##### 



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended  March 30, 2002

OR

|      |  |                                                                                          
|----- |  | -----------------------------------------------------------------------------------------
|(Box) |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

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

Commission file number 0-16453

HEARx LTD.

---

Exact Name of Registrant as Specified in Its Charter


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

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

---

Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report


Indicate by check 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 Box) No (Box)

On April 30, 2002, 15,540,743 shares of the Registrants Common Stock were outstanding.





---



##### 



INDEX

|         |  |                       |  |                                                                                            |  |      
|-------- |  | --------------------- |  | ------------------------------------------------------------------------------------------ |  | -----
|         |  |                       |  |                                                                                            |  | Page 
|         |  |                       |  |                                                                                            |  |      
|PART I.  |  | FINANCIAL INFORMATION |  |                                                                                           
|        
|        
|        
|        
|         |  |                       |  |                                                                                            |  |      
|        
|        
|        
|        
|         |  | Item 1.               |  | Financial Statements:                                                                      |  |      
|        
|        
|        
|        
|         |  |                       |  |                                                                                            |  |      
|        
|        
|        
|        
|         |  |                       |  | Consolidated Balance Sheets
March 30, 2002 and December 29, 2001                           |  | 3    
|        
|        
|        
|        
|         |  |                       |  |                                                                                            |  |      
|        
|        
|        
|        
|         |  |                       |  | Consolidated Statements of Operations
Three months ended March 30, 2002 and March 31, 2001 |  | 4    
|        
|        
|        
|        
|         |  |                       |  |                                                                                            |  |      
|        
|        
|        
|        
|         |  |                       |  | Consolidated Statements of Cash Flows
Three months ended March 30, 2002and March 31, 2001  |  | 5    
|        
|        
|        
|        
|         |  |                       |  |                                                                                            |  |      
|        
|        
|        
|        
|         |  |                       |  | Notes to Consolidated Financial Statements                                                 |  | 6-10 
|        
|        
|        
|        
|         |  |                       |  |                                                                                            |  |      
|        
|        
|        
|        
|         |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition
and Resultsof Operations       |  | 11-16
|        
|        
|        
|        
|         |  |                       |  |                                                                                            |  |      
|        
|        
|        
|        
|         |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                 |  | 17   
|        
|        
|        
|        
|         |  |                       |  |                                                                                            |  |      
|        
|        
|        
|        
|PART II. |  | OTHER INFORMATION     |  |                                                                                           
|        
|        
|        
|        
|         |  |                       |  |                                                                                            |  |      
|        
|        
|        
|        
|         |  | Item 2.               |  | Changes in Securities and Use of Proceeds                                                  |  | 17   
|        
|        
|        
|        
|         |  |                       |  |                                                                                            |  |      
|        
|        
|        
|        
|         |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                           |  | 18-19
|        
|        
|        
|        
|         |  |                       |  |                                                                                            |  |      
|        
|        
|        
|        
|         |  |                       |  | Signatures                                                                                 |  | 20   

2



---



##### 



HEARx Ltd.
Consolidated Balance Sheets

|                                                 |                                                                                              |                                                                                                                                   |                                                      |                            |             |             |            |              |             |       |            | 
|------------------------------------------------ | -------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | -------------------------- | ----------- | ----------- | ---------- | ------------ | ----------- | ----- | ---------- | 
|                                                 |                                                                                              |                                                                                                                                   |                                                      |                            |             | March 30,   |            | December 29,
|                                                 |                                                                                              |                                                                                                                                   |                                                      |                            |             | 2002        |            | 2001        
|                                                 |                                                                                              |                                                                                                                                   |                                                      |                            |             |             |            |             
|                                                 |                                                                                              |                                                                                                                                   |                                                      |                            |             | (unaudited) |            | (audited)   
|ASSETS                                          
|                                                
|                                                
|                                                
|                                                
|Current assets:                                  |                                                                                              |                                                                                                                                   |                                                      |                            |             |             |            |             
|                                                
|                                                
|                                                
|                                                
|                                                 | Cash and cash equivalents                                                                    |                                                                                                                                   | $                                                    | 3,779,869                  |             |             | $          | 5,561,608    |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Investment securities                                                                        |                                                                                                                                   |                                                      | 150,000                    |             |             |            | 150,000      |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Accounts and notes receivable, less allowance for
doubtful accounts of $194,636 and $185,814 |                                                                                                                                   |                                                      | 2,658,423                  |             |             |            | 3,965,491    |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Inventories                                                                                  |                                                                                                                                   |                                                      | 438,873                    |             |             |            | 504,762      |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Prepaid expenses and other                                                                   |                                                                                                                                   |                                                      | 769,986                    |             |             |            | 855,052      |            
|                                                 |                                                                                              |                                                                                                                                   |                                                      |                            |             |             |            |             
|                                                 |                                                                                              |                                                                                                                                   |                                                      | Total current assets       |             |             | 7,797,151  |              |             |       | 11,036,913 | 
|                                                
|                                                
|                                                
|                                                
|Property and equipment  net                     |                                                                                              |                                                                                                                                   | 6,532,500                                            |                            |             |             | 6,835,643  |             
|                                                
|                                                
|                                                
|                                                
|Investment in affiliated company (Notes 1 and 3) |                                                                                              |                                                                                                                                   | 2,653,680                                            |                            |             |             |           |             
|                                                
|                                                
|                                                
|                                                
|Note receivable (Note 3)                         |                                                                                              |                                                                                                                                   |                                                     |                            |             |             | 700,000    |             
|                                                
|                                                
|                                                
|                                                
|Deposits and other                               |                                                                                              |                                                                                                                                   | 2,838,500                                            |                            |             |             | 2,768,966  |             
|                                                 |                                                                                              |                                                                                                                                   |                                                      |                            |             |             |            |             
|                                                 |                                                                                              | $                                                                                                                                 | 19,821,831                                           |                            |             | $           | 21,341,522 |             
|                                                 |                                                                                              |                                                                                                                                   |                                                      |                            |             |             |            |             
|LIABILITIES AND STOCKHOLDERS EQUITY            
|                                                
|                                                
|                                                
|                                                
|Current liabilities:                             |                                                                                              |                                                                                                                                   |                                                      |                            |             |             |            |             
|                                                
|                                                
|                                                
|                                                
|                                                 | Accounts payable and accrued expenses                                                        |                                                                                                                                   | $                                                    | 6,778,943                  |             |             | $          | 6,871,124    |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Accrued salaries and other compensation                                                      |                                                                                                                                   |                                                      | 675,189                    |             |             |            | 890,985      |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Current maturities of long term debt                                                         |                                                                                                                                   |                                                      | 2,486,593                  |             |             |            | 2,492,313    |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Dividends payable                                                                            |                                                                                                                                   |                                                      | 1,556,983                  |             |             |            | 1,521,053    |            
|                                                 |                                                                                              |                                                                                                                                   |                                                      |                            |             |             |            |             
|                                                 |                                                                                              |                                                                                                                                   |                                                      | Total current liabilities  |             |             | 11,497,708 |              |             |       | 11,775,475 | 
|                                                 |                                                                                              |                                                                                                                                   |                                                      |                            |             |             |            |             
|Long term debt, less current maturities          |                                                                                              |                                                                                                                                   | 7,720,545                                            |                            |             |             | 8,750,999  |             
|                                                 |                                                                                              |                                                                                                                                   |                                                      |                            |             |             |            |             
|Commitments and contingencies                    |                                                                                              |                                                                                                                                   |                                                     |                            |             |             |           |             
|                                                
|                                                
|                                                
|                                                
|Stockholders equity:                            |                                                                                              |                                                                                                                                   |                                                      |                            |             |             |            |             
|                                                
|                                                
|                                                
|                                                
|                                                 | Preferred stock:                                                                             |                                                                                                                                   |                                                      |                            |             |             |            |              |            
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                              | (Aggregate liquidation preference $8,449,983 and
$8,628,053) $1 par, 2,000,000 shares authorized                                  |                                                      |                            |             |             |            |              |             |      
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                              |                                                                                                                                   | Series J (233 & 233 shares outstanding)              |                            |             | 233         |            |              |             | 233   |           
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                              |                                                                                                                                   | Series H Junior Participating (0 shares outstanding) |                            |             |            |            |              |             |      |           
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                              |                                                                                                                                   | 1998 Convertible (4,563 & 4,777 shares outstanding)  |                            |             | 4,563       |            |              |             | 4,777 |           
|                                                 |                                                                                              |                                                                                                                                   |                                                      |                            |             |             |            |             
|                                                 |                                                                                              |                                                                                                                                   |                                                      | Total preferred stock      |             |             | 4,796      |              |             |       | 5,010      | 
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                              | Common stock: $.10 par; 20,000,000 shares authorized;
14,559,403 and 14,559,403 shares issued
1,500,000 and 0 shares to be issued |                                                      |                            | 1,605,940   |             |            |              | 1,455,940   |      
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                              | Stock subscription                                                                                                                |                                                      |                            | (412,500    | )           |            |              | (412,500    | )    
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                              | Additional paid-in capital                                                                                                        |                                                      |                            | 92,614,939  |             |            |              | 91,438,475  |      
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                              | Accumulated deficit                                                                                                               |                                                      |                            | (90,741,241 | )           |            |              | (89,188,436 | )    
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                              | Accumulated other comprehensive income (Note 1)                                                                                   |                                                      |                            | 15,085      |             |            |              |            |      
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                              | Treasury stock, at cost: 518,660 & 518,660 common shares                                                                          |                                                      |                            | (2,483,441  | )           |            |              | (2,483,441  | )    
|                                                 |                                                                                              |                                                                                                                                   |                                                      |                            |             |             |            |             
|                                                 |                                                                                              |                                                                                                                                   |                                                      | Total stockholders equity |             |             | 603,578    |              |             |       | 815,048    | 
|                                                 |                                                                                              |                                                                                                                                   |                                                      |                            |             |             |            |             
|                                                 |                                                                                              | $                                                                                                                                 | 19,821,831                                           |                            |             | $           | 21,341,522 |             
|                                                 |                                                                                              |                                                                                                                                   |                                                      |                            |             |             |            |             

See accompanying notes to the consolidated financial statements

3



---



##### 



HEARx Ltd.
Consolidated Statements of Operations
Three Months Ended March 30, 2002 and March 31, 2001

|                                                              |                                     |                                    |            |             |            |             |            |           |            | 
|------------------------------------------------------------- | ----------------------------------- | ---------------------------------- | ---------- | ----------- | ---------- | ----------- | ---------- | --------- | ---------- | 
|                                                              |                                     |                                    |            | March 30,   |            | March 31,  
|                                                              |                                     |                                    |            | 2002        |            | 2001       
|                                                              |                                     |                                    |            |             |            |            
|                                                              |                                     |                                    |            | (unaudited) |            | (unaudited)
|                                                              |                                     |                                    |            |             |            |             |            |          
|                                                             
|                                                             
|                                                             
|                                                             
|Net Revenues                                                  |                                     | $                                  | 12,010,016 |             |            | $           | 12,488,191 |          
|                                                              |                                     |                                    |            |             |            |             |            |          
|                                                             
|                                                             
|                                                             
|                                                             
|Operating costs and expenses:                                 |                                     |                                    |            |             |            |             |            |          
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Cost of products sold               |                                    |            | 3,405,098   |            |             |            | 4,266,578 |           
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Center operating expenses           |                                    |            | 6,759,936   |            |             |            | 7,962,512 |           
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | General and administrative expenses |                                    |            | 2,386,551   |            |             |            | 2,565,702 |           
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Depreciation and amortization       |                                    |            | 523,598     |            |             |            | 642,043   |           
|                                                              |                                     |                                    |            |             |            |             |            |          
|                                                              |                                     | Total operating costs and expenses |            |             | 13,075,183 |             |            |           | 15,436,835 | 
|                                                              |                                     |                                    |            |             |            |             |            |          
|Loss from operations                                          |                                     |                                    | (1,065,167 | )           |            |             | (2,948,644 | )        
|                                                             
|                                                             
|                                                             
|                                                             
|Non-operating income (expense):                               |                                     |                                    |            |             |            |             |            |          
|                                                             
|                                                             
|                                                             
|                                                             
|Interest income                                               |                                     |                                    | 22,066     |             |            |             | 46,574     |          
|                                                             
|                                                             
|                                                             
|                                                             
|Interest expense                                              |                                     |                                    | (280,230   | )           |            |             | (9,919     | )        
|                                                              |                                     |                                    |            |             |            |             |            |          
|Loss before equity in loss of affiliated company              |                                     |                                    | (1,323,331 | )           |            |             | (2,911,989 | )        
|                                                             
|                                                             
|                                                             
|                                                             
|Equity in loss of affiliated company                          |                                     |                                    | (61,405    | )           |            |             |           |          
|                                                              |                                     |                                    |            |             |            |             |            |          
|Net loss                                                      |                                     |                                    | (1,384,736 | )           |            |             | (2,911,989 | )        
|                                                             
|                                                             
|                                                             
|                                                             
|Dividends on preferred stock                                  |                                     |                                    | (168,069   | )           |            |             | (201,235   | )        
|                                                              |                                     |                                    |            |             |            |             |            |          
|Net loss applicable to common stockholders                    |                                     | $                                  | (1,552,805 | )           |            | $           | (3,113,224 | )        
|                                                              |                                     |                                    |            |             |            |             |            |          
|Net loss per common share  basic and
diluted                 |                                     | $                                  | (0.11      | )           |            | $           | (0.25      | )        
|                                                              |                                     |                                    |            |             |            |             |            |          
|Weighted average number of shares of
common stock outstanding |                                     |                                    | 14,057,243 |             |            |             | 12,505,430 |          
|                                                              |                                     |                                    |            |             |            |             |            |          

See accompanying notes to the consolidated financial statements

4



---



##### 



HEARx Ltd.
Consolidated Statements of Cash Flows
Three Months Ended March 30, 2002 and March 31, 2001

|                                                                                          |                                                                                                     |                                                     |            |           |             |   |             |   |          |   | 
|----------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ---------- | --------- | ----------- | - | ----------- | - | -------- | - | 
|                                                                                          |                                                                                                     |                                                     |            |           | March 30,   |   | March 31,  
|                                                                                          |                                                                                                     |                                                     |            |           | 2002        |   | 2001       
|                                                                                          |                                                                                                     |                                                     |            |           |             |   |            
|                                                                                          |                                                                                                     |                                                     |            |           | (unaudited) |   | (unaudited)
|Cash flows from operating activities:                                                     |                                                                                                     |                                                     |            |           |             |   |             |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Net loss                                                                                  |                                                                                                     | $                                                   | (1,384,736 | )         |             | $ | (2,911,989  | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |                                                                                                     |                                                     |            |           |             |   |             |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Depreciation and amortization                       |            |           | 523,598     |   |             |   | 642,043  |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Provision for doubtful accounts                     |            |           | 39,750      |   |             |   | 75,750   |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Loss on disposition of equipment                    |            |           | 911         |   |             |   | 10,672   |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Equity in loss of affiliated company                |            |           | 61,405      |   |             |   |         |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Compensation expense from issuance of
capital stock |            |           | 40,250      |   |             |   |         |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|(Increase) decrease in:                                                                   |                                                                                                     |                                                     |            |           |             |   |             |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Accounts and notes receivable                       |            |           | 1,267,318   |   |             |   | 485,308  |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Inventories                                         |            |           | 65,889      |   |             |   | (16,992  | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Prepaid expenses and other                          |            |           | 91,344      |   |             |   | (415,944 | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Increase (decrease) in:                                                                   |                                                                                                     |                                                     |            |           |             |   |             |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Accounts payable and accrued expenses               |            |           | (92,181     | ) |             |   | 213,076  |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Accrued salaries and other                          |            |           | (215,796    | ) |             |   | (354,012 | )
|                                                                                          |                                                                                                     |                                                     |            |           |             |   |             |  
|Net cash provided by (used in) operating activities                                       |                                                                                                     |                                                     | 397,752    |           |             |   | (2,272,088  | )
|                                                                                          |                                                                                                     |                                                     |            |           |             |   |             |  
|Cash flow from investing activities:                                                      |                                                                                                     |                                                     |            |           |             |   |             |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Purchase of property and equipment                  |            |           | (199,240    | ) |             |   | (988,758 | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Issuance of note receivable to affiliated
company   |            |           | (2,000,000  | ) |             |   |         |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Cost of pending merger                              |            |           | (97,937     | ) |             |   |         |  
|                                                                                          |                                                                                                     |                                                     |            |           |             |   |             |  
|Net cash used in investing activities                                                     |                                                                                                     |                                                     | (2,297,177 | )         |             |   | (988,758    | )
|                                                                                          |                                                                                                     |                                                     |            |           |             |   |             |  
|Cash flows from financing activities:                                                     |                                                                                                     |                                                     |            |           |             |   |             |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Proceeds from issuance of:                          |            |           |             |   |             |   |          |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Long-term debt                                      |            |           |            |   |             |   | 252,014  |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Principal payments: Long-term debt                  |            |           | (1,036,174  | ) |             |   | (77,243  | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Proceeds from issuance common stock                 |            |           | 1,500,000   |   |             |   |         |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Dividends paid on preferred stock                   |            |           | (45,047     | ) |             |   |         |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                                     | Redemption of preferred stock                       |            |           | (301,093    | ) |             |   |         |  
|                                                                                          |                                                                                                     |                                                     |            |           |             |   |             |  
|Net cash provided by financing activities                                                 |                                                                                                     |                                                     | 117,686    |           |             |   | 174,771     |  
|                                                                                          |                                                                                                     |                                                     |            |           |             |   |             |  
|Net decrease in cash and cash equivalents                                                 |                                                                                                     |                                                     | (1,781,739 | )         |             |   | (3,086,075  | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Cash and cash equivalents at beginning of
period                                          |                                                                                                     |                                                     | 5,561,608  |           |             |   | 4,250,413   |  
|                                                                                          |                                                                                                     |                                                     |            |           |             |   |             |  
|Cash and cash equivalents at end of period                                                |                                                                                                     | $                                                   | 3,779,869  |           |             | $ | 1,164,338   |  
|                                                                                          |                                                                                                     |                                                     |            |           |             |   |             |  
|Supplemental disclosure of non-cash investing
and financing activities:                   |                                                                                                     |                                                     |            |           |             |   |             |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Purchase of investment in affiliated company by
exchanging notes receivable from affiliated
company |                                                     | $          | 2,700,000 |             |   | $           |  |         

See accompanying notes to the consolidated financial statements

5



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##### 



HEARx Ltd.
Notes to Consolidated Financial Statements

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results
for the three month period ended March 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December
28, 2002. 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, 2001.

1. Summary of Significant Accounting Policies

Helix Transaction

On July 27, 2001, HEARx and Helix Hearing Care of America Corp., a Canadian
corporation (Helix), signed a definitive merger agreement, which was
subsequently amended and restated as of November 6, 2001. Helix owns or
manages 128 hearing healthcare clinics located in Massachusetts,
Pennsylvania, New York, Ohio, Michigan, Wisconsin, Minnesota, Washington
and Missouri as well as in the Provinces of Ontario and Quebec. The boards
of directors of both companies have approved the transaction. The
transaction is now subject to approval by the stockholders of both HEARx
and Helix and by the Canadian courts. HEARx has filed a registration
statement/proxy statement on Form S-4 with the U.S. Securities and Exchange
Commission relating to the Helix transaction and the Form S-4 is currently
undergoing the SEC review process. The transaction is expected to close
before the end of the second quarter of 2002. See Note 3, which describes
certain significant transactions between HEARx and Helix.

Investment in Affiliated Company

HEARx owns approximately 10.5 percent of the common stock of Helix. HEARx
accounts for this investment using the equity method because it has the
ability to exercise significant influence over the operational and
financial policies of Helix as a result of the terms of the merger
agreement with Helix and the intended use of certain proceeds of HEARxs
credit facility with Siemens Hearing Instruments, Inc. to repay certain
debts of Helix (see Note 6 below). Under the equity method, the Company
records its proportionate share of profits and losses of the affiliated
company based on its percentage interest in the affiliated company. HEARx
reviews the carrying value of this investment, including the difference
between the cost of the investment and the amount of HEARxs underlying
equity in the net assets of Helix, for possible impairment due to other
than temporary declines in value, such as the absence of ability to recover
the carrying amount of the investment, or a current fair value of the
investment that is less than its carrying amount.

Comprehensive Income

Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
The Companys other comprehensive income represents a foreign currency
translation adjustment.

6



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##### 



HEARx Ltd.
Notes to Consolidated Financial Statements

Comprehensive income (loss) and the components of other comprehensive
income are as follows:

|                                         |  |           |            |           |  |   |            |  
|---------------------------------------- |  | --------- | ---------- | --------- |  | - | ---------- | -
|                                         |  | March 30, |            | March 31,
|                                         |  | 2002      |            | 2001     
|                                         |  |           |            |          
|Comprehensive income (loss):             |  |           |            |           |  |   |            |  
|                                        
|                                        
|                                        
|                                        
|Net loss for period                      |  | $         | (1,384,736 | )         |  | $ | (2,911,989 | )
|                                         |  |           |            |           |  |   |            |  
|Other comprehensive income:              |  |           |            |           |  |   |            |  
|                                        
|                                        
|                                        
|                                        
|Foreign currency translation adjustments |  |           | 15,085     |           |  |   |           |  
|                                         |  |           |            |           |  |   |            |  
|Comprehensive loss for the period        |  | $         | (1,369,651 | )         |  | $ | (2,911,989 | )
|                                         |  |           |            |           |  |   |            |  

Reclassifications

Certain amounts in the 2001 consolidated financial statements have been
reclassified in order to conform to the 2002 presentation.

Segment

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

|                              |  |           |           |         |  |            |           |           |  |       |           |  |  |  |            |   |  |   |            |  
|----------------------------- |  | --------- | --------- | ------- |  | ---------- | --------- | --------- |  | ----- | --------- |  |  |  | ---------- | - |  | - | ---------- | -
|                              |  | Northeast |           | Florida |  | California |           | Corporate |  | Total
|                              |  |           |           |         |  |            |           |           |  |      
|Net Revenues                  |  |           |           |         |  |            |           |           |  |       |           |  |  |  |            |   |  |   |            |  
|                             
|                             
|                             
|                             
|1st Quarter 2002              |  | $         | 3,157,000 |         |  | $          | 4,752,000 |           |  | $     | 4,101,000 |  |  |  |            |   |  | $ | 12,010,000 |  
|1st Quarter 2001              |  |           | 2,728,000 |         |  |            | 5,318,000 |           |  |       | 4,442,000 |  |  |  |            |   |  |   | 12,488,000 |  
|                             
|                             
|                             
|                             
|Income (Loss) from Operations |  |           |           |         |  |            |           |           |  |       |           |  |  |  |            |   |  |   |            |  
|                             
|                             
|                             
|                             
|1st Quarter 2002              |  |           | 562,000   |         |  |            | 1,015,000 |           |  |       | 268,000   |  |  |  | (2,910,000 | ) |  |   | (1,065,000 | )
|1st Quarter 2001              |  |           | (679,000  | )       |  |            | 452,000   |           |  |       | 483,000   |  |  |  | (3,204,000 | ) |  |   | (2,948,000 | )

Income (loss) from operations at the center level are computed before
general and administrative expenses and depreciation/amortization. Center
operations depreciation amounted to $347,000 and $453,000 for the three
months ended March 2002 and 2001 respectively. Center operations capital
expenditures amounted to $159,000 in the first quarter of 2002 compared to
$540,000 in the first quarter of 2001. Aggregate identifiable assets of
center operations at March 30, 2002 and March 31, 2001 were $ 6,011,000
and $7,424,000, respectively.

2. Stockholders Equity

Conversion of Preferred Stock into shares of Common Stock

During the quarter ended March 30, 2002, 214 shares of the 1998
Convertible Preferred Stock plus accrued dividends of approximately $70,000
and an 8% premium of approximately $17,000 were redeemed for cash of
approximately $301,000.

Common Stock

During the quarter ended March 30, 2002, no warrants or employee stock
options were exercised.

7



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##### 



HEARx Ltd.
Notes to Consolidated Financial Statements

Private Placement

On March 29, 2002, the Company closed on a private placement of 1.5 million
shares of common stock and 1.5 million common stock purchase stock warrants
for an aggregate sales price of $1.5 million. The offers and sales were
made only to accredited investors as defined in Rule 501(a) of Regulation
D and the Company relied on Regulation D and Section 4(2) of the Securities
Act of 1933 to issue the securities without registration. The warrants may
be exercised at any time until March 29, 2005 to purchase shares of common
stock for an exercise price of $1.15 per share. The Company has undertaken
to register the common stock for resale later this year.

All members of the board of directors of HEARx participated in the private
placement, purchasing 805,000 of the 1,500,000 shares of common stock.
Because the shares were sold at a $0.05 per share discount to the quoted
market price of $1.05 per share, additional compensation expense of
approximately $40,000 was incurred for the quarter ended
March 30, 2002. The fair value of the warrants was not
significant.

3. Investment in Affiliated Company

On November 16, 2001, HEARx loaned $700,000 to Helix for use by Helix as
part of the $3.5 million acquisition of substantially all of the capital
stock of Auxiliary Benefits Corporation, a Colorado corporation doing
business as National Ear Care Plan (NECP). The note was secured by
substantially all of the assets of NECP, bore interest at a rate of prime
plus 1% (6% at December 29, 2001) per annum and originally
matured on November 16,
2002. On January 10, 2002, HEARx loaned to Helix an additional $2 million
to complete the NECP transaction. On January 14, 2002 HEARx and Helix
entered into a subscription agreement pursuant to which HEARx purchased
4,853,932 common shares of Helix for an aggregate purchase price of $2.7
million. The purchase price was paid using the $2.7 million in loans to
Helix. Upon consummation of the purchase of the 4,853,932 Helix common shares,
HEARx became an approximate 10.5 percent owner of Helix common shares.
HEARx is accounting for this investment using the equity method.
At March 30, 2002, the carrying amount of the investment was approximately
$2,654,000. The difference of approximately $1,273,000 between the
carrying amount of the investment and the amount underlying the equity in
Helixs net assets is accounted for as goodwill. Approximately $61,400 was
recorded as equity in loss of affiliated company for the three months ended
March 30, 2002, representing HEARxs equity in the net loss of Helix from
the January 14, 2002 acquisition date through February 28, 2002, the end of
Helixs first quarter. As of March 30, 2002, the aggregate value of the
investment based on the quoted market price of Helixs common stock was
approximately $1,700,000.

4. Intangible Assets

At both March 30, 2002 and December 29, 2001, the gross carrying amount of
the Companys intangible assets subject to amortization, which consist of
customer lists, was $1,443,000, and the accumulated amortization was
approximately $530,000 and $508,000, respectively. For each three month
period ended March 30, 2002 and March 31, 2001, the aggregate amortization
expense for these assets was approximately $22,000. At March 30, 2002, the
estimated amortization expense for the next five fiscal years is
approximately: 2002  $88,000, 2003  $86,000, 2004  $86,000, 2005 -
$86,000, 2006  $86,000, and thereafter  $481,000.

5. Recent Accounting Pronouncements

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

8



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HEARx Ltd.
Notes to Consolidated Financial Statements

goodwill based on the criteria in SFAS 141.

SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for
the purpose of assessing potential future impairments of goodwill, reassess
the useful lives of other existing recognized intangible assets, and cease
amortization of intangibles assets with an indefinite useful life. An
intangible asset with an indefinite useful life should be tested for
impairment in accordance with the guidance in SFAS 142. SFAS 142 is
required to be applied in fiscal years beginning after December 15, 2001 to
all goodwill and other intangible assets recognized at that date,
regardless of when those assets were initially recognized. SFAS 142
requires the Company to complete transitional goodwill impairment test six
months from the date of adoption. The Company is also required to reassess
the useful lives of other intangible assets within the first interim
quarter after adoption of SFAS 142. The Companys previous business
combinations were accounted for using the purchase method. The Company
adopted SFAS 141 and 142 during the quarter ended March 30, 2002, which
included reassessing the useful lives of other intangible assets. The
impact of the adoption of SFAS 141 and SFAS 142 on the Companys financial
position and results of operations was not 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 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 was not material.

6. Subsequent Events

On April 30, 2002, the Company, Helix and each of Helixs direct and
indirect subsidiaries entered into a credit agreement pursuant to which the
Company agreed to extend to Helix up to $9.42 million in senior secured
term loans. Borrowings under the credit facility are secured by a first
priority security interest in substantially all of the assets of Helix and
its direct and indirect subsidiaries. In addition, Steve Forget, President
and Chief Executive Officer of Helix, has pledged all of his partnership
interest in Cousineau, Doucet, Parent, Forget Audioprothesistes s.e.n.c. to
HEARx as further security for the credit facility.

Funds under the credit facility may be advanced at the request of Helix
from time to time after Helix has satisfied the initial conditions to
closing and prior to June 30, 2002. The outstanding balance under the
credit facility will bear interest at a rate per annum equal to the prime
rate as announced from time to time by Citibank, N.A. plus one percent.
The outstanding principal and interest is due and payable on the final
maturity date of August 9, 2003. The facility may be prepaid in whole or
in part at any time without penalty. Before August 9, 2003, the credit
facility requires mandatory repayments in the amount of 25% of the
proceeds of a sale of assets or an issuance of equity securities, and
annually in the amount of 20% of Helixs excess cash flow.

The credit agreement contains loan covenants customary for a credit
facility of this size and nature, including limitations on the amount of
annual capital expenditures by Helix, the incurrence by Helix of additional
debt or the issuance by Helix of additional equity. The credit agreement
provides for the suspension of access to further funds and the repayment of
all then outstanding loans under the agreement in the event of a material
adverse change in Helix or its subsidiaries, a change in control of Helix
or a termination of the merger agreement with the Company. If an event of
default occurs because of a termination of the merger agreement as a result
of a change or withdrawal of the

9



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HEARx Ltd.
Notes to Consolidated Financial Statements

recommendation of the arrangement by the HEARx board or a breach by HEARx
of its representations, warranties or covenants in the merger agreement,
Helix will have a 365-day grace period before HEARx can accelerate the loan
or realize upon the collateral. In all other cases of an event of default
resulting from termination of the merger agreement, Helix will have a
180-day grace period. Neither grace period will extend the final maturity
date. The Company anticipates that it will fund the loans under the credit
agreement through its previously announced credit facility with Siemens
Hearing Instruments, Inc.

Helix may use the funds available under the credit facility only for the
purposes stated to repay all of Helixs existing convertible debt and
portions of its non-convertible debt, to pay fees and transaction costs
relating to the arrangement and the remainder, if any, for working capital.

10



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

GENERAL

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

HEARx intends, as its long-term goal, to establish a nationwide network of
hearing care centers, located in the metropolitan areas or regions with
concentrations of elderly consumers who are more likely to need the
Companys products and services. The Company plans on expanding its
hearing care center network through the completion of the Helix transaction
(described below) and the continuing expansion of HEARx West LLC, its joint
venture.

On July 27, 2001 the Company and Helix signed a definitive merger
agreement, which was subsequently amended and restated as of November 6,
2001. Helix owns or manages 128 hearing healthcare clinics located in
Massachusetts, Pennsylvania, New York, Ohio, Michigan, Wisconsin,
Minnesota, Washington and Missouri as well as in the Provinces of Ontario
and Quebec. 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. Upon the closing of the
transaction, Helix will become an indirect wholly owned subsidiary of
HEARx. The transaction is expected to close before the end of the second
quarter of 2002.

CRITICAL ACCOUNTING POLICIES

Financial Reporting Release No. 60, which was recently released by the U.S.
Securities and Exchange Commission, encourages all companies to include a
discussion of critical accounting policies or methods used in the
preparation of financial statements.

Management believes the following critical accounting policies affect the
significant judgments and estimates used in the preparation of the
financial statements:

Revenue Recognition

HEARx recognizes revenues from the sale of audiological products at the
time of delivery and revenues from hearing care services at the time those
services are performed.

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

Sales returns

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

11



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Estimates

HEARxs consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, management evaluates these
estimates, including those related to allowances for doubtful accounts
receivable and sales returns. Management bases these estimates on
historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. These estimates form the basis for
making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates.

RESULTS OF OPERATIONS

For the three months ended March 30, 2002 compared to the three months
ended March 31, 2001

Net revenues decreased $478,175, or 3.8%, to $12,010,016 in the first
quarter of 2002 from $12,488,191 in the comparable quarter of 2001. The
decrease in revenues resulted primarily from the decrease in revenues for
the Companys Florida and California centers which was offset by the
increase in revenues for the Northeast centers. Net revenues in Florida and
California combined decreased $907,000, or 9.3%, to $8,853,000 for the
three months ended March 30, 2002 from $9,760,000 for the comparable period
of 2001, offset by the increase in net revenues in the Northeast of
$429,000, or 15.7%, to $3,157,000 for the three months ended March 30, 2002
from $2,728,000 for the comparable period of 2001. Management believes the
decrease in revenues for the first quarter of 2002 as compared with the
first quarter of 2001 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 $861,480, or 20.2%, to $3,405,098 in the
first quarter of 2002 from $4,266,578 in the comparable quarter of 2001.
Approximately $847,000 of the decrease in the cost of products sold is the
result of the rebates received from Siemens pursuant to the supply
agreement 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 28.4% and 34.2%
for the first quarter of 2002 and 2001, respectively.

Center operating expenses decreased $1,202,576, or 15.1%, to $6,759,936 in
first quarter of 2002 from $7,962,512 in the comparable quarter of 2001.
This decrease is attributable to the cost reduction program the Company
implemented in May 2001. The Company reduced its marketing programs,
reducing center advertising expense to $1,449,243, or 12.1% of revenue, in
the first quarter of 2002 down from $1,947,746, or 15.7% in the comparable
quarter of 2001. Center wages expense also decreased $352,129 or 9.7%, to
$3,263,575 in the first quarter of 2002 from $3,615,704 in the comparable
quarter of 2001.

General and administrative expenses decreased $179,151, or 7.0%, to
$2,386,551 in the first quarter of 2002 from $2,565,702 in the comparable
quarter of 2001. This decrease is attributable to the cost reduction
program the Company implemented in May 2001. The Company reduced its
marketing programs, reducing corporate advertising $65,662 to $126,361 in
the first quarter of 2002 compared with $192,023 in the comparable quarter
of 2001. Shareholder relations expense decreased $80,696 or 69.2%, to
$35,931 in the first quarter of 2002 from $116,627 in the comparable
quarter of 2001. This decrease is primarily the result of the Companys
retention of an investment banking firm beginning in December 2000 to
render services with respect to financial consulting and public
relations. No such fees were incurred in 2002. In addition, corporate
travel and professional service fees decreased $51,649 and $140,092,
respectively, which was offset by

12



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##### 



an increase of $154,279 in telephone expense. The increase in telephone
expense is a direct result of the Companys full implementation of the
national call center and the wide area network.

Depreciation and amortization expense decreased $118,445, or 18.4%, to
$523,598 in the first quarter of 2002 from $642,043 in the comparable
period of 2001, which was primarily the result of certain equipment
becoming fully depreciated during 2001.

Interest income decreased $24,508, or 52.6%, to $22,066 in the first
quarter of 2002 from $46,574 in the comparable quarter of 2001. This
decrease is attributable to the decline in average interest rates earned
primarily on cash and cash equivalents. Interest expense increased
$270,311 to $280,230 in the first quarter of 2002 from $9,919 in the
comparable quarter of 2001. This increase is attributable to the addition
of interest on the line of credit with Siemens, beginning in April 2001.

LIQUIDITY AND CAPITAL RESOURCES

Working capital decreased $2,961,995 to a negative $3,700,557 as of March
30, 2002 from a negative $738,562 as of December 29, 2001. The working
capital of negative $3,700,557 includes approximately $1.5 million of
dividends payable at March 30, 2002, which at the option of the Company
may be paid in shares of the Companys common stock rather than cash. It
also reflects the use of $2,000,000 in cash as a loan to Helix to fund the
NECP acquisition in January 2002. See Note 3 of the Notes to Consolidated
Financial Statements.

On December 7, 2001, HEARx obtained a $51,875,000 secured credit facility
from Siemens Hearing Instruments, Inc. comprised of (a) a $10,875,000
secured five-year term loan credit facility (the Tranche A Loan); (b) a
$25,000,000 secured five-year revolving loan credit facility (the Tranche
B Loan); (c) a $3,000,000 secured five-year term loan facility (the
Tranche C Loan); and (d) a $13,000,000 secured five-year term loan credit
facility (the Tranche D Loan). At March 30, 2002, only $9,868,750,
representing the Tranche A Loan was outstanding.

The Tranche A Loan proceeds were used as follows: (i) the repayment of
$6,875,000 owed at December 7, 2001 to Siemens by the Company under an
April 23, 2001 agreement (which included a $7.5 million line of credit)
(ii) a $2,000,000 loan from HEARx to Helix to fund the NECP acquisition
(see Note 3 of the Notes to Consolidated Financial Statements) and (iii)
$2,000,000 for the exchange and redemption of all of the outstanding HEARx
Series I Convertible Preferred Stock. The Tranche B Loan may be used
only for future acquisitions by the Company subject to guidelines
established by the credit facility or otherwise agreed to by HEARx and
Siemens. The parties intend that the Tranche C Loan will be used for
general working capital purposes and the Tranche D Loan will be used
primarily in connection with the Helix transaction to retire certain
higher interest debt of Helix, most of which is convertible into Helix
common shares (see Recent Developments). The Siemens credit facility
imposes certain financial and other covenants on the Company which are
customary for loans of this size and nature. At March 30, 2002, the
Company was in compliance with all such covenants. If the Company cannot
maintain compliance with these covenants, Siemens may terminate future
funding under the credit facility and declare all then outstanding amounts
under the facility immediately due and payable.

The Tranche A, B and C Loans are payable quarterly over five years with
the outstanding principal, and interest at 10%, due and payable on the
final maturity date. Principal and interest, at the prime rate (as
defined) plus 1%, on the Tranche D Loan is payable on the final maturity
date. Quarterly principal and interest payments on the Tranche A, B and C
Loans may be paid through rebates received from Siemens by HEARx as long
as HEARx purchases certain minimum percentages of its requirements of
hearing aids from Siemens.

To address a short term cash need during the first quarter of 2002, the
Company closed on a $1.5 million private placement of 1.5 million shares
of its common stock and 1.5 million three-year common stock purchase
warrants on March 29, 2002. The purchasers in this private placement

13



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##### 



were primarily the Companys directors. The net proceeds of approximately
$1.5 million were used for working capital.

The Company believes that funds available under the Siemens credit
facility, current cash, investment securities and revenues from operations
will be sufficient to support the Companys operational needs through the
next twelve months, although there can be no assurance that HEARx can
maintain compliance with Siemens loan covenants, that the Helix merger
arrangement will be consummated or that unexpected capital needs will not
arise for which the credit facility, cash, investments and revenues from
operations will be sufficient. In the event the Company needs to raise
additional money to fund unexpected cash needs or otherwise to meet
requirements, the Company may consider the issuance of additional equity
or debt securities. There can be no assurance, however, that such
financing would be available to the Company on favorable terms or at all.

Below is a chart setting forth the Companys contractual cash payment
obligations for future fiscal years which have been aggregated to
facilitate a basic understanding of the Companys liquidity as of March
30, 2002.

|                                   |  |                        |            |      |  |        |           |       |  |       |            |         |  |   |           |  |  |   |         | 
|---------------------------------- |  | ---------------------- | ---------- | ---- |  | ------ | --------- | ----- |  | ----- | ---------- | ------- |  | - | --------- |  |  | - | ------- | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                        |            |      |  | Less   |           |       |  |       |            |         |  |   |           |  |  |  
|Contractual                        |  |                        |            |      |  | than 1 |           | 13   |  | 45   |            | After 5
|Obligations                        |  | Total                  |            | Year |  | Years  |           | Years |  | Years
|                                   |  |                        |            |      |  |        |           |       |  |      
|Long-Term Debt                     |  | $                      | 10,207,000 |      |  | $      | 2,487,000 |       |  | $     | 4,752,000  |         |  | $ | 2,968,000 |  |  | $ |        | 
|                                  
|                                  
|                                  
|                                  
|Operating Leases                   |  |                        | 14,395,000 |      |  |        | 3,368,000 |       |  |       | 6,952,000  |         |  |   | 3,626,000 |  |  |   | 449,000 | 
|                                   |  |                        |            |      |  |        |           |       |  |       |            |         |  |   |           |  |  |   |         | 
|Total Contractual Cash
Obligations |  | $                      | 24,602,000 |      |  | $      | 5,855,000 |       |  | $     | 11,704,000 |         |  | $ | 6,594,000 |  |  | $ | 449,000 | 
|                                   |  |                        |            |      |  |        |           |       |  |       |            |         |  |   |           |  |  |   |         | 

Net cash used by operating activities decreased from $2,272,088 in the
first quarter of 2001 to net cash provided by operations of $397,752 in
the first quarter of 2002. The increase in net cash provided from
operating activities was primarily the result of the decease of net loss
of approximately $1,500,000 and the change in current assets including
accounts and notes receivable from net cash provided of $458,308 in the
first quarter of 2001 to net cash provided of $1,267,318 in the first
quarter of 2002.

Net cash used by investing activities increased from $988,758 in the
first quarter of 2001 to $2,297,177 in the first quarter of 2002. This
increase is the result of a $2,000,000 note receivable issued to the
Company by Helix in January 2002 for the NECP acquisition, and
approximately $98,000 of capitalized merger costs (related to the pending
Helix transaction) incurred during the first quarter of 2002 , offset by
a decrease of approximately $790,000 in purchases of property and
equipment.

Net cash provided by financing activities decreased from $174,771 in the
first quarter of 2001 to $117,686 in the first quarter of 2002. This
decrease is primarily the result of proceeds of  $1,500,000 from the
2002 private placement of common stock, offset by approximately $1
million in repayments under the Siemens Tranche A loan, approximately
$301,000 redemption of 1998 Convertible Preferred Stock, and
approximately $45,000 of preferred stock dividends paid in cash.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB finalized FASB Statements No. 141, Business
Combinations(SFAS 141), and No. 142, Goodwill and Other Intangible
Assets(SFAS 142). SFAS 141 requires the use of the purchase method of
accounting and prohibits the use of the pooling-of-interest method
of accounting for business combinations initiated after June 30, 2001.
SFAS 141 also requires

14



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##### 



that the Company recognize acquired intangible
assets apart from goodwill if the acquired intangible assets meet certain
criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations completed on or
after July 1, 2001. It also requires, upon adoption of SFAS 142, that
the Company reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS 141.

SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for
the purpose of assessing potential future impairments of goodwill,
reassess the useful lives of other existing recognized intangible assets,
and cease amortization of 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 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
Company adopted SFAS 141 and 142 during the quarter ended March 30, 2002,
which included reassessing the useful lives of other intangible assets.
The impact of the adoption of SFAS 141 and SFAS 142 on the Companys
financial position and results of operations was not 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 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
was not material.

RECENT DEVELOPMENTS

On April 30, 2002, the Company, Helix and each of Helixs direct and
indirect subsidiaries entered into a credit agreement pursuant to which
the Company agreed to extend to Helix up to $9.42 million in senior
secured term loans. Borrowings under the credit facility are secured by
a first priority security interest in substantially all of the assets of
Helix and its direct and indirect subsidiaries. In addition, Steve
Forget, President and Chief Executive Officer of Helix, has pledged all
of his partnership interest in Cousineau, Doucet, Parent, Forget
Audioprothesistes s.e.n.c. to HEARx as further security for the credit
facility.

Funds under the credit facility may be advanced at the request of Helix
from time to time after Helix has satisfied the initial conditions to
closing and prior to June 30, 2002. The outstanding balance under the
credit facility will bear interest at a rate per annum equal to the
prime rate as announced from time to time by Citibank, N.A. plus one
percent. The outstanding principal and interest is due and payable on
the final maturity date of August 9, 2003. The facility may be prepaid
in whole or in part at any time without penalty. Before August 9, 2003,
the credit facility requires mandatory repayments in the amount of 25% of
the proceeds of a sale of assets or an issuance of equity securities,
and annually in the amount of 20% of Helixs excess cash flow.

The credit agreement contains loan covenants customary for a credit
facility of this size and nature, including limitations on the amount of
annual capital expenditures by Helix, the incurrence by Helix of
additional debt or the issuance by Helix of additional equity. The
credit agreement
provides for the suspension of access to further funds and the repayment
of all then outstanding

15



---



##### 



loans under the agreement in the event of a
material adverse change in Helix or its subsidiaries, a change in control
of Helix or a termination of the merger agreement with the Company. If an
event of default occurs because of a termination of the merger agreement
as a result of a change or withdrawal of the recommendation of the
arrangement by the HEARx board or a breach by HEARx of its
representations, warranties or covenants in the merger agreement, Helix
will have a 365-day grace period before HEARx can accelerate the loan or
realize upon the collateral. In all other cases of an event of default
resulting from termination of the merger agreement, Helix will have a
180-day grace period. Neither grace period will extend the final
maturity date. The Company anticipates that it will fund the loans under
the credit agreement through its previously announced credit facility
with Siemens Hearing Instruments, Inc.

Helix may use the funds available under the credit facility only for
the purposes stated to repay all of Helixs existing convertible debt and
portions of its non-convertible debt, to pay fees and transaction costs
relating to the arrangement and the remainder, if any, for working
capital.

Except for historical information provided in this discussion and
analysis, the discussion includes forward looking statements, including
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; and that funds available under credit facility,
current cash, investment securities and revenues from operations
sufficient to support the Companys operational needs. 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.

16



---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company does not engage in derivative transactions or issue
variable rate debt. The Company does become exposed to foreign currencies
as a result of its investment in the common stock of Helix, but such
exposure is not significant. Differences
in the fair value of investment securities are not material, therefore
the related market risk is not significant. The Companys exposure to
market risk for changes in interest rates relates primarily to the
Companys long-term debt. The following table presents the Companys
financial instruments for which fair value is subject to changing market
interest rates:

|                                                              |                     |   |                 |            |             |   |                |          |   |   |          |          |  
|------------------------------------------------------------- | ------------------- | - | --------------- | ---------- | ----------- | - | -------------- | -------- | - | - | -------- | -------- | -
|                                                              |                     |   |                 |            |             |   | Long-Term Debt |          |   |   |         
|                                                              |                     |   | 10.0% notes     |            | 8.75% note  |   |                |          |  
|                                                              |                     |   | due December 1, |            | due July 1, |   |                |          |  
|                                                              |                     |   | 2006            |            | 2004        |   | Other notes   
|                                                              |                     |   |                 |            |             |   |               
|As of March 30, 2002:                                         |                     |   |                 |            |             |   |                |          |   |   |          |         
|                                                             
|                                                             
|                                                             
|                                                             
|Estimated cash inflow (outflow) by year of
principal maturity |                     |   |                 |            |             |   |                |          |   |   |          |         
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | 2002                |   | $               | (2,300,000 | )           |   | $              | (81,000  | ) |   | $        | (106,000 | )
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | 2003                |   |                 | (2,300,000 | )           |   |                | (81,000  | ) |   |          | (71,000  | )
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | 2004                |   |                 | (2,300,000 | )           |   |                |         |   |   |          |         |  
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | 2005                |   |                 | (2,300,000 | )           |   |                |         |   |   |          |         |  
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | 2006 and thereafter |   |                 | (668,000   | )           |   |                |         |   |   |          |         |  
|                                                              |                     |   |                 |            |             |   |                |          |   |   |          |         
|                                                              | Total               |   | $               | (9,868,000 | )           |   | $              | (162,000 | ) |   | $        | (177,000 | )
|                                                              |                     |   |                 |            |             |   |                |          |   |   |          |         
|Estimated fair value                                          |                     | $ | (9,868,000      | )          |             | $ | (162,000       | )        |   | $ | (177,000 | )       
|                                                              |                     |   |                 |            |             |   |                |          |   |   |          |         
|Carrying value                                                |                     | $ | (9,868,000      | )          |             | $ | (162,000       | )        |   | $ | (177,000 | )       
|                                                              |                     |   |                 |            |             |   |                |          |   |   |          |         

Part II  Other Information

Item 2. Changes in Securities and Use of Proceeds

Preferred Stock Conversion

During the quarter ended March 30, 2002, 214 shares of the 1998
Convertible Preferred Stock plus accrued dividends of approximately
$70,000 and an 8% premium or approximately $17,000, were redeemed for cash
of approximately $301,000. The 1998 Convertible Preferred Stock was
initially issued to certain accredited investors pursuant to the
exemption from registration contained in Section 4(2) of the Securities Act
of 1933 and Rule 506 of Regulation D. The shares issued upon the conversion
were also issued pursuant to Section 4(2) of the securities Act of 1933.

Private Placement

On March 29, 2002, the Company closed on a private placement of
1.5 million shares of common stock and 1.5 million common stock purchase stock warrants
for an aggregate sales price of $1.5 million. The offers and sales were
made only to accredited investors as defined in Rule 501(a) of Regulation
D and the Company relied on Regulation D and Section 4(2) of the Securities
Act of 1933 to issue the securities without registration. The warrants may
be exercised at any time until March 29, 2005 to purchase shares of common
stock for an exercise price of $1.15 per share. The Company has undertaken
to register the common stock for resale later this year.

17



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##### 



Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:

| |  |  |     |  |  |                                                                                                                                                                                                                                                                                                                                                   
| |  |  | --- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 2.1 |  |  | Amended and Restated Merger Agreement, dated November 6, 2001
between HEAR Ltd. and Helix Hearing Care of America Corp. [2.1]
Filed as an exhibit to the Companys Joint Proxy
Statement/Prospectus on Form S-4 as the exhibit number indicated in
brackets, and incorporated by reference herein.                                                
|
|
|
|
| |  |  |     |  |  |                                                                                                                                                                                                                                                                                                                                                   
|
|
|
|
| |  |  | 3.1 |  |  | Restated Certificate of Incorporation of HEARx Ltd.,
including certain certificates of designations, preferences and
rights of certain preferred stock of the Company. [3] Filed as an
exhibit to the Companys Current Report on Form 8-K, filed May 17,
1996, as the exhibit number indicated in brackets, and incorporated
herein by reference.
|
|
|
|
| |  |  |     |  |  |                                                                                                                                                                                                                                                                                                                                                   
|
|
|
|
| |  |  | 3.2 |  |  | Amendment to Restated Certificate of Incorporation. [3.1A].
Filed as an exhibit to the Companys Quarterly Report on Form 10-Q
for the period ended June 28,1996, as the exhibit number indicated
in brackets, and incorporated herein by reference.                                                                                              
|
|
|
|
| |  |  |     |  |  |                                                                                                                                                                                                                                                                                                                                                   
|
|
|
|
| |  |  | 3.3 |  |  | Certificate of Designations, Preferences and Rights of the
Companys 1998 Convertible Preferred Stock. [3] Filed as an exhibit
to the Companys Current Report on Form 8-K, filed August 27, 1998,
as the exhibit number indicated in brackets, and incorporated herein
by reference.                                                             
|
|
|
|
| |  |  |     |  |  |                                                                                                                                                                                                                                                                                                                                                   
|
|
|
|
| |  |  | 3.4 |  |  | By-Laws of HEARx Ltd. [3.4]. Filed as an exhibit to the
Companys Annual Report on Form 10-K for the fiscal year ended
12/31/99 as the exhibit number indicated in brackets, and
incorporated herein by reference.                                                                                                                                
|
|
|
|
| |  |  |     |  |  |                                                                                                                                                                                                                                                                                                                                                   
|
|
|
|
| |  |  | 3.5 |  |  | Certificate of Designations, Preferences and Rights of the
Companys 1999 Series H Junior Participating Preferred Stock. [4]
Filed as an exhibit to the Companys Current Report on Form 8-K,
filed December 17, 1999, as the exhibit number indicated in
brackets, and incorporated herein by reference.                                         
|
|
|
|
| |  |  |     |  |  |                                                                                                                                                                                                                                                                                                                                                   
|
|
|
|
| |  |  | 3.6 |  |  | Certificate of Designations, Preferences and Rights of the
Companys Series J Preferred Stock. [4.1] Filed as an exhibit to the
Companys Current Report on Form 8-K, December 26, 2001, as the
exhibit number indicated in brackets, and incorporated herein by
reference.                                                                       
|
|
|
|
| |  |  |     |  |  |                                                                                                                                                                                                                                                                                                                                                   
|
|
|
|
| |  |  | 4.1 |  |  | 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                                                                                                                                         

18



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##### 



| |  |  |      |  |  |                                                                                                                                                                                                  
| |  |  | ---- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| |  |  |      |  |  | Preferred Stock. [4] Filed as an exhibit to the
Companys Current Report on Form 8-K, dated December
17, 1999, as the exhibit
number indicated in brackets, and incorporated herein by
reference.
|
|
|
|
| |  |  |      |  |  |                                                                                                                                                                                                  
|
|
|
|
| |  |  | 10.1 |  |  | Form of Stock Purchase Agreement dated March 29, 2002 by and
between HEARx Ltd. and each purchaser named therein.                                                                                
|
|
|
|
| |  |  |      |  |  |                                                                                                                                                                                                  
|
|
|
|
| |  |  | 10.2 |  |  | Form of Warrant to purchase Common Stock issued in connection
with March 29, 2002 private placement.                                                                                             

(b)  Reports on Form 8-K:



| |  | A current report on Form 8-K, dated January 14, 2002, was filed with
the Securities and Exchange Commission on January 17, 2002, in which
the Company reported it acquired through a private placement 4,853,932
common shares of Helix Hearing Care of America Corp., a Canadian
corporation, for $2.7 million.              
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | A current report on Form 8-K/A was filed with the Securities and
Exchange Commission on February 28, 2002 to amend, the Form 8-K filed
on December 26, 2001 to replace Exhibit 10.3, the Supply Agreement
dated as of December 7, 2001, between the Company and Siemens Hearing
Instruments, Inc.                             
|
| |  | A current report on Form 8-K/A was filed with the Securities and
Exchange Commission on March 8, 2002, to amend the Form 8-K filed on
December 26, 2001 and amended on February 28, 2002 to replace Exhibit
10.3, the Supply Agreement dated as of December 7, 2001, between the
Company and Siemens Hearing Instruments, Inc.

19



---



##### 



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

|                  |  |                         |  |                                                            
|----------------- |  | ----------------------- |  | -----------------------------------------------------------
|                  |  | HEARx Ltd.
(Registrant) |  |                                                            
|                 
|                 
|                 
|                 
|                  |  |                         |  |                                                            
|                 
|                 
|                 
|                 
|Date: May 6, 2002 |  | By:                     |  |                                                            
|                  |  |                         |  |                                                            
|                  |  |                         |  | Stephen J. Hansbrough
President and
Chief Operating Officer
|                 
|                 
|                 
|                 
|                  |  |                         |  |                                                            
|                 
|                 
|                 
|                 
|Date: May 6, 2002 |  | By:                     |  |                                                            
|                  |  |                         |  |                                                            
|                  |  |                         |  | James W. Peklenk
Vice President and
Chief Financial Officer

20



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##### 



Exhibit Index

| |  |  |      |  |  |                                                                                                                  
| |  |  | ---- |  |  | -----------------------------------------------------------------------------------------------------------------
| |  |  | 10.3 |  |  | Form of Stock Purchase Agreement dated March 29, 2002 by and
between HEARx Ltd. and each purchaser named therein.
|
|
|
|
| |  |  |      |  |  |                                                                                                                  
|
|
|
|
| |  |  | 10.4 |  |  | Form of Warrant to purchase Common Stock issued in connection
with March 29, 2002 private placement.             

21