During 1998, the Company distinguished itself from other hearing care
providers by being awarded a three year accreditation, effective June 2, 1998,
from the Joint Commission on Accreditation of Healthcare Organizations (JCAHO).
The Company plans to apply for renewal of this accreditation. To achieve
accreditation, the Company was required to meet national standards addressing
the rights and responsibilities of persons enrolled in the network;
organizational ethics; providing a continuum of care; educating and
communicating with enrollees; leadership; management of information; and
improving network performance.

Scientific Advisory Board

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

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

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<PAGE>   7

Hearing Testing
        James Jerger, Ph.D.
        Professor of Audiology
        University of Texas at Dallas
        Dallas, TX

Patient Satisfaction and Outcomes
        Lucille Beck, Ph. D.
        Director of Audiology and Speech Pathology Services
        VA Medical Center
        Washington, D.C.

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

Hearing Aids and Devices
        Charles I. Berlin, Ph.D.
        Professor of Otorhinolaryngology & Biocommunications
        Louisiana State University

        Director, Kresge Hearing Research Laboratory of the South
        New Orleans, Louisiana

Professional and Government Relations
        Derald Brackmann, M.D.
        House Ear Clinic, Inc.

        Clinical Professor of Otolaryngology
        University of Southern California
        Los Angeles, California

Medical Reporting and HEARx Data Link

        A computerized medical reporting system gives referring physicians the
results of, and recommended action for, every patient examined by HEARx. To the
Company's knowledge, no other dispenser or audiologist presently offers any
referring physician similar computerized documentation. The Company believes
that as hearing acuity and correction become an expected part of an individual's
health profile, accurate records of past audiological test results,
prescriptions and pathology should be available and accessible to those treating
the patient. To address this need, the Company has developed a centralized
computer data storage and retrieval system which provides information compiled
from each HEARx center visit.


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<PAGE>   8




COMPETITION

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

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

          Some competitors are large distributors, including: (1) Amplifon of
Italy, which owns a national network of over 1,000 franchised stores (Miracle
Ear) including 400 located in Sears Roebuck & Co. stores; and (2) Beltone
Electronics Corp., a hearing aid manufacturer owned by Great Nordic Corp. that
distributes its products primarily through its network of approximately 700
"authorized" distributors. A number of these franchises and distributors are
located in the areas the Company serves.

        These networks offer hearing aids and may not provide comprehensive
diagnostic services, or other ancillary products offered by the Company. These
networks are owned by companies having greater resources than the Company, and
there can be no assurance that one or more of these competitors will not expand
and/or change their operations to capture the market targeted by the Company.
Nor can there be any assurance that the largely fragmented hearing care market
cannot be successfully consolidated by the establishment of co-operatives,
alliances, confederations or the like which would then compete more directly
with HEARx in its marketing strategy.

RELIANCE ON MANUFACTURERS AND QUALIFIED HEARING PROFESSIONALS

        Through its hearing care centers, HEARx makes hearing aids available to
patients which are supplied by approximately five major manufacturers, as well
as hearing enhancement devices manufactured by other companies. The Company
relies on these manufacturers to supply such products, and a significant
disruption in supply from any or all of these manufacturers could adversely
affect the Company's business. In the event of a disruption of supply from one
or more of the Company's current suppliers, the Company could obtain comparable
products from other manufacturers. Few manufacturers offer dramatic product
differentiation. The Company has not experienced any significant disruptions in
supply in the past.

        The Company currently employs 160 licensed hearing professionals, of
which 133 are audiologists. The inability of the Company to attract and retain
qualified licensed hearing professionals would reduce the Company's ability to
distinguish itself from competing networks of hearing aid retailers and thus
adversely affect its business. Management believes that it will be able to
attract and retain qualified licensed hearing professionals sufficient to staff
its centers for the foreseeable future.


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REGULATION

Federal

        The practice of audiology and the dispensing of hearing aids are not
presently regulated on the Federal level. The United States Food and Drug
Administration ("FDA") is responsible for monitoring the hearing care industry.
Currently there are only two regulations affecting the sale of hearing aids: 1)
a physician's review and 2) a return policy. The FDA requires first time hearing
aid purchasers to receive medical clearance from a physician prior to purchase;
however, patients may sign a waiver in lieu of a physician's examination A
majority of the patients in HEARx centers are members of the managed care or
institutional providers with whom HEARx has contracts to provide hearing care.
Some of these organizations require a physician referral. Consequently, a new
federal or state physician referral mandate should not have an adverse impact on
the Company's operations. The FDA has mandated that states adopt a return policy
for consumers offering them the right to return their products, generally within
30 days. HEARx offers all its customers a full 30-day return period and extends
the return period to 60 days for patients who participate in the free HEARx
Educational Listening Program (H.E.L.P.) family hearing counseling program.

        In addition, because the Company's centers accept Medicare and Medicaid
patients, the centers must maintain their eligibility as Medicare/Medicaid
providers and must comply with related federal anti-fraud, and other applicable
regulations. Federal laws prohibit the payment of remuneration ("kickbacks") in
return for a physician referring a Medicare or Medicaid patient, and those laws
limit physicians from referring patients to providers in which they have a
financial interest. The Company believes that none of its managed care or other
provider contracts or its relationships with referring physicians are violative
of the anti-kickback statute.

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

State

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

        The Company believes it is in material compliance with all applicable
state regulatory requirements.

PRODUCT AND PROFESSIONAL LIABILITY

        In the ordinary course of its business, HEARx may be subject to product
and professional liability claims alleging the failure of, or adverse effects
claimed to have been caused by, products sold or services provided by the
Company. The Company maintains insurance at a level which the Company believes
to be adequate. A successful claim in excess of the policy limits of the
Company's liability insurance could adversely affect the Company. As the
distributor of products manufactured by others, the Company believes it would
properly have recourse against the manufacturer in the event of a product
liability claim; however, there can be no assurance that


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recourse against a manufacturer by the Company would be successful or that any
manufacturer will maintain adequate insurance or otherwise be able to pay such
liability.

SEASONALITY

        The Company is not generally affected by seasonality.

EMPLOYEES

        At December 29, 2000, HEARx Ltd. had approximately 375 full-time
employees, of which 81 were employed by HEARx West.

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

ITEM 2. PROPERTIES

        HEARx's corporate offices are located in 13,000 square feet of space in
West Palm Beach, Florida. The lease is for five years and expires May 2006.

        As of December 29, 2000, the Company operated 33 centers in Florida, 15
in New Jersey and 13 in New York and 19 HEARx West centers in California. All of
the locations are leased for one to ten year terms pursuant to generally
non-cancelable leases (with renewal options in some cases). Each center consists
of between 700 and 3,000 square feet with annual base rents ranging from
approximately $8,700 to $76,000. In January 1999, the Company closed twelve
centers in the northeast. The Company has successfully negotiated and completed
lease buy-outs, exercised early termination options or subleases on eleven of
the twelve properties.

        The Company believes its facilities are adequate and suitable for its
current operations.

ITEM 3. LEGAL PROCEEDINGS


        None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None


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<PAGE>   11



                        EXECUTIVE OFFICERS OF THE COMPANY

        The following sets forth certain information as of the date hereof with
respect to the Company's executive officers. Each of Dr. Brown and Mr.
Hansbrough are serving pursuant to employment agreements with 5 year terms
expiring in 2004 unless renewed or extended. Mr. Peklenk and Ms. Taylor each has
been appointed to a term which will expire at the annual meeting of Board of
Directors held at the time of the 2001 Annual Meeting of Stockholders, or at the
time his/her successor is duly elected and qualified:

<TABLE>
<CAPTION>
        NAME AND POSITION                   AGE                   FIRST SERVED AS EXECUTIVE
       ------------------                  ----                   -------------------------
                                                                             OFFICER
                                                                            ---------
<S>                                        <C>                     <C>
Paul A. Brown, M.D.                         62                                  1986
Chairman of the Board
Chief Executive Officer


Stephen J. Hansbrough                       53                                  1993
President, Chief Operating
Officer and Director

James W. Peklenk                            55                                  1996
Vice President - Finance
and Chief Financial Officer

Donna L. Taylor                             44                                  2000
Senior Vice President
Sales & Operations
</TABLE>


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

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

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


                                       11
<PAGE>   12

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

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


                                       12
<PAGE>   13



                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


        The following table sets forth the high and low sales prices of the
Common Stock as reported by the American Stock Exchange (AMEX), ticker symbol
EAR, for the fiscal quarters indicated. 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 shares were
approved at the June 7, 1999 Annual Meeting of Stockholders. Accordingly, the
Company has restated all share and per share data for all periods presented to
reflect the change in capital structure.

<TABLE>
<CAPTION>

               Fiscal Quarter                             Common Stock
             -----------------                          --------------
                                                          High          Low
                                                        --------      -------
<S>                                                    <C>             <C>
                    1999
                   -----

        First                                          $  7 1/2        $  5
        Second                                            5 5/8           4 3/8
        Third                                             5 3/8           4 3/8
        Fourth                                            4 7/8           3 9/16
                     2000
                    ------
        First                                          $  6 7/16       $  4 1/16
        Second                                            4 1/4           3 9/16
        Third                                             3 3/4           2 9/16
        Fourth                                            2 13/16         1 1/16

</TABLE>

        As of March 14, 2001, there were 1,081 holders of record of the Common
Stock. The Company estimates that included within the holders of record are
approximately 17,300 beneficial owners of the Common Stock.

Dividend Policy

        HEARx has never paid and does not anticipate paying any dividends on the
Common Stock in the foreseeable future but intends to retain any earnings for
use in the Company's business operations.

        Under the terms of the Company's 7% Series I Convertible Preferred
Stock, the Company may not directly or indirectly pay or declare any dividend or
make any distribution (other than a dividend or distribution described in the
purchase agreement or dividends due and paid in the ordinary course on preferred
stock of the Company at such times when the Company is in compliance with its
payment and other obligations). No distribution shall be made with respect to
any Junior Securities, or no more than $500,000 may be set aside for or applied
to the purchase or redemption (through a sinking fund or otherwise) of any
Junior Securities or shares pari passu with the Preferred Stock while shares of
the Preferred Stock are outstanding.


                                       13
<PAGE>   14




ITEM 6.        SELECTED FINANCIAL DATA

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














                                       14
<PAGE>   15


OPERATING STATEMENT DATA:

<TABLE>
<CAPTION>


                                                                               Year Ended
                                              -------------------------------------------------------------------------------
                                                December 29    December 31     December 25    December 26     December 27
                                                    2000          1999(1)          1998            1997           1996
                                                    ----          -------          ----            ----           ----

<S>                                             <C>            <C>             <C>            <C>             <C>
Net Revenues                                    $56,408,964    $ 47,686,868    $ 27,493,849   $ 24,213,879    $ 18,490,561
Total costs and expenses                         59,725,542      52,038,441     39,222,091(2)   33,417,880      26,349,540
                                                ------------   ------------     -------------  ------------    ------------
Loss before minority interest and
equity in loss of joint venture                  (3,316,578)     (4,351,573)    (11,728,242)    (9,204,001)     (7,858,979)
Minority Interest                                     -             347,677                          -               -
Equity in loss of joint venture                       -               -            (615,420)         -               -
                                                ------------   ------------     -------------  ------------    ------------
Net Loss                                         (3,316,577)     (4,003,896)    (12,343,662)    (9,204,001)     (7,858,979)
Dividends on preferred stock                     (1,346,872)       (821,387)       (587,893)    (1,992,123)    (10,036,507)
Net loss applicable to common
                                                ------------   --------------  -------------  ------------    ------------
 stockholders                                 $  (4,663,450)   $  (4,825,283)  $(12,931,555)  $(11,196,124)   $(17,895,486)
                                                ============   ==============  =============  =============   =============
Loss per common share:
Basic and diluted, including dividends on
preferred stock                               $       (0.39)   $      (0.45)   $      (1.28)   $     (1.25)   $      (2.51)
                                                ============   ==============  =============  =============   =============

Weighted average
number of common shares

outstanding                                      11,834,388      10,775,006      10,126,979      8,960,503       7,119,712
                                                ============   ==============  ============   =============   ============
Cash dividends per common
  Share                                             None            None           None            None           None
                                                    ====            ====           ====            ====           ====
</TABLE>

(1) As discussed in Note 1 to the Consolidated Financial Statements, during 2000
    and 1999 the Company's Consolidated Financial Statements include the
    accounts of HEARx West, its 50% subsidiary.

(2) During December 1998, the Company recorded a restructure charge of
    $2,233,857 in connection with the closing of 12 centers in the northeast in
    January 1999.



                                       15
<PAGE>   16









BALANCE SHEET DATA:



<TABLE>
<CAPTION>
                                                                             As of
                                          December 29    December 31      December 25      December 26    December 27
                                         -----------------------------------------------------------------------------
                                              2000            1999            1998            1997            1996
                                              ----            ----            ----            ----            ----

<S>                                       <C>            <C>              <C>              <C>            <C>
Total assets                              $21,872,123    $21,377,110      $25,208,317      $28,359,547    $26,627,484

Working capital                             2,350,834        938,815        7,614,042       13,136,147     12,456,391

Long-term debt, net of
 current portion                              175,887        322,332         123,316           177,897        230,258

</TABLE>




                                       16
<PAGE>   17



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

GENERAL


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

        HEARx intends, as its long-term goal, to establish a nationwide network
of hearing care centers, located in the metropolitan areas or regions with
concentrations of elderly consumers who are more likely to need the Company's
products and services. The Company is currently expanding its hearing care
center network through its joint venture, HEARx West LLC, in California. The
joint venture agreement provides for a 50/50 ownership by the Company and the
Permanente Federation and its affiliate Kaiser Foundation Health Plan, with the
centers bearing the HEARx name. For the year ended December 29, 2000, the
Company operated 19 of these centers in California.

        During the year ended December 29, 2000, the Company formed two
strategic marketing partnerships, one with TIME Magazine and one with Reader's
Digest. As part of each program, patients visiting HEARx centers will be offered
an opportunity to take advantage of a special promotion of these magazines.
Subscribers of these magazines will receive a discount at HEARx when purchasing
a hearing aid in addition to a free one-year subscription to TIME or a two-year
subscription to Reader's Digest Large Print Edition.

        The Company also launched a new website, HEARx.com, which was designed
to increase patient referrals to HEARx centers. The website contains educational
material regarding hearing loss and types of hearing aids directed to the adult
children of potential patients. The Company plans to offer for purchase on the
website various hearing enhancement devices designed for the hearing impaired
such as smoke detectors and alarm clocks.

        The Company has developed a national call center, which began beta
testing for five Florida centers in mid-November. As of March 19, 2001 there are
nineteen centers utilizing the call center. The national call center will be
responsible for both inbound and outbound marketing. The call center was
designed to increase the effectiveness of advertising, and is expected to be
fully operational by July 2001.

        Effective January 1, 2000, Florida Health Choice of southeast Florida
and United Healthcare of New Jersey discontinued providing hearing care benefits
to Medicare participants. Total revenue generated from these plans in 1999 was
approximately $692,000. In addition, several other insurance companies with
which the Company has contracts with, significantly changed their contract
benefits or service areas. The Company believes these changes will not have a
material effect on the Company's financial condition or results of operations.
The Company also believes that the loss of any single managed care contract will
not have a long term material adverse effect on its financial condition or
results of operations.






                                       17
<PAGE>   18





RESULTS OF OPERATIONS

2000 COMPARED TO 1999

        Net revenues increased $8,722,096, or 18.3%, to $56,408,964 in 2000 from
$47,686,868 in 1999. Net revenues by region for the Northeast, Florida and
California were approximately $14.2 million, $24.0 million, and $18.0 million,
respectively, in 2000 as compared to $10.1 million, $25.0 million and $12.4
million, respectively in 1999. Most of this increase resulted from an increase
in same store sales of 17.2%. The increase in net revenues resulted from, the
increase of revenues from HEARx West and the Northeast, and an increase in the
retail business arising from the Company's continued aggressive advertising
campaign resulting in an increase in revenues from the non-insured self-pay
market of $11,818,235, or 46.9% from $25,158,339 in 1999 to $36,976,574 in 2000.

        Cost of products sold increased $4,354,826, or 29.8%, to $18,966,110 in
2000 from $14,611,284 in 1999. Part of the increase in the cost of products sold
is a direct result of the 46.9% increase in revenues from the self-pay market
due to increased sales of hearing aids with advanced digital technology which
generally resulted in lower margins.. During 2000, the Company experienced an
increase in the sales level of digital hearing aids, however the Company cannot
be assured that this trend will continue in the year 2001. The cost of products
sold as a percent of net revenues, which was 33.6% and 30.6% for the year ended
2000 and 1999, respectively, fluctuates from period to period due to retail
pricing and changing marketing strategies.

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

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

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




                                       18
<PAGE>   19




1999 COMPARED TO 1998

        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. During 1999, as a result of
amendments to the agreement, HEARx obtained control of HEARx West. Accordingly,
during 1999, HEARx included the financial position and results of operations of
HEARx West in its consolidated financial statements.

        Net revenues increased $20,193,019, or 73%, to $47,686,868 in 1999 from
$27,493,849 in 1998. The consolidation of HEARx West revenues contributed
approximately $12,446,000 to the increase. The Company's aggressive advertising
campaign during 1999 yielded revenues from self-pay patients of approximately
$16,457,000, which was partially offset by the closing of the 12 northeast
centers in January 1999, which accounted for $1,228,000 of 1998 revenues.

        Cost of products sold increased $6,418,226, or 78%, to $14,611,284 in
1999 from $8,193,058 in 1998. Approximately $4,452,000 of the increase is a
result of the consolidation of HEARx West. The remainder of the increase is
attributable to the increase in sales from existing centers. The cost of
products sold as a percent of net revenues, which was 31% and 30 % for 1999 and
1998, respectively, fluctuates from period to period depending generally upon
the sales mix and sales promotions. However, HEARx West provided a higher cost
of sales percentage at 36%, because a fixed discount has been granted to Kaiser
members.

        Center operating expenses increased $6,406,335, or 32%, to $26,376,830
in 1999 from $19,970,495 in 1998. Approximately $6.3 million of the increase is
attributable to the now consolidated center operating expenses of HEARx West.
Consolidated center operating expenses as a percent of revenue decreased in 1999
to 55% from 73% in 1998, which is generally attributable to the increase in
sales. Increased advertising accounted for approximately $1,428,000, or 22% of
the increase, offset by a decrease in rent expense of approximately $619,000 or
10% of the increase resulting from the closing of the 12 northeast centers in
January 1999.

        Consolidated general and administrative expenses increased 33% or
$2,118,002 to $8,601,723 in 1999 from $6,483,721 in 1998, primarily as the
result of the consolidation of HEARx West expenses of approximately $1.7
million. Consolidated general and administrative expenses as a percent of net
revenue decreased to 18% in 1999 from 24% in 1998.

        Depreciation and amortization expense increased $142,423, or 6%, to
$2,420,891 in 1999 from $2,278,468 in 1998. An increase of $451,032 provided by
HEARx West was offset by a reduction of $308,609 primarily attributable to the
closing of twelve centers in the Northeast in January 1999.

LIQUIDITY AND CAPITAL RESOURCES

        Working capital increased $1,412,019 to $2,350,834 as of December 29,
2000 from $938,815 as of December 31, 1999. On May 9, 2000 the Company completed
a private placement of convertible preferred stock providing the Company with
net proceeds of approximately $4,500,000. The Company believes that its current
cash, investment securities and revenues from operations are sufficient to
support the Company's operational needs in the year 2001.

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


                                       19
<PAGE>   20

$982,000 million to $10,000 in 2000. This is primarily the result of the Company
improving its monitoring and collections process of accounts receivable.

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

        Cash from financing activities increased from cash being used for
financing activities of $2,335,385 in 1999 to cash being provided from financing
activities of $3,801,610 in 2000. This increase was primarily the result of net
proceeds of approximately $4,500,000, from a preferred stock offering during the
second quarter of 2000. In addition, the Company acquired 129,900 shares of
treasury stock for $413,061 in 2000 compared to 1,921,239 shares for $1,820,424
in 1999.


        The Company has historically been successful in raising capital when
needed and continues to have contact with investment bankers and lending
institutions. The Company is currently evaluating new financing alternatives and
may seek additional capital from the capital markets or otherwise, if available
on favorable terms. There can be no assurance, however, that such capital will
be available on favorable terms or at all when the Company's needs arise.

        On May 9, 2000, the Company issued 7% Series I convertible preferred
stock, which 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 may request redemption of the shares of preferred
stock at 110% of the stated value plus accrued dividends. The Company may elect
not to redeem the shares. If this occurs, the conversion price converts 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.

RECENT ACCOUNTING PRONOUNCEMENTS

        In June 1999, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133, amended by SFAS No. 137 requires companies to recognize all derivative
contracts as either assets or liabilities in the balance sheet and to measure
them at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged assets or
liabilities that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain and loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000.

        Historically, the Company has not entered into derivative contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect the adoption of the new standard as of January 1, 2001
to have material impact on the Company's financial position, results of
operations, or cash flows.

        In December 1999, the SEC staff release Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial Statements, which provides
interpretive guidance on the recognition presentation, and disclosure of revenue
in financial statements. SAB 101 must be applied to financial statements no
later than the quarter ended September 30, 2000. There was no material impact
from the application of SAB 101 on the Company's financial position, results of
operations, or cash flows.



                                       20
<PAGE>   21


        In March 2000, the FASB issued Interpretation No. 44 (FIN 44),
Accounting for Certain Transactions Involving Stock Compensation, and an
interpretation of APB. 25. FIN 44 clarifies the application of APB 25 for (a)
the definition of an employee for purposes of applying Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a non-compensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in business combination. FIN 44 became effective
July 2, 2000, but certain conclusions cover specific events that occur after
either December 15, 1998, or January 12, 2000. FIN 44 did not have a material
impact on the Company's financial position, results of operations, or cash flow




















 Except for historical information provided in this discussion and analysis, the
discussion includes forward looking statements, including the Company's goal of
establishing a nationwide center network; plans for the TIME and Reader's Digest
Large Print Edition promotionals; current working capital and revenues from
operations being sufficient to support the Company's capital; the Company's
belief concerning the effect on its financial condition or operations of changes
in benefits announced by some insurance companies and the loss of any single
contract. Such statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Potential risks and uncertainties include industry and market
conditions, especially those affecting managed health care; unforeseen capital
requirements; trends in market sales, and the success of the joint venture with
The Permanente Federation and of the strategic marketing partnerships programs
with TIME and Reader's Digest.






                                       21
<PAGE>   22






ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

        The Company does not perceive in general that it is subject to risks in
this area because it has not engaged in derivative transactions, or issue
variable rate debt, and does not become exposed to foreign currencies in its
business.


































                                       22
<PAGE>   23




ITEM 8.             FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>


                                                                                Page
                                                                                ----
Index to Financial Statements

Financial Statements:
<S>                                                                             <C>
Report of  Independent Certified Public Accountants                             24
Consolidated Balance Sheets at December 29, 2000 and December 31, 1999          25
Consolidated Statements of Operations for the years ended December 29, 2000,
             December 31, 1999, and December 25, 1998                           26
Consolidated Statements of Changes in Stockholders' Equity
        for the years ended December 29, 2000, December 31, 1999 and
        December 25, 1998                                                       27-28
Consolidated Statements of Cash Flows for the years ended December 29, 2000,
        December 31, 1999, and December 25, 1998                                29-30
Notes to Consolidated Financial Statements                                      31-46


Financial Statement Schedule:

For the years ended December 29, 2000, December 31, 1999 and December 25,
        1998

II Valuation and Qualifying Accounts                                            47


</TABLE>






                                       23
<PAGE>   24



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, 2000 and December 31, 1999, 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, 2000. 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, 2000 and December 31, 1999, and the results of its operations and
its cash flows for each of the three years in the period ended December 29, 2000
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.



West Palm Beach, Florida                                       BDO Seidman, LLP
March 9, 2001





                                       24
<PAGE>   25


                                   HEARx Ltd.
                           Consolidated Balance Sheets


                                     ASSETS
<TABLE>
<CAPTION>
                                                            December 29,     December 31,
                                                                2000             1999
                                                            ------------     -------------
<S>                                                       <C>                <C>
CURRENT ASSETS:
 Cash and cash equivalents                                $  4,250,413       $  2,857,187
 Investment securities (Note 2)                                993,224            900,000
 Accounts and notes receivable, less allowance for
   doubtful accounts of $ 212,657 and $535,609               5,734,497          5,874,286
 Inventories                                                   500,582            551,460
 Prepaid expenses and other                                    860,272            531,169
                                                          ---------------    --------------
     Total current assets                                   12,338,988         10,714,102

PROPERTY AND EQUIPMENT - NET (Notes 3, 4 & 10)               7,595,991          8,492,708

DEPOSITS AND OTHER                                           1,937,144          2,170,300
                                                          ---------------   ---------------
                                                          $ 21,872,123      $  21,377,110
                                                          ===============   ===============


                   LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable and accrued expenses                   $  7,377,495      $   6,914,025
  Accrued salaries and other compensation                    1,071,208          1,562,510
  Current maturities of long term debt (Note 3)                152,387            294,993
   Dividends payable (Notes 5A, 5C and 5D)                   1,387,066          1,003,759
                                                          ---------------    --------------
      Total current liabilities                              9,988,156          9,775,287
                                                          ---------------   ---------------


LONG TERM DEBT, LESS CURRENT MATURITIES (Note 3)               175,887            322,332
                                                          ----------------  ---------------
COMMITMENTS AND CONTINGENCIES (Notes 4,6,8 & 11)                 -                 -
STOCKHOLDERS' EQUITY:
 Preferred stock: (Note 5)
  (Aggregate liquidation preference $ 11,902,067 and
  $9,318,757) $1  par, 2,000,000 shares authorized
        Series I  Convertible  500 & 0 shares outstanding          500              -
        Series H Junior Participating  0 shares
         outstanding                                             -                  -
        1998 Convertible 5,515 & 7,315 shares
         outstanding                                             5,515              7,315

        1997 Convertible    0 & 1,000 shares outstanding         -                  1,000
                                                            -------------    --------------
           Total preferred stock                                 6,015              8,315
  Common stock; $.10 par; 20,000,000  shares authorized;
   12,364,139 & 11,547,337 shares issued (Notes 5 & 6)       1,236,414          1,154,734
  Additional paid-in capital                                92,695,792         87,307,886
  Accumulated deficit                                      (79,746,700)       (75,083,251)

  Unamortized deferred compensation                              -                (37,813)
  Treasury stock, at cost:518,660 & 388,760 common
   shares                                                   (2,483,441)        (2,070,380)
                                                          ---------------   ---------------
         Total stockholders' equity                         11,708,080         11,279,491
                                                          ---------------   ---------------

                                                          $ 21,872,123      $  21,377,110
                                                          ===============   ===============
</TABLE>

See accompanying notes to consolidated financial statements




                                       25
<PAGE>   26


                                   HEARx Ltd.
                      Consolidated Statements of Operations



<TABLE>
<CAPTION>
                                                                  Year Ended
                                                 ------------------------------------------------
                                                 December 29,    December 31,     December 25,
                                                     2000            1999             1998
                                                 -------------   -------------   ----------------
<S>                                             <C>             <C>              <C>
NET REVENUE                                     $   56,408,964  $   47,686,868   $   27,493,849
                                                --------------  --------------   --------------

COSTS AND EXPENSES:

  Cost of products sold                             18,966,110      14,611,284        8,193,058
  Center  operating expenses                        29,328,114      26,376,830       19,970,495
  General and administrative expenses                8,830,546       8,601,723        6,483,721
  Depreciation and amortization                      2,572,048       2,420,891        2,278,468
  Interest expense                                      28,723          27,713           62,492
  Restructure charge (Note 10)                          -               -             2,233,857
                                                 --------------  -------------    --------------

     Total  costs and expenses                      59,725,541      52,038,441       39,222,091
                                                --------------   --------------   --------------
LOSS BEFORE MINORITY INTEREST AND
EQUITY IN LOSS OF JOINT VENTURE                     (3,316,577)     (4,351,573)     (11,728,242)
MINORITY INTEREST                                        -             347,677           -
EQUITY IN LOSS OF JOINT VENTURE                          -                -            (615,420)
                                                --------------   --------------   --------------
NET LOSS                                            (3,316,577)     (4,003,896)     (12,343,662)

DIVIDENDS ON PREFERRED STOCK:
  Deemed dividends (Note 5A)                          (571,241)        -               -
  Dividends                                           (775,631)       (821,387)        (587,893)
                                                --------------   --------------   --------------
      Total dividends on preferred stock            (1,346,872)       (821,387)        (587,893)

NET LOSS APPLICABLE TO COMMON STOCKHOLDERS      $   (4,663,449) $   (4,825,283)  $  (12,931,555)
                                                ===============  ===============  ==============

NET LOSS PER COMMON SHARE -  BASIC AND
 DILUTED (NOTE 1)                               $         (.39) $         (.45)  $        (1.28)
                                                ===============  ===============  ==============

WEIGHTED AVERAGE NUMBER OF SHARES OF
  COMMON STOCK OUTSTANDING (NOTE 1)                 11,834,388      10,775,006        10,126,979
                                                ==============   ===============  ==============

</TABLE>


See accompanying notes to consolidated financial statements



                                       26
<PAGE>   27


                                   HEARx Ltd.
                  Consolidated Statements of Changes in Stockholders' Equity

<TABLE>
<CAPTION>

                                             Year Ended                      Year Ended                          Year Ended
                                          December 29,2000               December 31, 1999                    December 25, 1998
                                          ----------------               -----------------------           -----------------------
                                        Shares     Amount            Shares               Amount            Shares         Amount
                                        ------   ----------       ------------          --------          -----------      ------
<S>                               <C>            <C>             <C>               <C>                 <C>            <C>
PREFERRED STOCK:

Balance, beginning of year               8,315    $     8,315          12,709       $     12,709              7,115    $     7,115
 Issuance of preferred stock               500            500              --                 --              7,500          7,500
 Conversion of preferred stock          (2,800)        (2,800)         (4,394)            (4,394)            (1,906)        (1,906)
                                   ------------    -----------    ------------      -------------

Balance, end of year                     6,015    $     6,015           8,315       $      8,315             12,709    $    12,709
                                   ============    ===========    ============      =============       ===========    ===========

COMMON STOCK:
Balance, beginning of year          11,547,337    $ 1,154,734     104,023,643       $ 10,402,364        $99,211,436    $ 9,921,144
                                   ============    ===========    ============      =============       ===========    ===========
 Exercise of warrants                       --             --              --                 --          1,316,848        131,684
 Conversion of preferred stock         817,202         81,720       5,414,400            541,440          3,265,384        326,538
 Exercise of employee stock
   options                               1,600            160          13,600              1,360            104,975         10,498
 Exercise of stock options by
   consultants                          (2,000)          (200)             --                 --             50,000          5,000
 Exercise of stock options by
   Board of Directors                       --             --              --                 --             75,000          7,500


 Reverse stock split                        --             --     (97,904,306)        (9,790,430)                --             --
                                   ------------    -----------    ------------      -------------        -----------   -------------

Balance, end of year                12,364,139    $ 1,236,414      11,547,337       $  1,154,734        104,023,643    $10,402,364
                                   ============    ===========    ============      =============        ===========   =============

TREASURY STOCK:

 Balance, beginning of year           (388,760)   $(2,070,380)       (405,311)      $   (249,956)                --    $        --
  Purchase of treasury stock          (129,900)      (413,061)     (1,921,239)        (1,820,424)          (405,311)      (249,956)
  Reverse Stock Split                       --             --       1,937,790                                                   --
                                   ------------    -----------    ------------      -------------        -----------   -------------
Balance, end of year                  (518,660)   $(2,483,441)       (388,760)      $ (2,070,380)          (405,311)   $  (249,956)
                                    ===========    ===========    =============     =============        ===========   =============

ADDITIONAL PAID-IN CAPITAL:

 Balance, beginning of year                       $87,307,886                       $ 77,531,270                       $70,646,172
  Issuance of preferred stock                       4,999,500                                 --                         6,936,472
  Cost of issuing preferred stock                    (479,617)
  Conversion of preferred stock                       313,402                             31,852                          (155,845)
  Exercise of warrants                                     --                                 --                           (24,805)
  Exercise of employee stock
    options                                             3,180                              1,500                            43,620
  Exercise of stock options by
    consultants                                       (19,800)                                --                            45,000
  Exercise of stock options by
    Board of Directors                                     --                                 --                            40,256


  Deemed dividend                                     571,241                                 --                                --
  Reverse stock split                                      --                          9,743,264                                --
  Vesting of restricted stock                              --                                                                  400
                                                                                              --
                                                 ------------                       -------------                      ------------
Balance, end of year                              $92,695,792                       $ 87,307,886                       $77,531,270
                                                 ============                       =============                      ============

</TABLE>



See accompanying notes to consolidated financial statements


                                      27

<PAGE>   28
                                   HEARX Ltd.
           Consolidated Statements of Chnages in Stockholders' Equity


<TABLE>
<CAPTION>
                                            Year Ended           Year Ended                       Year Ended
                                          December 29,2000     December 31, 1999                December 25, 1998
                                          ----------------     -----------------             --------------------
                                                   Amount                 Amount                           Amount
                                                   ------                 ------                           ------
<S>                                       <C>                  <C>                           <C>
ACCUMULATED DEFICIT:

  Balance, beginning of year                   $(75,083,251)            $(70,257,968)              $(57,326,413)
     Net loss for the year                       (3,316,577)              (4,003,896)               (12,343,662)
     Deemed dividends on preferred
       stock                                        (571,241)                   -                           -
     Preferred stock dividends                     (775,631)                (821,387)                  (587,893)
                                                ------------            -------------              -------------
  Balance, end of year                         $(79,746,700)            $(75,083,251)              $(70,257,968)
                                                ============            =============              =============
UNAMORTIZED DEFERRED COMPENSATION:

  Balance, beginning of year                   $    (37,813)            $    (75,625)              $   (113,438)
      Issuance of restricted stock to
        officer                                           -                        -                          -

     Amortization                                    37,813                   37,812                     37,813
                                                ------------            -------------              -------------
  Balance, end of year                          $      -                $    (37,813)              $    (75,625)
                                                ============            =============              =============
ACCUMULATED OTHER COMPREHENSIVE
  INCOME:

  Balance, beginning of year                    $      -                $     58,263               $     20,156
  Unrealized gains on securities net
    of reclassification adjustment (see
    disclosure)                                        -                     (58,263)                    38,107
                                                ------------            -------------              -------------

  Balance, end of year                                 -                $        -                 $     58,263
                                                ============            =============              =============
COMPREHENSIVE INCOME (LOSS):

Net loss for the year                           $(3,316,577)            $ (4,003,896)              $(12,343,662)
Other comprehensive income (loss)                      -                     (58,263)                     38,107
                                                ------------            -------------              -------------
Comprehensive income(loss)                      $(3,316,577)            $ (4,062,159)               $(12,305,555
                                                ============            =============              =============

Disclosure of reclassification amount:
Unrealized holding gains (losses)
 arising during period                          $      -                $    (84,022)               $    50,763
Less: reclassification adjustment for
 gains (losses) included in net loss                   -                      25,759                    (12,656)
                                                ------------            -------------              -------------
Net unrealized gains (losses) on
  securities                                    $      -                $    (58,263)               $    38,107
                                                ============            =============              =============



</TABLE>

See notes to accompanying consolidated finanical statements



                                      28

<PAGE>   29


                                   HEARx Ltd.
                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                  Year Ended
                                               ------------------------------------------------------
                                                December 29,       December 31,         December 25,
                                                    2000               1999                 1998
                                                -----------     ---------------      ----------------
<S>                                        <C>                 <C>                   <C>
Cash flows from operating activities:
Net loss                                     $(3,316,577)       $ (4,003,896)        $ (12,343,662)
Adjustments to reconcile net loss to net
cash used in operating activities:
    Depreciation and amortization              2,572,048           2,420,891             2,278,468
    Write down of property and equipment               -                   -               783,118
    Provision for doubtful accts                 377,500             568,135               553,467
    Loss on disposition of equipment              72,005              40,325                60,238
    Minority Interest                                  -            (347,677)                    -
 (Increase) decrease in:
        Accounts and notes receivable           (237,711)         (2,395,710)           (1,384,669)
        Inventories                               50,878             (21,265)               (6,072)
        Prepaid expenses and other              (326,485)           (119,092)           (2,108,865)
Increase (decrease) in:
        Accounts payable                          463,470           1,372,605               991,620
       Accrued expenses                          (453,503)           (390,486)            2,056,447
                                              ------------        --------------     ---------------
Net cash used in operating activities            (798,375)         (2,876,171)           (9,119,910)
                                              ------------        --------------     ---------------
Cash flow from investing activities:
    Purchase of property and equipment         (1,519,764)         (1,450,107)           (1,140,914)
    Proceeds from sale of equipment                 2,979                  -                 48,406
    Purchase of investments                    10,375,928)         (2,750,000)          (24,287,452)
    Proceeds from maturities of
    investments                                10,282,704           8,962,516            27,436,692

    Net cash from consolidating HEARx West             -              656,223                    -
                                              ------------        --------------     ---------------
Net cash (used in)  provided by investing
Activities                                    (1,610,009)           5,418,632             2,056,732
                                              ------------        --------------     ---------------
Cash flows from financing activities:
     Proceeds from issuance of:
     Long-term debt                                    -              35,250                     -
     Principal payments:
      Long-term debt                            (289,051)           (505,905)             (465,612)
      Acquisition of treasury stock             (413,061)         (1,820,424)             (249,956)
     Proceeds from issuance of capital
     stock,
      net of offering costs                    4,503,722             (44,306)            6,784,019
                                              ------------        --------------     ---------------
Net cash provided(used in)  by financing
 activities                                    3,801,610          (2,335,385)            6,068,451
                                              ------------        --------------     ---------------

Net increase(decrease) in cash and cash
equivalents                                    1,393,226             207,076              (994,727)
Cash and cash equivalents at beginning of
year                                           2,857,187           2,650,111             3,644,838
                                              ------------        --------------     ---------------
Cash and cash equivalents at end of year     $ 4,250,413      $    2,857,187         $   2,650,111
                                              ============        ================   ===============






</TABLE>
See accompanying notes to consolidated financial statements


                                       29

<PAGE>   30
                                   HEARX Ltd.
                     Consolidated Statements of Cash Flows




<TABLE>
<CAPTION>
                                                                      Year Ended
                                                    ------------------------------------------------
                                                     December 29,     December 31,    December 25,
                                                         2000             1999            1998
                                                    ---------------  --------------   --------------
<S>                                                 <C>              <C>              <C>
Supplemental disclosure of cash flow information:


Cash paid for interest                              $   32,251        $  7,419        $       8,836
                                                    ===============  ==============   ==============

Supplemental schedule of non-cash investing
 and financing activities


Deemed dividends                                   $   571,241        $   -           $       -
Preferred stock dividend paid upon conversion
 in kind by issuance of additional common stock        392,323          568,898             168,787
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              54,118

</TABLE>


























See accompanying notes to consolidated financial statements




                                       30
<PAGE>   31
                                    HEARx Ltd
                   Notes To Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

HEARx Ltd. ("HEARx" or "the Company"), a Delaware corporation, was organized for
the purpose of creating a nationwide chain of retail centers ("HEARx Centers")
to serve the needs of the hearing impaired. At the end of 2000, the Company
operated a total of 80 centers. Those included 33 in Florida, 13 in New York, 15
in New Jersey and the 19 HEARx West centers in California.

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 by region for the Northeast, Florida and California were
approximately $14.2 million, $24.0 million, and $18.0 million in 2000; $10.1
million, $25.0 million and $12.4 million in 1999; and $7.8 million, $19.0
million, and $19,000 in 1998. Operating profits at the center level for the year
ended December 29, 2000, were approximately $861,000, $4,529,000 and $2,430,000
for the Northeast, Florida and California, respectively compared to an operating
loss of approximately $680,000 for the Northeast, and operating profit of
approximately $5,470,000 and $1,970,000, for Florida and California,
respectively, for 1999 and an operating loss of approximately $3,888,000 and
$608,000 for the Northeast and California, respectively, and operating profit of
approximately $2,615,000 in Florida, for 1998. Operating profits at the center
level are computed before corporate general and administrative expenses,
depreciation/amortization and preferred dividends. Center operations'
depreciation amounted to $1,863,000, $1,793,000 and $1,632,000 in 2000, 1999 and
1998, respectively. Center operations' capital expenditures amounted to
$952,000, $1,450,000 and $1,141,000 in 2000, 1999 and 1998, respectively.
Aggregate identifiable assets of center operations at December 29, 2000 and
December 31, 1999 were $7,159,000 and $7,961,000, 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,
at December 29, 2000 and December 31, 1999, 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.


                                       31
<PAGE>   32




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 other assets, primarily represent customer lists
acquired from acquisitions of hearing businesses. These customer lists are being
amortized on a straight-line basis over periods 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. Accumulated amortization at December 29, 2000 and December
31, 1999 was $464,659 and $350,608, respectively.

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. At December 29, 2000, no long-lived assets were held for disposal.

Advertising Costs

Costs for newspaper, television, and other media advertising are expensed as
incurred and were $7,757,000, $5,470,000 and $4,105,000 in 2000, 1999, and 1998,
respectively.

Sales return policy

Patients purchasing hearing aids are given a specific return period, usually 30
days, if dissatisfied with the product. The Company provides an allowance in
accrued expenses for returns. The return period can be extended to 60 days if
the customer attends the Company's H.E.L.P. program.



                                       32
<PAGE>   33




Deferred compensation

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

Warranties

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

Capitation revenue

The Company has capitation contracts with certain health care organizations
under which the Company is paid an amount, per enrollee of the health
maintenance organization, to provide 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. Revenue under capitation contracts is
recorded based on actual utilization by the member populations of the healthcare
organizations with whom the Company has contracted to provide hearing care
services.

Income  taxes

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

Excluded from the computation of net loss per common share - diluted at December
29, 2000, December 31, 1999 and December 25, 1998 were convertible preferred
stock, outstanding options and warrants to purchase 3,457,296, 2,693,885 and
1,773,928 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 1,568,560, 889,941 and
394,268 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 a maturity of ninety days or less are considered cash equivalents.



                                       33
<PAGE>   34




Reclassifications

Certain amounts in the 1999 and 1998 financial statements have been reclassified
in order to conform to the 2000 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:
<TABLE>
<CAPTION>
                                                          Gross        Estimated
                                           Amortized    Unrealized       Market
                                             Cost      Gains/(Losses)    Value
                                          ----------   --------------   --------
<S>                                       <C>          <C>              <C>
December 29, 2000
-----------------

Asset-Backed Securities                    $750,000            --       $750,000

Certificates of Deposit                     243,224            --        243,224
                                           --------       -------       --------
Total                                      $993,224       $    --       $993,224
                                           ========       =======       ========

December 31, 1999
-----------------
Asset-Backed Securities                    $750,000       $    --       $750,000

Certificate of Deposit                      150,000            --        150,000
                                           --------       -------       --------
Total                                      $900,000       $    --       $900,000
                                           ========       =======       ========
</TABLE>


At December 29, 2000, $750,000 and $243,225 of investment securities have
contractual maturities of twenty and one years, respectively.



                                       34
<PAGE>   35



3. DEBT

Long term debt consists of the following:

<TABLE>
<CAPTION>
                                                                  December 29,  December 31,
                                                                      2000         1999
                                                                   ---------    ---------
<S>                                                               <C>           <C>
Note payable to supplier, collateralized by equipment,
 due January 13, 2000, see (a) below                               $      --    $ 140,000
Note payable collateralized by customer list, see (b)& (c) below     291,144      417,316
Other notes payable                                                   37,130       60,009
                                                                   ---------    ---------
                                                                     328,274      617,325
Less current maturities                                             (152,387)    (294,993)
                                                                   ---------    ---------
                                                                   $ 175,887    $ 322,332
                                                                   =========    =========
</TABLE>


The approximate aggregate maturities on long term debt obligations in years
subsequent to 2000 are as follows: 2001 - $152,000; 2002 - $95,000; and 2003 -
$81,000.

(a) On March 5, 1996, the Company completed a $2.5 million trade agreement with
    a vendor pursuant to which the vendor provides financing for the purchase of
    diagnostic equipment to be utilized by the Company's distribution network.
    The financing is collateralized by the equipment financed. A percentage of
    all hearing aid purchases by the Company from this vendor is applied to
    repayment of financed amounts under the financing agreement. This note was
    repaid in January 2000.

(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 includes interest at 5.5% and
    is payable in five annual installments of $50,000 including interest
    beginning January 22, 1997.

(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.

4. PROPERTY AND EQUIPMENT AND LEASES

Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                 Range of    December 29,    December 31,
                                               Useful Lives      2000            1999
<S>                                            <C>           <C>            <C>
Equipment, furniture and fixtures              5 -10 years   $ 7,922,131    $  7,472,695
Leasehold Improvements                         5 -10 years     6,554,421       6,123,687
Computer systems                                 3 years       3,363,613       3,055,847
Leasehold improvements in progress                 N/A           147,050          37,485
                                                            ------------    ------------
                                                              17,987,215      16,689,714
                                                            ------------    ------------
Less accumulated depreciation and
amortization                                                  10,391,224       8,197,006
                                                            ------------    ------------
                                                             $ 7,595,991    $  8,492,708
                                                            ============    ============
</TABLE>



                                       35
<PAGE>   36


Approximate future minimum rental commitments under operating leases are as
follows: $4,301,000 in 2001; $4,062,000 in 2002; $3,626,000 in 2003; $2,858,000
in 2004; $2,527,000 in 2005 and $1,237,000 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, 2000,
December 31, 1999 and December 25, 1998 was $3,181,000, $2,956,000 and
$2,892,000, respectively.

5.      STOCKHOLDERS' EQUITY

A.      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 of the
Company's common stock, par value $.10 per share (the "Common Stock") (the
"Warrants") for an aggregate purchase price of $5.0 million.

The Series I Preferred Stock is convertible into Common Stock after August 6,
2000. Upon conversion, holders will be 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 elects to pay dividends in cash) by $4.46 (subject to adjustments
upon occurrence of certain dilutive events). The dividends payable upon
conversion will be 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 may 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 may request redemption of the shares of preferred stock at 110% of the
stated value plus accrued dividends. If the Company elects not to redeem the
shares, the conversion price converts 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 may be converted by holders in accordance with these terms any time prior
to May 9, 2003, and will 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 will be
entitled to receive an amount equal to the stated value per share before any
distribution shall be made to the holders of any junior securities but after any
distribution made to holders of senior securities.

The Warrants are exercisable for shares of Common Stock of the Company. Upon
exercise, holders will be entitled to receive shares of common Stock for an
exercise price of $4.46 per share. The Warrants will expire 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 Convertible 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.

In connection with this transaction, the Company also entered into a
Registration Rights Agreement with the purchaser under which the Company was
required to file a registration statement on Form S-3 by June 8, 2000, covering
the resale of the shares of Common Stock underlying all of the Series I
Preferred Stock and Warrants. The registration statement was declared effective
by the Securities and Exchange Commission on June 19, 2000.

The net proceeds to the Company after payment of finders fees, placement fees.
legal and accounting expenses was approximately $4,500,000. 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. All of the shares


                                       36
<PAGE>   37

underlying the finder warrants were included in the registration statement on
Form S-3 filed by the Company.

B.      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 was 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 issued. 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.

C.      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 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 with the Company's 1997 Convertible Preferred Stock, and after any
class or series of capital stock of the Company thereafter created and
specifically ranking by its terms senior to the 1998 Convertible Preferred. The
1998 Preferred Stock is convertible into Common Stock, par value $.10 per share,
of the Company. Upon the conversion, holders will be entitled to receive a
number of shares of Common Stock determined by dividing the sum of the stated
value of the 1998 Preferred Stock ($1,000 per share), 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 of 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). The
premium payable upon conversion will be equal to 8% of the stated value of 1998
Preferred Stock from the date of issuance until one year following such date,
and shall increase by 0.5% each year, commencing on the date which is one year
following the date of issuance. The 1998 Preferred Stock may not be converted
for the 180-day period after the closing. The 1998 Preferred Stock 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
Preferred Stock, holders of 1998 Preferred Stock 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 Stock until holders of 1998 Preferred Stock 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 2000 and 1999, 1,800 and 185 shares of the
1998 Convertible Preferred Stock plus accrued dividends of $216,926 and $16,156
were converted into 94,109 and 44,712 shares of the Company's Common Stock.

For each unit of 1998 Convertible Preferred Stock purchased, each investor
received 7.5 warrants to acquire 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 56,250 warrants with an
exercise price of $18.00 to purchase shares of the Company's Common Stock. These
warrants were issued to certain individuals as finder's fees for the placement
of preferred shares with investors. All related warrants remain outstanding as
of December 29, 2000.



                                       37
<PAGE>   38

D.      1997 CONVERTIBLE PREFERRED STOCK

The 1997 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 1997 Convertible Preferred,
pari passu with the Company's 1996 Series B-1 Convertible Preferred Stock, 1996
Series B-2 Convertible Preferred Stock and after any class or series of capital
stock of the Company thereafter created and specifically ranking by its terms
senior to the 1997 Convertible Preferred. The 1997 Convertible Preferred Stock
bears dividends of 6%, payment in kind or cash upon conversion at the option of
the Company. Upon conversion of the Preferred Stock, holders will be entitled to
receive a number of shares of Common Stock determined by dividing the stated
value of the Preferred Stock ($1,000 per share), plus a premium in the amount of
6% per annum of the stated value from the date of issuance (unless the Company
chooses to redeem the shares otherwise issuable in respect of that premium) by a
conversion price equal to the lesser of (i) $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 may
be converted by holders beginning August 15, 1997 and at any time prior to March
17, 2000 and must be converted on that date. During 2000, 1999 and 1998, 1,000,
4,209, and 1,906 shares of the 1997 Convertible Preferred Stock plus accrued
dividends of $175,397, $552,743, and $168,787 were converted into 299,214,
1,098,906, and 326,538 shares of the Company's Common Stock, respectively. No
shares of the 1997 Convertible Preferred Stock were outstanding as of December
29, 2000.

In connection with the 1997 Convertible Preferred Stock, the Company issued
85,000 warrants with an exercise price of $50.00 and 75,000 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. All related warrants remain outstanding
as of December 29, 2000.

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

As of December 26, 1997, all of the shares of the 1996 Series A, B-1, and B-2
Preferred Stock had been converted into shares of Common Stock. Upon conversion
of the Series B-1 Preferred Stock, holders were entitled to and were issued
375,000 warrants to acquire shares of Common Stock at $64.70 per share. On
August 27, 1998, the Company cancelled 426,413 warrants in exchange for 65,975
new warrants with an exercise price of $20.00. The new warrants are exercisable
any time prior to August 24, 2003.

F.      1996 SENIOR PREFERRED STOCK

  Holders of the 1996 Senior Preferred Stock received warrants to purchase
1,107,048 shares of common stock at an exercise price of $5.50 per share.
Additionally 228,327 warrants, to acquire shares of Common Stock at $ 6.30 per
share, were issued to an investment banker as a placement fee. The Company
redeemed the 1996 Senior Preferred Stock during May 1996. All but 9,226 of the
related warrants had been exercised as of December 29, 2000.


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


                                       38
<PAGE>   39

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 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 2000.

On May 9, 2000, the Company issued warrants with an exercise price of $4.46 to
purchase 335,085 shares of the Company's Common Stock. These warrants were
issued in connection with the private placement of 500 units of 7% Series I
Convertible Preferred Stock The warrants are exercisable any time prior to May
9, 2005.

The aggregate number of common shares reserved for issuance upon the exercise of
warrants is 760,998 as of December 29, 2000. The expiration date and exercise
prices of the outstanding warrants are as follows:

<TABLE>
<CAPTION>

                OUTSTANDING             EXPIRATION             EXERCISE
                 WARRANTS                  DATE                 PRICE
                -----------             ----------             --------
<S>             <C>                     <C>                    <C>
                  59,500                   2002                 $50.00
                  75,000                   2001                 20.00
                  57,712                   2003                 12.50
                  30,000                   2001                  6.30
                   9,225                   2001                  5.50
                  65,975                   2003                 20.00
                  112,501                  2003                 18.00
                  16,000                  Various             6.30-40.00
                  335,085                  2005                  4.46
                -----------
                  760,998
                ===========
</TABLE>


6.      STOCK PLANS

The Company has the following stock plans:

A.      EMPLOYEE STOCK OPTION PLANS

In 1987, the Company established the 1987 Stock Options 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 the principal stockholder, were eligible to receive options under
this plan at the sole discretion of the Board of


                                       39
<PAGE>   40

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 424,647 shares may be issued under
the plan. All employees of the Company are eligible to receive stock options
under this plan at the sole discretion of the Board of Directors. Incentive
stock options, non-qualified stock options, stock appreciation rights,
restricted shares, performance shares, and other stock-based awards may be
awarded under this plan.

On December 14, 1999 the Board of Directors approved the issuance of
non-qualified stock options to purchase 268,246 shares of the Company's Common
Stock for $3.88 per share to certain officers of the Company. These grants are
independent of the Company's 1987 and 1995 stock option plans and are to be
issued from shares of treasury stock.

As of December 29, 2000, 346 employees of the Company held options under the
Stock Option Plans permitting them to purchase 873,957 shares of Common Stock at
prices ranging from $2.00 to $18.75 per share. Options are exercisable for
periods ranging from four to nine years commencing one year following the date
of grant and are exercisable in cumulative annual installments of 25 percent per
year.


                                       40
<PAGE>   41



The following table summarizes the transactions of the Company's employee stock
option plans:
<TABLE>
<CAPTION>
                                                              Year Ended
                                    ---------------------------------------------------------------
                                    December 29, 2000      December 31, 1999      December 25, 1998
                                    -----------------      -----------------      -----------------
                                              Weighted               Weighted               Weighted
                                              Average                Average                Average
                                              Exercise               Exercise               Exercise
                                    Shares     Price      Shares      Price       Shares     Price
                                    ------     -----      ------      -----       ------     -----
<S>                                 <C>       <C>        <C>         <C>         <C>        <C>
Outstanding at beginning of year     764,194   $5.78       464,718    $7.19        466,178   $15.80
Granted                              152,360   $4.12       342,256    $4.17        528,080   $10.04
Exercised                              1,600   $2.09         1,360    $2.10         10,498   $5.20
Forfeited and cancelled               40,997   $7.42        41,420    $8.45        519,042   $18.32
                                    --------   -----      --------    -----       --------   ------
Outstanding at end of year           873,957   $5.42       764,194    $5.78        464,718   $6.74
                                    ========   =====      ========    =====       ========   ======
Exercisable at end of year           452,214               345,921                 272,230
                                    ========              ========                ========
Weighted average fair market
of options granted during year        $ 3.43                $ 2.96                  $ 7.30
                                    ========              ========                ========
</TABLE>

The following table summarizes information about fixed employee stock options
outstanding at December 29, 2000:

<TABLE>
<CAPTION>
                                            Weighted
                                             Average      Weighted      Options     Weighted
                                            Remaining      Average    Exercisable    Average
                               Options     Contractual    Exercise    At December   Exercise
  Range of Exercise Price    Outstanding      Life          Price       29, 2000      Price
  -----------------------    -----------      ----          -----       --------      -----
<S>                          <C>           <C>            <C>         <C>           <C>
           $2.00                  48,515       3.4          $2.00         48,515      $2.00
       $2.10 - $5.40             458,871       6.3          $4.01        110,435      $4.31
       $5.41 - $8.75             347,631       5.9          $7.21        278,744      $7.43
      $8.75 - $30.00              18,940       6.3         $15.64         14,520     $15.56
                             -----------                                --------
                                 873,957                                 452,214
                             ===========                                ========
</TABLE>
The stock options are exercisable in the following years:

<TABLE>
<S>                                                     <C>
                      2001                                    591,178
                      2002                                    128,468
                      2003                                    117,866
                      2004                                     36,445
                                                             --------
                                                              873,957
                                                             ========
</TABLE>


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 2000, 1999, and 1998, respectively, no dividends,



                                       41
<PAGE>   42


expected volatility of 89%, 89% and 59%; risk-free interest rates of 5.12%,
6.65% and 5.74% 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:

<TABLE>
<CAPTION>
                                                      2000           1999           1998
                                                    --------       --------       --------
<S>                                              <C>             <C>            <C>
Net Loss applicable to Common
Stockholders


     As reported                                 $  (4,663,450)  $ (4,825,283)  $  (12,931,555)
     Pro forma                                   $  (5,591,000)  $ (5,896,000)  $  (14,718,000)

Loss per share - basic and diluted
                                                 $       (0.39)  $      (0.45)  $        (1.28)
   As reported                                   $       (0.47)  $      (0.55)  $        (1.45)
   Pro forma
</TABLE>


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. 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, non-employee directors are 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, 2000, 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 2000, 1999 or 1998..

7. MAJOR CUSTOMERS

During 1999, the Company did not have sales totaling 10% or more of the total
net sales to a single customer. In 2000 and 1998, the Company had sales totaling
$ 5.7 million and $3.3 million, or 10.1% and 12.7% of net sales to two different
single customers.




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 (the "Plan"). Under the terms of the


                                       42
<PAGE>   43

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 2000 and 1999 approximately $5,722,000 and $4,308,000 of
capitation revenue from this contract is included in net revenue in the
accompanying consolidated statement 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, allowance
for doubtful accounts, and the restructure charge) for financial reporting
purposes in periods different from those for tax reporting purposes.

Deferred tax assets are comprised of the following:

<TABLE>
<CAPTION>
                                             December
                                  ----------------------------
                                      2000              1999
                                  -------------   ------------
<S>                               <C>             <C>
Depreciation                      $     37,000    $     91,000
Allowance for doubtful accounts        103,000         120,000
Other                                  163,000         241,000
Net operating loss carryforward     25,112,000      23,354,000
                                  ------------    ------------
                                    25,415,000      23,812,000
Less valuation allowance           (25,415,000)    (23,812,000)
                                  ============    ============

Net deferred tax asset            $         --    $         --
                                  ============    ============
</TABLE>


At December 29, 2000 the Company had net operating loss carryforwards of
approximately $66,700,000 for both tax and financial 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. RESTRUCTURE CHARGE

In order to reduce losses in the northeast region, on December 14, 1998, the
Company approved a plan to close 12 of its centers, located in the northeast
region. The plan consisted of closing the centers, terminating the employees,
transferring the equipment and negotiating the lease terminations. These centers
closed in January 1999. During 1999, payments totaling approximately $1,236,000
were made for lease termination costs, employee severance and other. At December
31, 1999, the remaining balance of approximately $215,000 of the restructure
reserve related to lease termination costs which were substantially paid as of
December 29, 2000. As of December 29,2000 substantially all phases have been
completed.

These centers had a combined loss for the year ended December 25, 1998 of
approximately $1.9 million. A restructure charge of $2,233,800 was recorded in
the fourth quarter of 1998 to reflect the costs of closing the centers as
detailed below.

<TABLE>
<S>                                                                <C>
       Lease termination costs                                     $  1,304,400
       Employee severance                                                81,800
       Write down of Fixed Assets to net realizable value               783,100
</TABLE>


                                       43
<PAGE>   44

<TABLE>
<S>                                                                <C>
       Other                                                             64,500
       Total Restructure Charge                                    $  2,233,800
</TABLE>

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 $45,400, $42,400 and $8,400 for the
years ended December 29, 2000, December 31, 1999 and December 25, 1998,
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)

<TABLE>
<CAPTION>
         Year Ended               First          Second          Third         Fourth
     DECEMBER 29, 2000           Quarter        Quarter         Quarter        Quarter
     -----------------           -------        -------         -------        -------
<S>                        <C>             <C>            <C>               <C>
Net Sales                  $  13,121,767   $ 15,174,416   $  13,347,032     $  14,765,749
Operating Expenses            11,040,658     12,796,191      11,461,289        12,996,087
Operating Profit               2,081,109      2,378,225       1,885,743         1,769,662
Net Loss applicable to
 Commons stockholders  (a)      (819,495)      (596,898)     (1,227,839)       (2,019,217)
Earnings per share                  (.07)          (.05)           (.10)             (.17)
</TABLE>

(a) 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."


<TABLE>
<CAPTION>
       Year Ended             First           Second           Third         Fourth
    DECEMBER 31, 1999        Quarter          Quarter         Quarter        Quarter
    -----------------        -------          -------         -------        -------
<S>                      <C>             <C>             <C>             <C>
Net Sales                $ 10,454,525    $ 12,005,230    $ 13,262,242    $ 11,964,871
Operating Expenses          9,294,961      10,075,064      10,844,561      10,773,528
Operating Profit            1,159,564       1,930,166       2,417,681       1,191,343
Net Loss applicable to
 Common stockholders       (1,249,290)       (856,971)       (541,227)     (2,177,795)
Earnings per share               (.12)           (.08)           (.05)           (.20)
</TABLE>




                                       44
<PAGE>   45



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 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.

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

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

Accounts Payable, Accrued Expenses and Long Term Debt - the carrying amounts
reported in the consolidated balance sheets approximate those liabilities' fair
value.

14. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133,
amended by SFAS No. 137 requires companies to recognize all derivative contracts
as either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged assets or liabilities that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging instrument,
the gain and loss is recognized in income in the period of change. SFAS No. 133
is effective for all fiscal quarters of all fiscal years beginning after June
15, 2000.

Historically, the Company has not entered into derivative contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect the adoption of the new standard as January 1, 2001 to have material
impact on the Company's financial position, results of operations, or cash
flows.

In December 1999, the SEC staff release Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements, which provides interpretive
guidance on the recognition presentation, and disclosure of revenue in financial
statements. SAB 101 must be applied to financial statements no later than the
quarter ended September 30, 2000. There was no material


                                       45
<PAGE>   46

impact from the application of SAB 101 on the Company's financial position,
results of operations, or cash flows.

In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting for
Certain Transactions Involving Stock Compensation, and an interpretation of APB.
25. FIN 44 clarifies the application of APB 25 for (a) the definition of an
employee for purposes of applying Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in business combination. FIN 44 became effective July 2,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. FIN 44 did not have a material impact on
the Company's financial position, results of operations, or cash flows.



                                       46
<PAGE>   47




                                   HEARX LTD.
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS



<TABLE>
<CAPTION>
                                       Balance
                                          at                                       Balance at
                                       Beginning                                      End
                                       Of Period    Additions      Deductions      Of Period
----------------------------------------------------------------------------------------------------
<S>                               <C>           <C>            <C>               <C>
December 29, 2000
  Allowance for doubtful
  accounts                        $ 535,609     $  377,500     $   (700,452) (1)    $  212,657
====================================================================================================
December 31, 1999
  Allowance for doubtful
  accounts                        $ 588,509     $  568,135     $    (621,035)(1)    $  535,609
====================================================================================================
December 25, 1998
  Allowance for doubtful
  accounts                        $ 246,371     $  553,467     $    (211,329)(1)    $  588,509
====================================================================================================
</TABLE>

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



                                       47
<PAGE>   48



Item 9.    Changes in and Disagreement with Accountants on
           Accounting and Financial Disclosure


        None.





                                       48
<PAGE>   49





                                    PART III

Item 10.   Directors and Executive Officers

     The information required by this Item for directors is set forth in the
Company's 2001 Proxy Statement under the heading "Election of Directors" and is
incorporated herein by this reference as if set forth in full.

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


Item 11.  Executive Compensation

     The information required by this Item is set forth in the Company's 2001
Proxy Statement under the heading "Election of Directors" and is incorporated
herein by this reference as if set forth in full.


Item 12.  Security Ownership of Certain Beneficial Owners and Management

     The information required by this Item is set forth in the Company's 2001
Proxy Statement under the heading "Election of Directors" and is incorporated
herein by this reference as if set forth in full.


Item 13.  Certain Relationships and Related Transactions

      The information required by this item is set forth in the Company's 2001
Proxy Statement under the heading "Election of Directors" and is incorporated
herein by this reference as if set forth in full.



                                       49
<PAGE>   50



                                     PART IV


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

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

                (i)     Consolidated Balance Sheets as of December 29, 2000 and
                        December 31, 1999.
                (ii)    Consolidated Statements of Operations for the years
                        ended December 29, 2000, December 31, 1999 and December
                        25, 1998.
                (iii)   Consolidated Statements of Changes in Stockholders'
                        Equity for the years ended December 29, 2000, December
                        31, 1999 and December 25, 1998.
                (iv)    Consolidated Statements of Cash Flows for the years
                        ended December 29, 2000, December 31, 1999 and December
                        25, 1998.
                (v)     Notes to Consolidated Financial Statements

        (2) The following financial statement schedules are filed as part of
        this report and are contained on page 41.

<TABLE>
<CAPTION>
                      Schedule II           Valuation  and Qualifying Accounts
                      -----------           ----------------------------------
<S>                                         <C>
        (3)    Exhibits:

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

            3.2(2)                          Amendment to Restated Certificate of Incorporation [3.1A]

            3.3(3)                          Certificate of Designations, Preference and Rights of the
                                            Company's 1997 Convertible Preferred Stock [3]

            3.4                             Amended and Restated By-Laws of HEARx, Ltd.

            3.5(6)                          Certificate of Designations, Preferences and Rights of the
                                            Company's 1998 Convertible Preferred Stock. [3]

            3.6(8)                          Amendment to Restate Certificate of Incorporation including one
                                            for ten reverse stock split and reduction of authorized shares.

            3.7(9)                          Certificate of Designations, Preferences and Rights of the
                                            Company's 1999 Series H Junior Participating Preferred Stock[4]

            3.8(10)                         Certificate of Designations, Preferences and Rights of the
                                            Company's 2000 Series I Convertible Preferred Stock. [3]
</TABLE>


                                       50
<PAGE>   51


<TABLE>
<S>                                         <C>
            4.1(1)                          Securities Purchase Agreement, dated March 17, 1997, between HEARx
                                            Ltd. and each of the purchasers set forth on the signature pages
                                            thereto. [4.1]

            4.2(3)                          Registration Rights Agreement, dated March 17, 1997, between HEARx
                                            Ltd. and each of the purchasers set forth on the signature pages
                                            thereto. [4.2]

            4.3(3)                          Form of Placement Agent Warrant (to purchase up to 850,000 shares of
                                            Common Stock at an exercise price equal to $5.00 per share). [4.3]

            4.5(4)                          Specimen of Certificate representing Common Stock. [4.1]

            4.1(6)                          Securities Purchase Agreement, dated August 27, 1998, between
                                            HEARx Ltd. and each of the purchasers set forth on the signature
                                            pages thereto. [4.1]

            4.2(6)                          Registration Rights Agreement, dated August 27, 1998, between
                                            HEARx Ltd. and each purchaser set forth on the signature pages
                                            thereto. [4.2]

            4.3(6)                          Form of Placement Agent Warrant (to purchase up to 1,125,000
                                            shares of Common Stock at an exercise price equal to $1.80 per
                                            share). [4.3]

            4.4(9)                          Form of Rights Agreement, dated December 14, 1999, between HEARx
                                            and the Rights Agent, which includes the Certificate of
                                            Designations, Preferences and Rights of the Company's 1999 Series
                                            H Junior Participating Preferred Stock [4]

            4.1(10)                         Securities Purchase Agreement, dated May 9, 2000, between HEARx
                                            Ltd. and each of the purchasers set forth on the signature pages
                                            thereto. [4.1]

            4.2(10)                         Registration Rights Agreement, dated May 9, 2000 between HEARx
                                            Ltd. and each purchaser set forth on the signature pages thereto.
                                            [4.2]

            4.3(10)                         Form of Placement Agent Warrant (to purchase up to 203,390 shares of
                                            Common Stock at an exercise price equal to $4.46 per share).[4.3]

            10.1(4)                         Form of Consulting Agreement, dated January 1, 1987, as of June 1,
                                            1986, by and between HEARx Ltd. and each of the members of the
                                            Company's Scientific Advisory Board. [10.1]

            10.2(4)                         HEARx Ltd. 1987 Stock Option Plan. [10.11]#
</TABLE>


                                       51
<PAGE>   52


<TABLE>
<S>                                       <C>
            10.3(5)                         (a) HEARx Ltd. Stock Option Plan for Non-Employee Directors and
                                            (b) Form of Option Agreement. [10.35] [10.48]#

            10.9(7)                         1995 Flexible Employee Stock Plan [4]#

            10.10(9)                        Executive Employment Agreement, dated December 14, 1999, with Dr.
                                            Paul A Brown #

            10.11(9)                        Executive Employment Agreement, dated December 14, 1999,  with
                                            Stephen J. Hansbrough #

            21                              List Subsidiaries

            23                              Consent of Independent Certified Public Accountants.


-----------------------------------------------------------------------------------------------------------------------
</TABLE>



       (1)      Filed as an exhibit to the Company's Current Report on Form 8-K,
                filed May 17, 1996,as the exhibit number indicated in brackets,
                and incorporated herein by reference.

       (2)     Filed as an exhibit to the Company's Quarterly Report on Form
               10-Q for the period ended June 28, 1996, as the exhibit number
               indicated in brackets, and incorporated herein by reference.

       (3)     Filed as an exhibit to the Company's Current Report on Form 8-K,
               filed on March 26, 1997, as the exhibit number indicated in
               brackets, and incorporated herein by reference.

       (4)      Filed as an exhibit to the Company's Registration Statement on
                Form S-18 (Registration No. 33-17041-NY) as the exhibit number
                indicated in brackets, and incorporated by reference herein.

       (5)      Filed as an exhibit to Post-Effective Amendment No. 1 to the
                Company's Registration Statement on Form S-18, as the exhibit
                number indicated in brackets, and incorporated by reference
                herein.

       (6)     Filed as an exhibit to the Company's Current Report on Form 8-K,
               filed August 27, 1998, as the exhibit number indicated in
               brackets, and incorporated herein by reference.

       (7)     Filed as an exhibit to the Company's 1995 Proxy Statement, as the
               exhibit number indicated in brackets, and incorporated by
               reference herein.

       (8)     Filed as an exhibit to the Company's Quarterly Report on Form 10Q
               for the period ending July 2, 1999, as the exhibit number
               indicated in brackets, and incorporated herein by reference.

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


                                       52
<PAGE>   53

       (10)    Filed as an exhibit to the Company's Current Report on Form 8-K,
               May 9, 2000 as the exhibit number indicated in brackets, and
               incorporated herein by reference.


        #       Denotes compensatory plan or arrangement for Company Officer or
                Director.

        (b)     Reports on Form 8-K :

                None



                                       53
<PAGE>   54



                                   SIGNATURES


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


                                                   HEARx Ltd.
                                                   (Registrant)

        Date: March 23, 2001                       By: /s/Paul A. Brown, M.D.
                                                       ---------------------
                                                          Paul A. Brown, M.D.
                                                          Chairman of the Board

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


<TABLE>
<CAPTION>
Signature                                   Title                                Date
---------                                   -----                                ----
<S>                                         <C>                          <C>
s/Paul A. Brown, M.D.                       Chairman of the Board            March 23, 2001
---------------------
Paul A. Brown, M.D.                         Chief Executive Officer
                                            And Director

s/Stephen J. Hansbrough                     President, Chief                 March 23, 2001
-----------------------
Stephen J. Hansbrough                       Operating Officer and
                                            Director

s/James W. Peklenk                          Vice President - Finance         March 23, 2001
------------------
James W. Peklenk                            and Chief Financial Officer

s/David J. McLachlan                        Director                         March 23, 2001
--------------------
David J. McLachlan

s/Thomas W. Archibald                       Director                         March 23, 2001
---------------------
Thomas W. Archibald

s/Joseph L. Gitterman III                   Director                         March 23, 2001
-------------------------
Joseph L. Gitterman III
</TABLE>




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