##### 



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

|                               |  |                   
|------------------------------ |  | ------------------
|For the quarterly period ended |  | September 29, 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. EmployerIdentification 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 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

On November 8, 2001 13,434,049 shares of the Registrants Common Stock were
outstanding.





---



##### 



INDEX

|        |                                            |                                                                                       |       |        
|------- | ------------------------------------------ | ------------------------------------------------------------------------------------- | ----- | -------
|        |                                            |                                                                                       |       | Page   
|       
|PART I. |                                            | FINANCIAL INFORMATION                                                                 |       |        
|       
|        | Item 1.                                    | Financial Statements:                                                                 |       |        
|       
|        | Consolidated Balance Sheets                |                                                                                       | 3    
|        |                                            | September 29, 2001 and December 29, 2000                                              |       |        
|       
|        | Consolidated Statements of Operations      |                                                                                       | 4    
|        |                                            | Nine months ended September 29, 2001 and 2000                                         |       |        
|       
|        | Consolidated Statements of Operations      |                                                                                       | 5    
|        |                                            | Three months ended September 29, 2001 and 2000                                        |       |        
|       
|        | Consolidated Statements of Cash Flows      |                                                                                       | 6    
|        |                                            | Nine months ended September 29, 2001 and  2000                                        |       |        
|       
|        | Notes to Consolidated Financial Statements |                                                                                       | 7 - 9
|       
|        | Item 2.                                    | Managements Discussion and Analysis of Financial Condition
and Results of Operations |       | 10 - 13
|       
|        | Item 3.                                    | Quantitative and Qualitative Disclosure about Market Risk                             |       | 14     
|       
|PART II |                                            | OTHER INFORMATION                                                                     |       |        
|       
|        | Item 2.                                    | Changes in Securities and Use of Proceeds                                             |       | 14     
|       
|        | Item 6.                                    | Exhibits and Reports on Form 8-K                                                      |       | 14 - 15
|       
|        |                                            | Signatures                                                                            |       | 16     

2



---



##### 



HEARx Ltd.
Consolidated Balance Sheets

|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |           |             |           |            | 
|--------------------------------------- | -------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------- | ----------- | ----------- | ---------- | --------- | ----------- | --------- | ---------- | 
|ASSETS                                 
|                                        |                                                                                              | September 29,                                                                                 |                                                                                                                                                        | December 29,                                       
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             | 2001        |            | 2000     
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             | (unaudited) |            | (audited)
|Current assets:                         |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          
|                                        | Cash and cash equivalents                                                                    |                                                                                               | $                                                                                                                                                      | 1,549,644                                           |             |             | $          | 4,250,413 |            
|                                        | Investment securities                                                                        |                                                                                               |                                                                                                                                                        | 4,151,286                                           |             |             |            | 993,224   |            
|                                        | Accounts and notes receivable, less allowance for
doubtful accounts of $154,408 and $212,657 |                                                                                               |                                                                                                                                                        | 4,961,810                                           |             |             |            | 5,734,497 |            
|                                        | Inventories                                                                                  |                                                                                               |                                                                                                                                                        | 528,394                                             |             |             |            | 500,582   |            
|                                        | Prepaid expenses                                                                             |                                                                                               |                                                                                                                                                        | 872,886                                             |             |             |            | 860,272   |            
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        | Total current assets                                |             |             | 12,064,020 |           |             |           | 12,338,988 | 
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          
|Property and equipment  net            |                                                                                              |                                                                                               | 7,230,926                                                                                                                                              |                                                     |             |             | 7,595,991  |          
|Deposits and other                      |                                                                                              |                                                                                               | 2,522,498                                                                                                                                              |                                                     |             |             | 1,937,144  |          
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          
|                                        |                                                                                              | $                                                                                             | 21,817,444                                                                                                                                             |                                                     |             | $           | 21,872,123 |          
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          
|                                       
|LIABILITIES AND STOCKHOLDERS EQUITY   
|                                       
|Current liabilities:                    |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          
|                                        |                                                                                              | Accounts payable and accrued expenses                                                         |                                                                                                                                                        | $                                                   | 7,165,177   |             |            | $         | 7,377,495   |          
|                                        |                                                                                              | Accrued salaries and other compensation                                                       |                                                                                                                                                        |                                                     | 526,060     |             |            |           | 1,071,208   |          
|                                        |                                                                                              | Current maturities of long term debt                                                          |                                                                                                                                                        |                                                     | 1,698,033   |             |            |           | 152,387     |          
|                                        |                                                                                              |                                                                                               | Dividends payable                                                                                                                                      |                                                     |             | 1,846,180   |            |           |             | 1,387,066 |           
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        | Total current liabilities                           |             |             | 11,235,450 |           |             |           | 9,988,156  | 
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          
|Long term debt, less current maturities |                                                                                              |                                                                                               | 5,950,202                                                                                                                                              |                                                     |             |             | 175,887    |          
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          
|Commitments and contingencies           |                                                                                              |                                                                                               |                                                                                                                                                       |                                                     |             |             |           |          
|Stockholders equity:                   |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          
|                                        | Preferred stock:                                                                             |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |           |            
|                                        |                                                                                              |                                                                                               | (Aggregate liquidation preference $10,963,180 and
$11,902,067) $1 par, 2,000,000 shares authorized
Series I Convertible 424 and 500 shares outstanding |                                                     |             | 424         |            |           |             | 500       |           
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        | Series H Junior Participating 0 shares outstanding  |             |             |           |           |             |           |           | 
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        | 1998 Convertible 4,877 and 5,515 shares outstanding |             |             | 4,877      |           |             |           | 5,515      | 
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        | Total preferred stock                               |             |             | 5,301      |           |             |           | 6,015      | 
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          
|                                        |                                                                                              | Common stock: $.10 par; 20,000,000 shares authorized;
13,852,626 and 12,364,139 shares issued |                                                                                                                                                        |                                                     | 1,385,262   |             |            |           | 1,236,414   |          
|                                        |                                                                                              |                                                                                               | Stock subscription                                                                                                                                     |                                                     |             | (412,500    | )          |           |             |          |           
|                                        |                                                                                              | Additional paid-in capital                                                                    |                                                                                                                                                        |                                                     | 93,150,352  |             |            |           | 92,695,792  |          
|                                        |                                                                                              | Accumulated deficit                                                                           |                                                                                                                                                        |                                                     | (87,013,182 | )           |            |           | (79,746,700 | )        
|                                        |                                                                                              | Treasury stock, at cost: 518,660 & 518,660 common shares                                      |                                                                                                                                                        |                                                     | (2,483,441  | )           |            |           | (2,483,441  | )        
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        | Total stockholders equity                          |             |             | 4,631,792  |           |             |           | 11,708,080 | 
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          
|                                        |                                                                                              | $                                                                                             | 21,817,444                                                                                                                                             |                                                     |             | $           | 21,872,123 |          
|                                        |                                                                                              |                                                                                               |                                                                                                                                                        |                                                     |             |             |            |          

See accompanying notes to the consolidated financial statements

3



---



##### 



HEARx Ltd.
Consolidated Statements of Operations
Nine Months Ended September 29, 2001 and 2000

|                                                              |          |                                     |                          |            |             |            |             |            |            |            | 
|------------------------------------------------------------- | -------- | ----------------------------------- | ------------------------ | ---------- | ----------- | ---------- | ----------- | ---------- | ---------- | ---------- | 
|                                                              |          |                                     |                          |            | 2001        |            | 2000       
|                                                              |          |                                     |                          |            |             |            |            
|                                                              |          |                                     |                          |            | (Unaudited) |            | (Unaudited)
|                                                             
|Net revenues                                                  |          | $                                   | 36,374,960               |            |             | $          | 41,643,215  |           
|                                                              |          |                                     |                          |            |             |            |             |           
|                                                             
|Costs and expenses:                                           |          |                                     |                          |            |             |            |             |           
|                                                              |          | Cost of products sold               |                          |            | 11,406,377  |            |             |            | 14,056,328 |           
|                                                              |          | Center operating expenses           |                          |            | 21,711,624  |            |             |            | 21,241,810 |           
|                                                              |          | General and administrative expenses |                          |            | 7,606,356   |            |             |            | 6,479,019  |           
|                                                              |          | Depreciation and amortization       |                          |            | 1,850,523   |            |             |            | 1,923,165  |           
|                                                              |          | Interest expense                    |                          |            | 417,325     |            |             |            | 22,502     |           
|                                                              |          |                                     |                          |            |             |            |             |           
|                                                              |          |                                     | Total costs and expenses |            |             | 42,992,205 |             |            |            | 43,722,824 | 
|                                                              |          |                                     |                          |            |             |            |             |           
|                                                             
|                                                              | Net loss |                                     |                          | (6,617,245 | )           |            |             | (2,079,609 | )         
|                                                             
|Dividends on preferred stock                                  |          |                                     | (649,237                 | )          |             |            | (564,623    | )         
|                                                              |          |                                     |                          |            |             |            |             |           
|                                                             
|Net loss applicable to common shareholders                    |          | $                                   | (7,266,482               | )          |             | $          | (2,644,232  | )         
|                                                              |          |                                     |                          |            |             |            |             |           
|                                                             
|Net loss per common share  basic and diluted                 |          | $                                   | (0.56                    | )          |             | $          | (0.22       | )         
|                                                              |          |                                     |                          |            |             |            |             |           
|                                                             
|Weighted average number of shares of
common stock outstanding |          |                                     | 12,938,350               |            |             |            | 11,826,380  |           
|                                                              |          |                                     |                          |            |             |            |             |           

See accompanying notes to the consolidated financial statements

4



---



##### 



HEARx Ltd.
Consolidated Statements of Operations
Three Months Ended September 29, 2001 and 2000

|                                                              |          |                                     |                          |          |             |            |             |          |           |            | 
|------------------------------------------------------------- | -------- | ----------------------------------- | ------------------------ | -------- | ----------- | ---------- | ----------- | -------- | --------- | ---------- | 
|                                                              |          |                                     |                          |          | 2001        |            | 2000       
|                                                              |          |                                     |                          |          |             |            |            
|                                                              |          |                                     |                          |          | (Unaudited) |            | (Unaudited)
|                                                             
|Net revenues                                                  |          | $                                   | 12,444,717               |          |             | $          | 13,347,032  |         
|                                                              |          |                                     |                          |          |             |            |             |         
|                                                             
|Costs and expenses:                                           |          |                                     |                          |          |             |            |             |         
|                                                              |          | Cost of products sold               |                          |          | 3,553,017   |            |             |          | 4,226,554 |           
|                                                              |          | Center operating expenses           |                          |          | 6,523,762   |            |             |          | 7,234,736 |           
|                                                              |          | General and administrative expenses |                          |          | 2,437,309   |            |             |          | 2,208,636 |           
|                                                              |          | Depreciation and amortization       |                          |          | 586,542     |            |             |          | 636,873   |           
|                                                              |          | Interest expense                    |                          |          | 242,188     |            |             |          | 6,220     |           
|                                                              |          |                                     |                          |          |             |            |             |         
|                                                              |          |                                     | Total costs and expenses |          |             | 13,342,818 |             |          |           | 14,313,019 | 
|                                                              |          |                                     |                          |          |             |            |             |         
|                                                             
|                                                              | Net loss |                                     |                          | (898,101 | )           |            |             | (965,987 | )        
|                                                             
|Dividends on preferred stock                                  |          |                                     | (259,622                 | )        |             |            | (261,852    | )       
|                                                              |          |                                     |                          |          |             |            |             |         
|                                                             
|Net loss applicable to common shareholders                    |          | $                                   | (1,157,723               | )        |             | $          | (1,227,839  | )       
|                                                              |          |                                     |                          |          |             |            |             |         
|                                                             
|Net loss per common share  basic and diluted                 |          | $                                   | (0.09                    | )        |             | $          | (0.10       | )       
|                                                              |          |                                     |                          |          |             |            |             |         
|                                                             
|Weighted average number of shares of
common stock outstanding |          |                                     | 13,298,409               |          |             |            | 11,913,845  |         
|                                                              |          |                                     |                          |          |             |            |             |         

See accompanying notes to the consolidated financial statements

5



---



##### 



HEARx Ltd.
Consolidated Statements of Cash Flows
Nine Months Ended September 29, 2001 and 2000

|                                                                                        |                                              |                  |            |             |          |             |            |            |            |  
|--------------------------------------------------------------------------------------- | -------------------------------------------- | ---------------- | ---------- | ----------- | -------- | ----------- | ---------- | ---------- | ---------- | -
|                                                                                        |                                              |                  |            | 2001        |          | 2000       
|                                                                                        |                                              |                  |            |             |          |            
|                                                                                        |                                              |                  |            | (Unaudited) |          | (Unaudited)
|Cash flows from operating activities:                                                   |                                              |                  |            |             |          |             |            |           
|Net loss                                                                                |                                              | $                | (6,617,245 | )           |          | $           | (2,079,609 | )         
|Adjustments to reconcile net loss to net cash
Providedby(used in) operating activities: |                                              |                  |            |             |          |             |            |           
|                                                                                        | Depreciation and amortization                |                  |            | 1,850,523   |          |             |            | 1,923,165  |           
|                                                                                        | Provision/(recoveries) for doubtful accounts |                  |            | 74,773      |          |             |            | (184,016   | )         
|                                                                                        | Loss on disposition of equipment             |                  |            | 91,176      |          |             |            | 32,040     |           
|                                                                                       
|(Increase) decrease in:                                                                 |                                              |                  |            |             |          |             |            |           
|                                                                                        | Accounts and notes receivable                |                  |            | 697,914     |          |             |            | (3,496     | )         
|                                                                                        | Inventories                                  |                  |            | (27,812     | )        |             |            | 34,489     |           
|                                                                                        | Prepaid expenses, deposits and other         |                  |            | (684,263    | )        |             |            | 63,320     |           
|(Decrease) in:                                                                          |                                              |                  |            |             |          |             |            |           
|                                                                                        |                                              | Accounts payable |            |             | (212,318 | )           |            |            | (202,843   | )
|                                                                                        |                                              | Accrued expenses |            |             | (545,148 | )           |            |            | (1,118,856 | )
|                                                                                        |                                              |                  |            |             |          |             |            |           
|Net cash used in operating activities                                                   |                                              |                  | (5,372,400 | )           |          |             | (1,535,806 | )         
|                                                                                        |                                              |                  |            |             |          |             |            |           
|                                                                                       
|Cash flows from investing activities:                                                   |                                              |                  |            |             |          |             |            |           
|                                                                                        | Purchase of property and equipment           |                  |            | (1,200,504  | )        |             |            | (937,879   | )         
|                                                                                        | Proceeds from sale of equipment              |                  |            | 600         |          |             |            | 2,587      |           
|                                                                                        | Purchase of investments                      |                  |            | (9,124,537  | )        |             |            | (9,130,575 | )         
|                                                                                        | Proceeds from maturities of investments      |                  |            | 5,966,475   |          |             |            | 6,996,951  |           
|                                                                                        |                                              |                  |            |             |          |             |            |           
|Net cash provided by(used in) investing activities                                      |                                              |                  | (4,357,966 | )           |          |             | (3,068,916 | )         
|                                                                                        |                                              |                  |            |             |          |             |            |           
|                                                                                       
|Cash flows from financing activities:                                                   |                                              |                  |            |             |          |             |            |           
|                                                                                       
|Proceeds from issuance of long-term debt                                                |                                              |                  | 7,500,000  |             |          |             |           |           
|Principle payments:                                                                     |                                              |                  |            |             |          |             |            |           
|                                                                                        | Long-term debt                               |                  |            | (470,473    | )        |             |            | (283,332   | )         
|Acquisition of treasury stock                                                           |                                              |                  |           |             |          |             | (291,293   | )         
|Proceeds from the exercise of employee stock options                                    |                                              |                  | 70         |             |          |             |           |           
|Proceeds from the issuance of stock, net of expenses                                    |                                              |                  |           |             |          |             | 4,503,723  |           
|                                                                                        |                                              |                  |            |             |          |             |            |           
|Net cash provided by financing activities                                               |                                              |                  | 7,029,597  |             |          |             | 3,929,098  |           
|                                                                                        |                                              |                  |            |             |          |             |            |           
|Net decrease in cash and cash equivalents                                               |                                              |                  | (2,700,769 | )           |          |             | (675,624   | )         
|                                                                                        |                                              |                  |            |             |          |             |            |           
|Cash and cash equivalents at beginning of period                                        |                                              |                  | 4,250,413  |             |          |             | 2,857,187  |           
|                                                                                        |                                              |                  |            |             |          |             |            |           
|Cash and cash equivalents at end of period                                              |                                              | $                | 1,549,644  |             |          | $           | 2,181,563  |           
|                                                                                        |                                              |                  |            |             |          |             |            |           

See accompanying notes to the consolidated financial statements

6



---



##### 



HEARx Ltd.
Notes to Consolidated Financial Statements
(Unaudited)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 nine month period ended September 29, 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 $8,814,000, $14,408,000 and $12,978,000
during the nine months ended September 29, 2001 and $10,413,000,
$17,957,000 and $13,056,000 during the nine months ended September 29,
2000, respectively. Operating profits and losses at the center level for
the nine months ended September 29, 2001 were an operating loss of
approximately $392,000 for the Northeast, and operating profits of
approximately $1,771,000 and $1,703,000 for Florida and California,
respectively, compared to operating profits of approximately $770,000,
$3,531,000 and $1,826,000 for the Northeast, Florida and California,
respectively, for the nine months ended September 29, 2000. Operating
profits at the center level are computed before corporate general and
administrative expenses, depreciation/amortization and preferred
dividends. Center operations depreciation amounted to $1,291,000 and
$1,400,000 for the nine months ended September 29, 2001 and the nine
months ended September 29, 2000, respectively. Center operations capital
expenditures amounted to $813,000 in the nine months ended September 29,
2001 as compared to $669,000 for the nine months ended September 29,
2000.



| |                         
| | ------------------------
| | 2.  Stockholders Equity



| |                              
| | -----------------------------
| | Conversion of Preferred Stock



| |                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the nine months ended September 29, 2001, 638 shares of the 1998
Convertible Preferred Stock and 76 shares of the Series I Convertible
Preferred Stock, plus accrued dividends of $140,254 and $49,871, were
converted into 699,417 and 589,035 shares of Common Stock, respectively.

7



---



##### 



HEARx Ltd.
Notes to Consolidated Financial Statements
(Unaudited)



| |             
| | ------------
| | Common Stock



| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the nine months ended September 29, 2001, no warrants were
exercised, however 11,000 warrants expired. Employee stock options were
exercised resulting in the issuance of 35 shares of Common Stock.



| |                   
| | ------------------
| | Stock Subscription



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On April 1, 2001 the Company sold 200,000 shares of Common Stock, par
value $.10 per share, for $2.0625 per share, and received a secured,
nonrecourse promissory note for the principal amount of $412,500. The
principal amount of the note and the accrued interest is payable on April
1, 2006. The note bears interest at the prime rate published by the Wall
Street Journal adjusted annually. At September 29, 2001, the interest
rate on the note was 8%. The $412,500 note has been recorded as Stock
Subscription in stockholders equity in the accompanying balance sheet.



| |                                     
| | ------------------------------------
| | 3.  Recent Accounting Pronouncements



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



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In October 2001, the FASB issued SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets which resolves significant implementation
issues related to FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and
supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of OperationsReporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and

8



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##### 



HEARx Ltd.
Notes to Consolidated Financial Statements
(Unaudited)



| |                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Transactions,for the disposal of a business segment.
SFAS 144 is effective for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early
application encouraged. The impact of adoption of SFAS 144 on the
Companys financial position and results of operations is not expected to
be material.



| |                     
| | --------------------
| | 4.  Long  term Debt



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As part of this LOI, Siemens agreed to provide the Company with a
five-year $7.5 million line of credit with interest at 12%, payable
quarterly. These terms of the LOI became binding on the parties on April
27, 2001, the date on which HEARx first drew on the line of credit. The
Company has agreed to purchase from Siemens at least 70% and up to 90% of
HEARxs total hearing aid requirements over the next five years. As the
Company purchases 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. As of
September 29, 2001, the Company has drawn all of the $7.5 million on the
line of credit



| |                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pursuant to the agreement with Siemens, in the event of a takeover of the
Company by a third party, the entire outstanding amount under the line of
credit will be immediately due and payable and the supply arrangements may
be terminated only upon payment to Siemens of a $50 million breakup fee.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Subsequently, on or about June 25, 2001, the Company and Helix Hearing
Care of America Corp., a Canadian corporation (Helix) (see note 5)
obtained a financing commitment from Siemens that could aggregate to as
much as $70 million if the HEARx-Helix combination is consummated and
HEARx and Helix meet certain business goals. This $70 million commitment
includes the $7.5 million line of credit to HEARx of April 23, 2001 as
well as a previously funded $3.5 million line of credit to Helix. The
parties are currently working on definitive agreements reflecting these
financing commitments.



| |                             
| | ----------------------------
| | 5.  Mergers and Acquisitions



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On July 27, 2001, the Company and Helix signed a definitive merger
agreement, which was subsequently amended and restated on November 6,
2001. Helix owns or manages 129 hearing healthcare clinics located in
Massachusetts, Pennsylvania, New York, Ohio, Michigan, Wisconsin,
Minnesota, Washington and Arizona as well as in the Provinces of Ontario
and Quebec. The boards of directors of both companies have approved the
transaction. The transaction is subject to shareholder, Canadian court,
certain third party and other regulatory approvals. On November 8, 2001,
the Company filed a registration statement/proxy statement on Form S-4
with the U.S. Securities and Exchange Commission relating to the Helix
transaction. The transaction is expected to close before the end of the
first quarter of 2002.

9



---



##### 





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



| |        
| | -------
| | GENERAL



| |                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys strategy for increasing market penetration includes
advertising to the non-insured self-pay or retail market and positioning
the Company as the leading provider of hearing care to the managed care
marketplace in its geographic markets.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 planned transaction with Helix
Hearing Care of America Corp., a Canadian corporation (Helix). The
Company and Helix signed a definitive merger agreement, which was
subsequently amended and restated on November 6, 2001. Helix owns or
manages 129 hearing healthcare clinics located in Massachusetts,
Pennsylvania, New York, Ohio, Michigan, Wisconsin, Minnesota, Washington
and Arizona as well as in the Provinces of Ontario and Quebec. The boards
of directors of both companies have approved the transaction. The
transaction is subject to shareholder, Canadian court, certain third party
and other regulatory approvals. On November 8, 2001, the Company filed a
registration statement/proxy statement on Form S-4 with the U.S.
Securities and Exchange Commission relating to the Helix transaction. The
transaction is expected to close before the end of the first quarter of
2002.



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has developed a national call center, which became fully
operational during the third quarter of 2001. The call center was
designed to increase the effectiveness of advertising, and is responsible
for both inbound and outbound marketing calls.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Since 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.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nevertheless, early this year, the Company experienced a slowdown of sales
which the Company believes is a result of the general economic downturn.
On May 8, 2001, responding to this slowdown in hearing aid sales, the
Company announced it would reduce annual expenses by approximately $6
million. The cost control measures are expected to reduce annual revenues
needed to break even to approximately $60 million from $70 million.
Although the Company continues to be adversely affected by the softening
economy, the cost reduction measures implemented during the second quarter
of 2001 enabled the Company to improve margins and reduce the loss in the
third quarter of 2001 as compared to the third quarter of 2000 as well as
the first two quarters of 2001.

10



---



##### 





| |                      
| | ---------------------
| | RESULTS OF OPERATIONS



| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | For the three months ended September 29, 2001 compared to the three months
ended September 29, 2000



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net revenues decreased $902,315, or 6.8%, to $12,444,717 in the third
quarter of 2001 from $13,347,032 in the comparable quarter of 2000. The
decrease in revenues resulted primarily from the decrease in revenues from
the Companys Florida centers. Net revenues in Florida decreased $609,714,
or 11.4% to $4,716,794, for the quarter ended September 29, 2001 from
$5,326,508 for the comparable quarter of 2000. Management believes the
decrease in revenues is the result of the overall downward trend in the
nations economy. Management believes that the slowing economy has caused
the Companys primary market, the nations elderly population, to reduce
discretionary spending.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of products sold decreased $673,537, or 15.9%, to $3,553,017 in the
third quarter of 2001 from $4,226,554 in the comparable quarter of 2000.
Approximately $608,443 of the decrease in the cost of products sold is the
result of the rebates received from Siemens Hearing Instruments Inc. in
connection with its distributor relationship with the Company. The cost
of products sold as a percent of net revenues, which was 28.6% and 31.7%
for the third quarter of 2001 and 2000, respectively, fluctuates from
period to period due to changes in retail pricing and marketing
strategies.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Center operating expenses decreased $710,974, or 9.8%, to $6,523,762 in
the third quarter of 2001 from $7,234,736 in the comparable quarter of
2000. This is primarily the result of the cost reduction plan implemented
by the Company in May 2001. The plan included the reduction of staff by
approximately 8% and rollbacks in advertising and discretionary expenses,
which was offset by a $78,000 write off of leasehold improvements due to a
center relocation.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | General and administrative expenses increased $228,673, or 10.4%, to
$2,437,309 in the third quarter of 2001 from $2,208,636 in the comparable
quarter of 2000. This increase is due to the expansion of corporate
administrative functions, which includes the implementation of the
national call center. The costs associated with the call center were
approximately $404,000, which included salaries and wages of $178,000 and
occupancy costs, including rent, common area maintenance charges and
utilities, of $170,000. These call center costs were offset by the
reduction in the remaining general and administrative functions resulting
from the cost reduction plan implemented during the second quarter of
2001.



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Depreciation and amortization expense decreased slightly to $586,542 in
the third quarter of 2001 from $636,873 in the comparable quarter of 2000.



| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interest expense increased $235,968 to $242,188 in the third quarter of
2001 from $6,220 in the comparable quarter of 2000. This increase is
attributable to the interest on the $7.5 million line of credit with
Siemens.



| |                                                                            
| | ---------------------------------------------------------------------------
| | For the nine months ended September 29, 2001 compared to September 29,
2000



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net revenues decreased $5,268,225, or 12.7%, to $36,374,960 in the first
nine months of 2001 from $41,643,215 in the comparable period of 2000.
The decrease in revenues resulted primarily from the decrease in revenues
from the Companys Florida and Northeast centers. Net revenues in Florida
and the Northeast decreased $3,549,294, or 19.8%, and $1,598,408, or
15.4%, to $14,407,825 and $8,814,176, respectively, for the nine months
ended September 29, 2001, from $17,957,119 and $10,412,584 for the
comparable period of 2000. Management believes the decrease in revenues
for the nine months ended

11



---



##### 





| |                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | September 29, 2001 as compared with the
comparable period of 2000 is the result of the overall downward trend in
the nations economy. Management believes that the slowing economy has
caused the Companys primary market, the nations elderly population, to
reduce discretionary spending.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of products sold decreased $2,649,951, or 18.9%, to $11,406,377 in
the first nine months of 2001 from $14,056,328 in the comparable period of
2000. Approximately $1,114,000 of the decrease in the cost of products
sold is the result of the rebates received
from Siemens in connection with its distributor relationship with the
Company. Additionally, the decrease in the cost of products sold is a
direct result of the decrease in net revenues. The cost of products sold
as a percent of net revenues, which was 31.4% and 33.8% for the first nine
months of 2001 and 2000 respectively, fluctuates from period to period due
to changes in retail pricing and marketing strategies.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Center operating expenses increased $469,814, or 2.2%, to $21,711,624 in
the first nine months of 2001 from $21,241,810 in the comparable period of
2000. This increase is attributable to bad debt expense of
approximately $75,000 for the nine months ended September 29, 2001 in
comparison to a recovery of a bad debt of approximately $184,000 for the
comparable period of 2000. In addition, a $78,000 write off of
leasehold improvements due to a center relocation occurred in the nine
months ended September 29, 2001.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | General and administrative expenses increased $1,127,337, or 17.4% to
$7,606,356 in the first nine months of 2001 from $6,479,019 in the
comparable period 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 the call center
were approximately $788,000, which included salaries and wages of $440,000
and occupancy costs, including rent, common area maintenance charges and
utilities of $285,000. In addition, professional service fees increased
$98,776, or 30.0%, to $432,839 for the nine months ended September 29,
2001 from $334,063 in the comparable period of 2000. This increase is
primarily the result of additional fees paid to the Companys independent
public accountants and attorneys for additional services. Shareholder
relations expense increased to $391,113 for the nine months ended
September 29, 2001 from $136,772 in the comparable period of 2000.
This increase is the result of the Companys retention of an
investor relations firm to render services with respect to financial planning and
public relations.



| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Depreciation and amortization expense was down slightly at $1,850,523 for
the nine months ended September 29, 2001 compared to $1,923,165 for the
nine months ended September 29, 2000.



| |                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interest expense increased $394,823 to $417,325 for the nine months ended
September 29, 2001 from $22,502 in the comparable period of 2000. This
increase is attributable to the interest on the $7.5 million line of
credit with Siemens.



| |                                
| | -------------------------------
| | LIQUIDITY AND CAPITAL RESOURCES



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Working capital decreased $1,522,262 to $828,570 as of September 29, 2001
from $2,350,832 as of December 29, 2000. In April 2001, the Company
obtained a $7.5 million five-year line of credit from Siemens and in June
2001, the Company and Helix obtained a financing commitment from Siemens
that could aggregate to as much as $70 million if the HEARx-Helix
combination is consummated and the combined company meets certain business
goals (see note 4 to the Consolidated Financial Statements). The
Company believes if the HEARx-Helix merger is not finalized and the
$70 million financing commitment is not completed, the Company would
renegotiate the financing commitment with Siemens. The Company
believes that its funds available under the line of credit, credit
commitment, current cash, investment securities and revenues from
operations will be sufficient to support the

12



---



##### 





| |                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Companys operational needs
through the next twelve months, although there can be no assurance that
unexpected capital needs will not arise for which the credit line, credit
commitment, cash, investments and revenues from operations may be
insufficient.



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net cash used in operating activities increased from $1,535,806 for the
nine months ended September 29, 2000, to $5,372,400 for the nine months
ended September 29, 2001. The increase in cash used by operating
activities was primarily the result of the increase of operating losses of
approximately $4,538,000.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net cash used by investing activities increased from $3,068,916 for the
nine months ended September 29, 2000, to $4,357,966 for the nine months
ended September 29, 2001. In the
nine months ended September 29, 2000, net funds from the maturity of
investment securities were $6,996,951, which was offset by the purchase of
investment securities of $9,130,575. In the nine months ended September
29, 2001, net funds from the maturity of investment securities were
$5,966,475, which was offset by the purchase of investment securities of
$9,124,537. In addition, equipment for the national call center and wide
area network costing approximately $560,000 was purchased during the nine
months ended September 29, 2001.



| |                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net cash provided by financing activities increased from $3,929,098 for
the nine months ended September 29, 2000, to $7,029,597 for the nine
months ended September 29, 2001. This increase is the result of the $7.5
million five-year line of credit from Siemens in 2001, offset by, net
proceeds of $4,503,723 received from a preferred stock offering during the
nine months ended September 29, 2000.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| | Except for historical information provided in this discussion and
analysis, the discussion includes forward looking statements, including
the impact of FASB 141, 142 and 144; the expected closing of the
HEAR-Helix transaction; the Companys goal of establishing a nationwide
center network; expectation concerning the effect of cost control
measures; funds available under the line of credit and credit commitment,
current cash, investment securities and revenues from operations
sufficient to support the Companys operational needs; the Companys
belief concerning the effect on its financial condition or operations of
changes in benefits announced by some insurance companies and the loss of
any single contract. Such statements involve certain risks and
uncertainties that could cause actual results to differ materially from
those in the forward-looking statements. Potential risks and
uncertainties include industry and market conditions, especially those
affecting managed health care; the ability of the Company and Helix to
successfully consummate the combination; unforeseen capital requirements;
trends in market sales; and the success of the HEARx West joint venture
with The Permanente Federation as well as those risks 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.

13



---



##### 



Item 3. Quantitative and Qualitative Disclosure About Market Risk

None

Part II - Other Information

Item 2. Changes in Securities and Use of Proceeds

On July 16 and July 30, 2001, an aggregate of 25 shares of the 1998 Convertible
Preferred Stock plus accrued dividends of $6,584, were converted into 23,927
shares of the Companys Common Stock. On July 26, 2001, 11 shares of the
Series I Convertible Preferred Stock plus accrued dividends of
$9,368 were
converted into 94,887 shares of the Companys Common Stock. The shares of 1998
Convertible Preferred Stock and Series I Convertible Preferred Stock were
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 of Common Stock 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: |  |                                                                                                                                                                                                                                                                                                                                                   
|
| | 2.1 |           |  | The Amended and Restated Merger Agreement, dated November 6,
2001, between HEARx and Helix Hearing Care of America Corp. [2.1]
Filed as an exhibit to the Companys Form S-4, filed November 8,
2001 as the exhibit number indicated in brackets, and incorporated
herein by reference.                                                           
|
| | 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.                                                                                                                                

14



---



##### 



| |      |                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---- | -------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                                                                          
|
| | 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.
|
| | 10.8 |                      |  | Stockholders Agreement, dated July 27, 2001, between HEARx
Ltd. And each stockholder set forth on the signature page thereto.
[10.8] Filed as an exhibit to the Companys Form S-4, filed November
8, 2001 as the exhibit number indicated in brackets, and
incorporated herein by reference.                                                                                                                      
|
| | 10.9 |                      |  | Amendment to the Limited Liability Company Agreement of HEARx
West LLC by and between HEARx Ltd and The Permanente Federation LLC.                                                                                                                                                                                                                                                                                 
|
| | (b)  | Reports on Form 8-K:



| |                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A current report on Form 8-K, dated July 30, 2001, was filed with the
Securities and Exchange Commission on July 30, 2001, in which the
Company reported it signed a definitive merger agreement to
consolidate operations with Helix Hearing Care of America Corp.

15



---



##### 



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: |  | November 13, 2001 |  | By: |  | s/Stephen J. Hansbrough                   
|      |  |                   |  |     |  | Stephen J. Hansbrough                     
|      |  |                   |  |     |  | President and
Chief Operating Officer     
|     
|Date: |  | November 13, 2001 |  | By: |  | s/James W. Peklenk                        
|      |  |                   |  |     |  | James W. Peklenk                          
|      |  |                   |  |     |  | Vice President and
Chief Financial Officer

16