SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

|    |  |                                                                                         |  |  |  | 
|--- |  | --------------------------------------------------------------------------------------- |  |  |  | 
|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15
(d) OF THESECURITIES EXCHANGE ACT OF 1934 |  |  |  | 

|                               |  |               
|------------------------------ |  | --------------
|For the quarterly period ended |  | March 31, 2001
|                               |  |               

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.

---

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 22-2748248                          
|                                                              
|(State of Other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer
Identification No.)

|                                                  |  |            |  | 
|------------------------------------------------- |  | ---------- |  | 
|1250 Northpoint Parkway, West Palm Beach, Florida |  | 33407     
|                                                 
|(Address of Principal Executive Offices)          |  | (Zip Code) |  | 

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



---

Indicate by check Xwhether 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

On May 7, 2001, 13,116,860 shares of the Registrants Common Stock were
outstanding.





---



INDEX

|                                  |                                                                                               |                                            |  |                                                      |     |      |   | 
|--------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  | ---------------------------------------------------- | --- | ---- | - | 
|                                  |                                                                                               |                                            |  |                                                      |     | Page
|                                  |                                                                                               |                                            |  |                                                      |     |     
|PART I.     FINANCIAL INFORMATION
|                                 
|                                 
|                                 
|                                 
|                                  | Item 1. Financial Statements:                                                                
|                                 
|                                 
|                                 
|                                 
|                                  |                                                                                               | Consolidated Balance Sheets               
|                                 
|                                 
|                                 
|                                 
|                                  |                                                                                               |                                            |  | March 31, 2001 and December 29, 2000                 |     |      | 3 | 
|                                 
|                                 
|                                 
|                                 
|                                  |                                                                                               | Consolidated Statements of Operations     
|                                 
|                                 
|                                 
|                                 
|                                  |                                                                                               |                                            |  | Three months ended March 31, 2001 and March 31, 2000 |     |      | 4 | 
|                                 
|                                 
|                                 
|                                 
|                                  |                                                                                               | Consolidated Statements of Cash Flows     
|                                 
|                                 
|                                 
|                                 
|                                  |                                                                                               |                                            |  | Three months ended March 31, 2001 and March 31, 2000 |     |      | 5 | 
|                                 
|                                 
|                                 
|                                 
|                                  |                                                                                               | Notes to Consolidated Financial Statements |  |                                                      | 6-7 |     
|                                 
|                                 
|                                 
|                                 
|                                  | Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                            |  | 8-10                                                 |    
|                                 
|                                 
|                                 
|                                 
|                                  | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                            |  | 11                                                   |    
|                                 
|                                 
|                                 
|                                 
|PART II.     OTHER INFORMATION   
|                                 
|                                 
|                                 
|                                 
|                                  | Item 2. Changes in Securities and Use of Proceeds                                             |                                            |  | 11                                                   |    
|                                 
|                                 
|                                 
|                                 
|                                  | Item 6. Exhibits and Reports on Form 8-K                                                      |                                            |  | 11-12                                                |    
|                                 
|                                 
|                                 
|                                 
|                                  |                                                                                               | Signatures                                 |  | 13                                                   |    

2



---



HEARx Ltd.
Consolidated Balance Sheets

|                                        |                                                                                                |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |              |             |           |            | 
|--------------------------------------- | ---------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------- | ----------- | ----------- | ---------- | ------------ | ----------- | --------- | ---------- | 
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        | ASSETS                                              |             |             |           
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        |                                                     |             | March 31,   |            | December 29,
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        |                                                     |             | 2001        |            | 2000        
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |             
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        |                                                     |             | (unaudited) |            | (audited)   
|Current assets:                        
|                                       
|                                       
|                                       
|                                       
|                                        | Cash and cash equivalents                                                                      |                                                                                               | $                                                                                                                                                      | 1,164,338                                           |             |             | $          | 4,250,413    |            
|                                       
|                                       
|                                       
|                                       
|                                        | Investment securities                                                                          |                                                                                               |                                                                                                                                                        | 993,224                                             |             |             |            | 993,224      |            
|                                       
|                                       
|                                       
|                                       
|                                        | Accounts and notes receivable, less allowance for
  doubtful accounts of $235,018 and $212,657 |                                                                                               |                                                                                                                                                        | 5,173,439                                           |             |             |            | 5,734,497    |            
|                                       
|                                       
|                                       
|                                       
|                                        | Inventories                                                                                    |                                                                                               |                                                                                                                                                        | 517,574                                             |             |             |            | 500,582      |            
|                                       
|                                       
|                                       
|                                       
|                                        | Prepaid expenses                                                                               |                                                                                               |                                                                                                                                                        | 749,231                                             |             |             |            | 860,272      |            
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |              |            
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        | Total current assets                                |             |             | 8,597,806  |              |             |           | 12,338,988 | 
|                                       
|                                       
|                                       
|                                       
|Property and equipment  net            |                                                                                                |                                                                                               | 7,960,798                                                                                                                                              |                                                     |             |             | 7,595,991  |             
|                                       
|                                       
|                                       
|                                       
|Deposits and other                      |                                                                                                |                                                                                               | 2,435,363                                                                                                                                              |                                                     |             |             | 1,937,144  |             
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |              |            
|                                        |                                                                                                | $                                                                                             | 18,993,967                                                                                                                                             |                                                     |             | $           | 21,872,123 |             
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |              |            
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        | LIABILITIES AND STOCKHOLDERS EQUITY                |             |             |           
|                                       
|                                       
|                                       
|                                       
|Current liabilities:                   
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                | Accounts payable and accrued expenses                                                         |                                                                                                                                                        | $                                                   | 7,590,571   |             |            | $            | 7,377,495   |          
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                | Accrued salaries and other compensation                                                       |                                                                                                                                                        |                                                     | 717,196     |             |            |              | 1,071,208   |          
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                | Current maturities of long term debt                                                          |                                                                                                                                                        |                                                     | 188,998     |             |            |              | 152,387     |          
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                |                                                                                               | Dividends payable                                                                                                                                      |                                                     |             | 1,440,572   |            |              |             | 1,387,066 |           
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |              |            
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        | Total current liabilities                           |             |             | 9,937,337  |              |             |           | 9,988,156  | 
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |              |            
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|Long term debt, less current maturities |                                                                                                |                                                                                               | 314,046                                                                                                                                                |                                                     |             |             | 175,887    |             
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |              |            
|Commitments and contingencies           |                                                                                                |                                                                                               |                                                                                                                                                       |                                                     |             |             |           |             
|                                       
|                                       
|                                       
|                                       
|Stockholders equity:                  
|                                       
|                                       
|                                       
|                                       
|                                        | Preferred stock:                                                                              
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                |                                                                                               | (Aggregate liquidation preference $10,985,572 and
$11,902,067) $1 par, 2,000,000 shares authorized
Series I Convertible 461 and 500 shares outstanding |                                                     |             | 461         |            |              |             | 500       |           
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        | Series H Junior Participating 0 shares outstanding  |             |             |           |              |             |           |           | 
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        | 1998 Convertible 4,935 and 5,515 shares outstanding |             |             | 4,935      |              |             |           | 5,515      | 
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |              |            
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        | Total preferred stock                               |             |             | 5,396      |              |             |           | 6,015      | 
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                | Common stock: $.10 par; 20,000,000 shares authorized;
13,313,335 and 12,364,139 shares issued |                                                                                                                                                        |                                                     | 1,331,334   |             |            |              | 1,236,414   |          
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                | Additional paid-in capital                                                                    |                                                                                                                                                        |                                                     | 92,749,219  |             |            |              | 92,695,792  |          
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                | Accumulated deficit                                                                           |                                                                                                                                                        |                                                     | (82,859,924 | )           |            |              | (79,746,700 | )        
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                | Treasury stock, at cost: 518,660 common shares                                                |                                                                                                                                                        |                                                     | (2,483,441  | )           |            |              | (2,483,441  | )        
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |              |            
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        | Total stockholders equity                          |             |             | 8,742,584  |              |             |           | 11,708,080 | 
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |              |            
|                                        |                                                                                                | $                                                                                             | 18,993,967                                                                                                                                             |                                                     |             | $           | 21,872,123 |             
|                                        |                                                                                                |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |              |            

See accompanying notes to the consolidated financial statements

3



---



HEARx Ltd.
Consolidated Statements of Operations
Three Months Ended March 31, 2001 and March 31, 2000

|                                                                |                                     |                          |            |           |             |   |             |           |            |  | 
|--------------------------------------------------------------- | ----------------------------------- | ------------------------ | ---------- | --------- | ----------- | - | ----------- | --------- | ---------- |  | 
|                                                                |                                     |                          |            |           | March 31,   |   | March 31,  
|                                                                |                                     |                          |            |           | 2001        |   | 2000       
|                                                                |                                     |                          |            |           |             |   |            
|                                                                |                                     |                          |            |           | (Unaudited) |   | (Unaudited)
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|Net revenue                                                     |                                     | $                        | 12,534,765 |           |             | $ | 13,121,767  |          
|                                                                |                                     |                          |            |           |             |   |             |           |            |  | 
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|Costs and expenses:                                            
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Cost of products sold               |                          |            | 4,266,578 |             |   |             | 4,297,050 |           
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Center operating expenses           |                          |            | 7,962,512 |             |   |             | 6,743,608 |           
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | General and administrative expenses |                          |            | 2,565,702 |             |   |             | 2,111,999 |           
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Depreciation and amortization       |                          |            | 642,043   |             |   |             | 644,365   |           
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Interest expense                    |                          |            | 9,919     |             |   |             | 8,204     |           
|                                                                |                                     |                          |            |           |             |   |             |           |            |  | 
|                                                                |                                     | Total costs and expenses |            |           | 15,446,754  |   |             |           | 13,805,226 | 
|                                                                |                                     |                          |            |           |             |   |             |           |            |  | 
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|Net loss                                                        |                                     |                          | (2,911,989 | )         |             |   | (683,459    | )        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|Dividends on preferred stock                                    |                                     |                          | (201,235   | )         |             |   | (136,036    | )        
|                                                                |                                     |                          |            |           |             |   |             |           |            |  | 
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|Net loss applicable to common stockholders                      |                                     | $                        | (3,113,224 | )         |             | $ | (819,495    | )        
|                                                                |                                     |                          |            |           |             |   |             |           |            |  | 
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|Net loss per common share  basic and diluted                   |                                     | $                        | (0.25      | )         |             | $ | (0.07       | )        
|                                                                |                                     |                          |            |           |             |   |             |           |            |  | 
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|Weighted average number of shares of
common   stock outstanding |                                     |                          | 12,505,430 |           |             |   | 11,630,428  |          
|                                                                |                                     |                          |            |           |             |   |             |           |            |  | 

See accompanying notes to the consolidated financial statements

4



---



HEARx Ltd.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and March 31, 2000

|                                                                            |                     |                                            |            |             |          |             |            |   |            |  
|--------------------------------------------------------------------------- | ------------------- | ------------------------------------------ | ---------- | ----------- | -------- | ----------- | ---------- | - | ---------- | -
|                                                                            |                     |                                            |            | March 31,   |          | March 31,  
|                                                                            |                     |                                            |            | 2001        |          | 2000       
|                                                                            |                     |                                            |            |             |          |            
|                                                                            |                     |                                            |            | (Unaudited) |          | (Unaudited)
|Cash flows from operating activities:                                      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net loss                                                                    |                     | $                                          | (2,911,989 | )           |          | $           | (683,459   | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Adjustments to reconcile net loss to net cash
used by operating activities:
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                     | Depreciation and amortization              |            |             | 642,043  |             |            |   | 644,365    |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                     | Provision (recovery) for doubtful accounts |            |             | 75,750   |             |            |   | (273,163   | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                     | Loss on disposition of property            |            |             | 10,672   |             |            |   | 12,662     |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|(Increase) decrease in:                                                    
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                     | Accounts and notes receivable              |            |             | 485,308  |             |            |   | (507,612   | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                     | Inventories                                |            |             | (16,992  | )           |            |   | (35,722    | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                     | Prepaid expenses and other                 |            |             | (415,944 | )           |            |   | 132,074    |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Increase (decrease) in :                                                   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                     | Accounts payable                           |            |             | 213,076  |             |            |   | 1,403,144  |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                     | Accrued expenses                           |            |             | (354,012 | )           |            |   | (1,042,225 | )
|                                                                            |                     |                                            |            |             |          |             |            |  
|Net cash used by operating activities                                       |                     |                                            | (2,272,088 | )           |          |             | (349,936   | )
|                                                                            |                     |                                            |            |             |          |             |            |  
|Cash flows from investing activities:                                      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                     | Purchase of property and equipment         |            |             | (736,744 | )           |            |   | (389,460   | )
|                                                                            |                     |                                            |            |             |          |             |            |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net cash used by investing activities                                       |                     |                                            | (736,744   | )           |          |             | (389,460   | )
|                                                                            |                     |                                            |            |             |          |             |            |  
|Cash flows from financing activities:                                      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Principal payments:
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                     | Long-term debt                             |            |             | (77,243  | )           |            |   | (190,642   | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Acquisition of treasury stock                                               |                     |                                            |           |             |          |             | (193,901   | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Proceeds from the issuance of stock, net of expenses                        |                     |                                            |           |             |          |             | (21,221    | )
|                                                                            |                     |                                            |            |             |          |             |            |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net cash used by financing activities                                       |                     |                                            | (77,243    | )           |          |             | (405,764   | )
|                                                                            |                     |                                            |            |             |          |             |            |  
|Net decrease in cash and cash equivalents                                   |                     |                                            | (3,086,075 | )           |          |             | (1,145,160 | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Cash and cash equivalents at beginning of period                            |                     |                                            | 4,250,413  |             |          |             | 2,857,187  |  
|                                                                            |                     |                                            |            |             |          |             |            |  
|Cash and cash equivalents at end of period                                  |                     | $                                          | 1,164,338  |             |          | $           | 1,712,027  |  
|                                                                            |                     |                                            |            |             |          |             |            |  

See accompanying notes to the consolidated financial statements

5



---



HEARx Ltd.
Notes to Consolidated Financial Statements

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results
for the three month period ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ending December
29, 2001. For further information, refer to the audited consolidated
financial statements and footnotes thereto included in the Companys annual
report on Form 10-K for the year ended December 29, 2000.

1.     Summary of Significant Accounting Policies

Reclassifications

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

Segments

The Companys operations are organized by centers in 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 $2,728,000, $5,318,000 and $4,442,000 during
the three months ended March 31, 2001 and $2,943,000, $6,240,000 and
$3,899,000 during the three months ended March 31, 2000, respectively.
Operating profits and losses at the center level for the quarter ended
March 31, 2001 were approximately an operating loss of $679,000, and
operating profits of $452,000 and $483,000 for the Northeast, Florida and
California, respectively, compared to operating profits of approximately
$146,000, $1,454,000 and $441,000 for the Northeast, Florida and
California, respectively, for the quarter ended March 31, 2000. Operating
profits at center level are computed before corporate general and
administrative expenses, depreciation/amortization and preferred dividends.
Center operations depreciation amounted to $453,000 and $468,000, for the
first quarter of 2001 and the first quarter of 2000, respectively. Center
operations capital expenditures amounted to $540,000 in the first quarter
of 2001 as compared to $289,000 for the first quarter of 2000.

2. Stockholders Equity

Conversion of Preferred Stock into shares of Common Stock

During the quarter ended March 31, 2001, 580 shares of the 1998
Convertible Preferred Stock and 39 shares of the Series I Convertible
Preferred Stock were converted into 648,182 and 301,026 shares of Common
Stock, respectively.

Common Stock

During the quarter ended March 31, 2001, no warrants or employee stock
options were exercised.

3. Recent Accounting Pronouncements

In December 1999, the SEC staff released Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial Statements, which provides
interpretive guidance on the recognition

6



---



HEARx Ltd.
Notes to Consolidated Financial Statements

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.

In March 2000, the FASB issued Interpretation No. 44 (FIN 44),
Accounting for Certain Transactions Involving Stock Compensation, 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 a
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.

4. Subsequent Events

On April 23, 2001, the Company and Siemens Hearing Instruments, Inc. signed
a Letter of Intent (LOI) pursuant to which the parties intend to form a
marketing and promotional alliance in the United States.

Under the terms of the LOI, Siemens has provided the Company with a
five-year $7.5 million line of credit with interest at 12%, payable
quarterly. The Company has agreed to purchase from Siemens at least 70%
and up to 90% of HEARx total hearing aid requirements over the next five
years. As the Company purchases such products from Siemens, Siemens will
pay to the Company certain rebates which must be used to pay down the
quarterly installments of principal and interest under the five-year line
of credit.

The LOI contains certain change of control provisions. In the event of a
change of control of the Company, the entire outstanding amount under the
line of credit will be immediately due and payable and the supply
arrangements may be terminated upon payment to Siemens of a signficant
breakup fee.

7



---



|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|Item 2. |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations

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 in California, HEARx
West LLC. 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. The Company
currently operates 22 of these centers in California.

The Company has developed a national call center, which began beta testing
for five Florida centers in mid-November 2000. During the first quarter of
2001, an additional fourteen centers began using the call center, and as
of May 7, 2001 there are twenty-three centers utilizing the call center.
The national call center is 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, 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 Medicare benefits. 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.

RESULTS OF OPERATIONS

For the three months ended March 31, 2001 compared to the three months
ended March 31, 2000

Net revenues decreased $587,002, or 4.5%, to $12,534,765 in the first
quarter of 2001 from $13,121,767 in the comparable quarter of 2000. The
decrease in revenues resulted primarily from the decrease in revenues for
the Companys Florida centers. Net revenues in Florida decreased $921,410,
or 14.8%, to $5,318,375 for the three months ended March 31, 2001 from
$6,239,785 for the comparable period of 2000. This decrease is partially
the result of the average price per hearing aid sold decreasing in the
first quarter of 2001 compared to the comparable period of 2000. In
addition, management believes the decrease in revenues for the first
quarter of 2001 as compared with the first quarter of 2000 is also
partially the result of the overall downward trend in the nations economy.
Management believes that the slowing economy has caused the Companys
primary market, the nations elderly population, to reduce discretionary
spending.

Cost of products sold remained relatively constant in the first quarter of
2001 compared to the first quarter of 2000. During the first quarter of
2001, the Company experienced an increase in sales of digital hearing aids,
which generally have lower margins. The cost of products sold as a
percentage

8



---



of net revenues was 34.0% and 32.7% for the first quarters of
2001 and 2000, respectively, and fluctuates from period to period due to
retail pricing and changing marketing strategies.

Center operating expenses increased $1,218,904, or 18.1%, to $7,962,512 in
the first quarter of 2001 from $6,743,608 in the comparable quarter of
2000. During the first quarter of 2001, the Company continued to intensify
its aggressive marketing program, increasing center advertising expense to
$1,947,746 or 15.5% of revenue, up from $1,684,100 or 12.8% of revenue for
the comparable quarter of 2000. In addition, other operating expenses
increased $401,133 to $709,146 in the first quarter of 2001 from $308,014
for the comparable quarter of 2000. This increase is primarily the result
of the Company having bad debts expense of approximately $76,000 for the
first quarter 2001compared to a recovery of net bad debts of approximately
$273,000 in the comparable quarter of 2000.

General and administrative expenses increased $453,703, or 21.5%, to
$2,565,702 in the first quarter of 2001 from $2,111,999 in the comparable
quarter of 2000. This increase is partially due to the expansion of
corporate administrative functions, which includes the implementation of
the national call center. The costs associated with this were approximately
$157,000, which included salaries and wages of $110,000 and occupancy costs
of $28,000. In addition professional service fees increased $43,736, or
45.6%, to $139,563 in the first quarter of 2001 from $95,828 in the
comparable quarter of 2000. This increase is primarily the result of
additional fees paid to the Companys independent public accountants and
attorneys for additional work. Shareholder relations expense increased
$89,424 or 328%, to $116,627 in the first quarter of 2001 from $27,203 in
the comparable quarter of 2000. This increase is the result of hiring an
investment banking firm to render services with respect to financial
consulting and public relations.

Depreciation and amortization expense remained relatively constant at
$642,043 in the first quarter of 2001 compared to $644,365 in the first
quarter of 2000.

LIQUIDITY AND CAPITAL RESOURCES

Working capital decreased $3,690,363 to a negative $1,339,531 as of March
31, 2001 from $2,350,832 as of December 29, 2000. This decrease is
primarily the result of net cash used by operating activities. On April 27,
2001, the Company was extended a $7.5 million five-year line of credit from
one of its hearing aid manufacturers. See Recent Developments below.
The Company believes that its funds available under the line of credit,
current cash, investment securities and revenues from operations will be
sufficient to support the Companys operational needs through the next
twelve months, although there can be no assurance that unexpected capital
needs will not arise for which existing credit line, cash and revenues from
operations may be insufficient. To respond to the decrease in revenues,
management has begun implementation of a cost reduction program. Since
March 31, 2001, the Company has reduced staffing by approximately eight
percent and has initiated rollbacks in marketing and discretionary
expenses.

Net cash used by operating activities increased from $349,935 in the first
quarter of 2000, to $2,272,088 in the first quarter of 2001. The increase
in cash used by operating activities was primarily the result of the
increase of operating losses of approximately $2,229,000.

Net cash used by investing activities increased from $389,460 in the first
quarter of 2000, to $736,744 in the first quarter of 2001. This increase
is the result of purchasing equipment for the national call center and wide
area network in the 2001 first quarter.

Net cash used by financing activities decreased from $405,764 in the first
quarter of 2000 to $77,243 in the first quarter of 2001. In the first
quarter of 2000, the Company used approximately $194,000 in connection with
its stock repurchase program. There were no shares purchased in the

9



---



first
quarter of 2001. This represents the major reason for the decrease in
cash used by financing activities in 2001, and a decrease of approximately
$113,000 in repayments of long-term debt

RECENT DEVELOPMENTS

On April 23, 2001, the Company and Siemens Hearing Instruments, Inc. signed
a Letter of Intent (LOI) pursuant to which the parties intend to form a
marketing and promotional alliance in the United States.

Under the terms of the LOI, Siemens has provided the Company with a
five-year $7.5 million line of credit with interest at 12%, payable
quarterly. The Company has agreed to purchase from Siemens at least 70%
and up to 90% of HEARx total hearing aid requirements over the next five
years. As the Company purchases such products from Siemens, Siemens will
pay to the Company certain rebates which must be used to pay down the
quarterly installments of principal and interest under the five-year line
of credit.

The LOI contains certain change of control provisions. In the event of a
change of control of the Company, the entire outstanding amount under the
line of credit will be immediately due and payable and the supply
arrangements may be terminated upon payment to Siemens of a significant
breakup fee.



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 completion
of the national call center; funds available under the line of credit,
current cash, investment securities and revenues from operations sufficient
to support the Companys operational needs; the Companys belief concerning
the effect on its financial condition or operations of changes in benefits
announced by some insurance companies and the loss of any single contract.
Such statements involve certain risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. Potential risks and uncertainties include industry and market
conditions, especially those affecting managed health care; unforeseen
capital requirements; trends in market sales, and the success of the joint
venture with The Permanente Federation as well as risks those associated
with the Companys business described in the Companys annual report on
Form 10-K for the fiscal year December 29, 2000 filed with the Securities
and Exchange Commission.

10



---



Item 3. Quantitative and Qualitative Disclosures About Market Risk



| |     
| | ----
| | None

Part II  Other Information

Item 2. Changes in Securities and Use of Proceeds

During the quarter ended March 31, 2001, 580 shares of the 1998
Convertible Preferred Stock and 39 shares of the Series I Convertible
Preferred Stock plus accrued dividends of $125,878 and $21,852 were
converted into 648,182 and 301,026 shares of the Companys Common Stock,
respectively. The 1998 and Series I Convertible Preferred Stock was
initially issued to certain accredited investors pursuant to the
exemption from registration contained in Section 4(2) of the Securities Act
of 1933 and Rule 506 of Regulation D. The shares issued upon the conversion
were also issued pursuant to Section 4(2) of the securities Act of 1933.

Item 6. Exhibits and Reports on Form 8-K

|                |  |                                                                                                                                                                                                                                                                                                                                                   
|--------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)   Exhibits:
|               
|               
|               
|               
|               
|               
|               
|               
|               
|               
|               
|               
|3.1             |  | Restated Certificate of Incorporation of HEARx Ltd.,
including certain certificates of designations, preferences and
rights of certain preferred stock of the Company. [3] 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.
|               
|               
|               
|               
|               
|               
|               
|               
|               
|               
|               
|               
|3.2             |  | Amendment to Restated Certificate of Incorporation. [3.1A].
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.                                                                                              
|               
|               
|               
|               
|               
|               
|               
|               
|               
|               
|               
|               
|3.3             |  | Certificate of Designations, Preferences and Rights of the
Companys 1998 Convertible Preferred Stock. [3] 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.                                                             
|               
|               
|               
|               
|               
|               
|               
|               
|               
|               
|               
|               
|3.4             |  | By-Laws of HEARx Ltd. [3.4]. Filed as an exhibit to the
Companys Annual Report on Form 10-K for the fiscal year ended
12/31/99 as the exhibit number indicated in brackets, and
incorporated herein by reference.                                                                                                                                
|               
|               
|               
|               
|               
|               
|               
|               
|               
|               
|               
|               
|3.5             |  | Certificate of Designations, Preferences and Rights of the
Companys 1999 Series H Junior Participating Preferred Stock. [4]
Filed as an exhibit to the Companys Current Report on Form 8-K,
filed December 17, 1999, as the exhibit number indicated in
brackets, and incorporated herein by reference.                                         

11



---



|                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|---------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                            
|                            
|                            
|                            
|3.6                          |  | Certificate of Designations, Preferences and Rights of the
Companys 2000 Series I Convertible Preferred Stock. [3] Filed as
an exhibit to the
Companys Current Report on Form 8-K, filed May 9,
2000, as the exhibit number indicated in brackets, and
incorporated herein by reference                                                                                                                          
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|4.1                          |  | 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] Filed as an exhibit to the
Companys Current Report on Form 8-K, dated December 17, 1999, as
the exhibit
number indicated in brackets, and incorporated herein by
reference.
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|10.1                         |  | Letter of Intent dated April 23, 2001 by and between HEARx
Ltd and Siemens Hearing Instruments, Inc.                                                                                                                                                                                                                                                                                                               
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|(b)     Reports on Form 8-K:
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|None                        

12



---



SIGNATURES

Pursuant to the requirements 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:  May 15, 2001 |  |  |  | By: |  | s/Stephen J. Hansbrough
Stephen J. Hansbrough
President and
Chief Operating Officer

|                    |  |  |  |     |  |                                                                               
|------------------- |  |  |  | --- |  | ------------------------------------------------------------------------------
|Date:  May 15, 2001 |  |  |  | By: |  | s/James W. Peklenk
James W. Peklenk
Vice President and
Chief Financial Officer

13